India faces a potential slowdown in economic momentum as rising energy costs threaten to derail current projections.
According to a recent report by EY India, the country’s real gross domestic product growth could slip to approximately 6% in the 2026 to 2027 fiscal year if the Indian crude basket price averages 120 dollars per barrel.
This scenario also suggests that consumer price index inflation could surge to 6 per cent, hitting the upper limit of the Reserve Bank of India’s tolerance band.
Rising Energy Costs
The current geopolitical situation, particularly the ongoing West Asian crisis, appears likely to persist longer than many analysts initially expected.
EY India Chief Policy Advisor DK Srivastava noted that even after a resolution is reached, the global crude supply situation will take significant time to return to normal. Currently, there is a strong likelihood that the Indian crude basket price will exceed an average of 95 dollars per barrel during the next fiscal year.
Policy changes to diversify India’s crude supply?
To mitigate these economic headwinds, analysts suggest that policymakers may need to evaluate an upward revision of the repo rate. Additionally, there is an urgent need to accelerate the diversification of crude supply sources to reduce vulnerability to regional conflicts.
EY India Chief Policy Advisor DK Srivastava highlights that policymakers must prioritize the accelerated diversification of crude supply sources.
1. Accelerated Source Diversification
The primary recommendation involves moving quickly to secure crude from a wider range of international suppliers. This shift aims to reduce India’s vulnerability to regional conflicts that disrupt traditional supply chains. Analysts suggest that the price of the Indian crude basket may continue to rise if geopolitical tensions persist. Diversification is viewed as a critical step to maintain economic stability when global supply normalization is delayed.
2. Strategic Reserves and Fiscal Adjustments
Building up crude oil reserves is another policy measure identified to address supply shocks hitting stocks. In addition to supply changes, fiscal policy adjustments are recommended to protect the national budget. Srivastava suggests that increased energy costs should be passed on to retailers to a larger extent to minimize the impact on the fiscal deficit. This approach would help manage the economic strain as real GDP growth faces a potential slip toward 6 per cent.
3. Monetary Policy Alignment
Monetary policy may also need to adapt through an upward revision of the repo rate if inflation targets are threatened. Retail inflation could rise to the upper tolerance band of 6 per cent if oil prices remain elevated at 120 dollars per barrel. While room for policy intervention is currently limited, proactive interest rate adjustments are considered a necessary tool. These combined measures are intended to stabilize the domestic economy against external energy headwinds
Benchmark Projections
The 6 per cent growth forecast under the adverse oil price scenario sits below the baseline projections provided by various global and domestic institutions. The Reserve Bank of India recently projected a growth rate of 6.9 per cent for the fiscal year 2027, with inflation expected to average around 4.6 per cent.
Meanwhile, the International Monetary Fund has set its projection at 6.5 per cent, while the Asian Development Bank and the World Bank expect growth of 6.9 per cent and 6.6 per cent respectively. Despite these challenges, India’s growth is still expected to remain more than double the global average even in an adverse scenario.
The Logical Indian’s Perspective
The Indian economy remains vulnerable to external energy shocks that could derail its growth trajectory. If crude oil prices reach the projected 120 dollar peak, the dual challenge of cooling growth and heating inflation will test the limits of current fiscal and monetary frameworks.
While the prospect of 6 per cent growth represents a significant slowdown from baseline estimates, India’s ability to maintain a growth rate double the global average provides a silver lining. Success will depend on the government’s agility in diversifying energy sources and the central bank’s readiness to adjust rates to maintain economic stability.
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