An Elara Securities report projects a Rs 3.6 lakh crore annual rise in government spending if crude oil sustains at USD 100/bbl. The report links this to the Middle East conflict, warning of a wider CAD, weaker rupee, and rising fiscal risks.
Projected Economic Impact of $100/bbl Crude
If crude oil prices sustain above USD 100 per barrel in FY27, the Central government's annual additional expenditure could rise by Rs 3.6 lakh crore, according to a report by Elara Securities.
The report highlighted that the ongoing Middle East conflict shows few signs of de-escalation, which could intensify Asia's energy crisis and trigger global supply chain disruptions. It stated "scenario where Brent crude sustains at USD 100/ bbl through FY27E, India's current account deficit (CAD) could widen to 2 per cent of GDP (from 1 per cent at US D 70/bbl), USD -INR could weaken further to 94 - 95, while the Centre's annual additional expenditure would rise by INR 3.6tn/annually".
It noted that prolonged interruptions in the Strait of Hormuz (SOH) beyond mid-March, delayed energy supply normalization from affected producers, and persistent geopolitical uncertainty could put pressure on India's external sector. These developments may also spill over into the domestic economy and lead to rising fiscal pressures.
Underlying Assumptions and Monthly Costs
This estimate assumes excise duty cuts by the government to offset under-recoveries faced by oil marketing companies (OMCs) on petrol and diesel. It also factors in higher subsidies for liquified petroleum gas (LPG).
Elara Securities also pointed out that every additional month of conflict with oil prices near USD 100 per barrel could add around Rs 30000 crore to the Centre's fiscal cost, mainly covering losses of oil marketing companies.
Broader Fiscal Risks and Long-Term Effects
The report added that a prolonged crisis could also lead to second-order economic effects. These include reduced tax collections due to growth shocks, which could further strain government finances.
While the report said that a one-month crisis would be manageable through internal fiscal buffers, a prolonged period of elevated oil prices and geopolitical tensions could increase fiscal risks and potentially lead to a pullback in capital expenditure.
The crude price is trading at USD 100 per barrel at the time of filing this report. (ANI)
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