India's fiscal deficit is likely to breach its budgeted target for the current fiscal year, potentially reaching 4.5 per cent of GDP, as the government's policy responses to the escalating West Asia conflict are set to strain public finances, according to a new report from research firm BMI.
Key Points
- BMI forecasts India's fiscal deficit to reach 4.5 per cent of GDP for the current fiscal year, surpassing the budgeted target of 4.3 per cent for FY27.
- The government's policy responses to the West Asia conflict, including potential subsidies for energy and fertiliser products, are expected to strain public finances.
- New Delhi may introduce policies to redirect critical inputs, restrain business costs, and improve financial support for firms affected by global disruptions.
- The Rs 1 lakh crore Economic Stabilisation Fund is estimated to contribute 0.1 per cent of GDP to fiscal expenditure in 2026-27.
- To manage total fiscal expenditure, the government might defer several energy-intensive public infrastructure projects to the next fiscal year.
India's fiscal deficit is likely to breach the budgeted target for current fiscal and hit 4.5 per cent of GDP as the government's policy response to the West Asia conflict could strain public finances, research firm BMI said on Wednesday.
The government in 2026-27 Budget had projected a 4.3 per cent fiscal deficit, a tad lower than 4.4 per cent as per revised estimates for 2025-26.
Impact of West Asia Conflict
BMI also expects the government to introduce policies to redirect critical inputs to key industries, restrain business costs and improve financial support for firms.
BMI said it also expects the government to consider restrictions on exports of scarce inputs such as helium and sulphur -- used for producing semiconductor chips.
It said that since sulphur is also an important ingredient for making fertilisers, the government will strive to minimise disruptions to the agriculture sector, which employs 43 per cent of India's workforce.
The government will seek to restrain cost increases for businesses affected by Strait of Hormuz's closure.
To this end, the central government has established a Rs 1 lakh crore Economic Stabilisation Fund.
BMI estimates this will contribute 0.1 per cent of GDP to fiscal expenditure in 2026-27.
Global Oil Price Surge
Strait of Hormuz is a key shipping lane through which about 20 per cent of the world's natural gas and crude oil transits.
Iran's grip on the strait has pushed oil prices sharply higher. Brent crude, the international benchmark, was trading close to $95 per barrel on Tuesday, up more than 30 per cent since February 28, the day Israel and the US launched strikes on Iran, triggering the war.
"New Delhi will likely spend the proceeds on additional subsidies for energy and fertiliser products.
"The government's past fiscal consolidation efforts reduced expenditure on energy and fertiliser subsidies to around 1.5 per cent of India's GDP in recent years.
"Given the importance of energy and fertilisers to India's economy, we expect this subsidy amount to rise in FY2026/27," BMI said.
Fiscal Consolidation Efforts
BMI had previously projected the Centre's fiscal deficit, the gap between revenue and expenditure, hitting 4.5 per cent of GDP.
"We are maintaining this forecast while acknowledging rising upside risks.
"The government's policy response to the Iran conflict could strain public finances," BMI said, adding it believes the government will continue its pursuit of long-term fiscal consolidation.
To maintain total fiscal expenditure, New Delhi might defer several energy-intensive public infrastructure projects to the next fiscal year, BMI said.
