Is India’s Economic Stability at Risk? The Impact of US-Iran Conflict and Rising Crude Oil Prices on Growth
Inflation in India remains at a manageable 2.2%, while the economy has recorded an impressive growth rate of 8.0% in the first half of the fiscal year 2025-26. However, recent geopolitical tensions, particularly the ongoing conflict in the Middle East, threaten to disrupt this favorable economic landscape. Rising oil prices, which have surged above $100 per barrel, could lead to increased inflation and a potential slowdown in GDP growth. Economists predict that if these conditions persist, India may experience a decline in growth rates and a widening current account deficit.
Current Account Deficit Under Pressure
The escalating oil prices are expected to significantly impact India’s current account deficit (CAD), which occurs when a country’s imports exceed its exports. With crude oil prices climbing, the cost of oil imports will rise, thereby increasing the CAD. Economists estimate that for every $10 increase in oil prices, the CAD could widen by approximately $18 billion. If oil prices remain above $100 per barrel, the balance of payments could be adversely affected. Experts warn that prolonged conflict in the Middle East could disrupt global trade dynamics, further straining India’s economic situation. Additionally, remittances from Gulf Cooperation Council (GCC) countries may decline, exacerbating the CAD’s impact on the economy. Projections suggest that the CAD could rise by 0.4 percentage points of GDP for every sustained $10 increase in oil prices, potentially reaching 2.5-2.7% of GDP if current conditions persist.
Rupee: No Respite From Depreciation
The Indian rupee has struggled in 2025, becoming the worst-performing currency in Asia. The ongoing tensions in the Middle East have added further pressure, with a wider CAD and rising imported inflation contributing to the rupee’s depreciation. Experts indicate that the currency could depreciate by 2-3% if oil prices remain high and capital flows diminish. Current forecasts suggest the rupee may trade between Rs 91.5 and Rs 93 until the end of March. The Reserve Bank of India (RBI) may intervene to stabilize the currency, but the overall outlook remains bleak unless the geopolitical situation improves significantly.
Inflation: How Long Can Prices Be Kept Stable?
India has enjoyed a period of low inflation, but the surge in oil prices threatens to disrupt this trend. A 10% increase in fuel prices typically results in a 1% rise in wholesale price index (WPI) inflation, with additional secondary effects pushing the total impact to around 1.5%. The consumer price index (CPI) may also be affected, depending on government actions regarding fuel price adjustments. Experts suggest that the government may absorb some of the cost increases to protect consumers, especially given the upcoming state elections. However, if the conflict continues, the pressure on fuel prices could lead to higher inflation rates, with estimates indicating a potential increase of 40-75 basis points in CPI inflation for sustained oil price hikes.
Fiscal Deficit And Management Under Strain
The rising oil prices pose significant challenges for India’s fiscal management. Higher oil costs lead to increased subsidy bills for essential commodities like fertilizers and LPG, straining government finances. The government’s revenue from fuel taxation may decline as it faces pressure to maintain stable fuel prices. If the government opts to absorb the price shock through lower excise duties, it could widen the fiscal deficit and increase borrowing needs. Experts warn that sustained high oil prices could push the fiscal deficit above budgeted targets, complicating efforts to maintain economic stability. While some economists believe the fiscal impact may be limited to 0.1-0.2% of GDP, the overall economic landscape remains precarious as the government navigates these challenges.
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