Clouded year ahead: Economic conditions have changed since February 1

The new financial year starts under skies that are considerably more overcast than when the Union Budget for 2026-27 was presented on February 1. The central government’s fiscal arithmetic was designed in a moment of relative calm: The inflation rate was benign and growth in gross domestic product (GDP) was projected at over 6.5 per cent. The Budget was thus able to retain the government’s approach to pump-priming capital expenditure while also signalling debt reduction. In the weeks that have passed since then, however, these assumptions may no longer hold. The most destabilising development is, of course, the expanding conflict in West Asia, driving up the price of crude oil. A barrel of Brent crude oil cost just over $70 when the United States and Israel began their assault on Iran; it has since reached $110. The price of the Indian basket of crude oil is considerably higher than that, given the country’s dependence on Gulf sources. Volatility will continue for the foreseeable future, now that Iran has laid claim to the right to stop any transits through the Strait of Hormuz, and the Houthi rebels in Yemen have resumed their campaign against shipping in the Red Sea. This will also impact broader trade flows.

 

Multiple sectors will come under pressure, complicating the government’s plans for the year. Higher energy prices do cause generalised inflation, and the depreciation of the rupee at such moments causes imported inflation. But there are more granular impacts to be considered. The scarcity of particular inputs will have a cascading effect through specific important industries. Fertiliser production depends upon the availability of gas, for example, and shortages during the forthcoming sowing season will have a multiplier effect on costs, inflation, and living standards. Labour-intensive sectors such as textiles use polyester, which is dependent on ethylene glycol, and that is Hormuz-linked. The capital-goods backbone of the economy is steel, which requires limestone flux, and almost four-fifths of that comes through a single port in the Gulf. Such slowdowns will not only have a macroeconomic impact on cost-push inflation and growth but will also increase demands on the state for protection or subsidies.

 

The government has already acted to insulate consumers and oil companies from some of the effects of this crisis, limiting the pass-on effects of the global increase in fuel costs. But this is unsustainable in the longer term, and some fiscal effects can already be predicted. Special additional excise duty has been reduced, with a consequent hit to the exchequer of ₹1.3 trillion-1.7 trillion if maintained for the course of the year. While the Budget arithmetic included some space for exigencies, reductions of this size — especially if accompanied by other forms of relief as the crisis draws on — will make meeting the fiscal-deficit target of 4.3 per cent of GDP difficult. The broader debt-consolidation agenda is already complicated by the fact that the base of such targets, India’s nominal GDP, has been revised downwards in the new GDP series.

 

Further, if high prices begin to course through the economy, threatening to breach the Reserve Bank of India’s inflation target of 4 per cent considerably, then it may have to adjust monetary policy — and the growth slowdown that follows will further impact government revenues and their ability to meet fiscal targets. It would be prudent for the government to acknowledge that its assumptions have shifted materially since the Budget. Transparent mid-course corrections, a vigilant eye on the fiscal arithmetic, and a calibrated approach to crisis relief may well be called for over 2026-27.