Rising energy prices could put strain on India’s FY27 fiscal position, says ICRA

Rising global energy prices amid the ongoing West Asia conflict are likely to put significant pressure on India's fiscal position in FY27, according to a report by ICRA. However, the report still claims that available buffers are likely to help manage the impact of the crisis.

It noted that geopolitical tensions largely drive recent increases in energy prices, have added volatility to global markets and could require adjustments in fiscal policy. "Even if the situation stabilises, energy prices are expected to remain higher than earlier budgeted assumptions, which may require fiscal adjustments," the report said.

The rating agency said that higher crude oil and gas prices may increase subsidy burdens, particularly for fertilisers and LPG. "Higher crude oil and natural gas prices may lead to an increase in subsidy requirements, particularly for fertilisers and liquefied petroleum gas (LPG)," it added.

Fiscal buffers

It also flagged possible pressure on government revenues, indicating that elevated prices could lead to softer excise collections and lower corporate tax inflows. Over supply-side concerns, ICRA stated that “global supply disruptions and logistical challenges have contributed to the increase in energy prices, which could impact various sectors, including petroleum and fertilisers.”

However, ICRA highlighted the availability of fiscal buffers despite these challenges. "Multiple buffers are available to manage the impact," ICRA said. It also cited mechanisms that include the Economic Stabilisation Fund (ESF), expenditure savings, and flexibility through supplementary demand for grants.

It also stated that savings in expenditure seen in recent years, along with the possible carry-forward of higher small savings collections, could create extra fiscal room. At the same time, lower redemptions and tweaks in market borrowing may provide additional support.

On the fiscal outlook, ICRA said these buffers could help limit deviations from targets. "These buffers may help contain any significant deviation from the fiscal deficit target of 4.5 per cent of GDP for FY2026-27," the report stated and cautioned that outcomes depend on how long elevated energy prices continue.