West Asia crisis so far may cost govt Rs 1.35 lakh crore, spending cuts
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The West Asia crisis may impose a fiscal burden of approximately Rs 1.35 lakh crore on India. Government spending has generally remained below budget estimates, providing financial flexibility for these pressures. Higher customs duty collections from gold and silver imports might help offset some costs. ICRA anticipates GDP growth to remain robust, exceeding 7 percent in the second quarter of FY27.
Mumbai: The West Asia crisis could have a fiscal impact of around Rs 1.35 lakh crore on the government so far, but the Centre may be able to absorb this pressure through routine expenditure savings without cutting spending, Aditi Nayar, Chief Economist at ICRA, told in an exclusive interview.Nayar said higher allocations for fertiliser and LPG subsidies, along with lower-than-budgeted excise duty collections following excise cuts, could add to the pressure on government finances. Some impact could also come from direct taxes and dividends from oil marketing companies.
However, she said these pressures could be partly offset by higher-than-expected customs duty collections from gold and silver imports and savings in government expenditure.
"Net net, we think that the fiscal impact will be around Rs 1.35 lakh crore," Nayar said.
She noted that actual government spending had been below budget estimates in recent years, providing room to absorb the additional costs.
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"So hopefully there will not need to be any undue expenditure tightening this year to be able to take care of the crisis," she said.
Nayar cautioned, however, that the estimate was based on the current situation and could change if the West Asia crisis continued for longer or its economic impact increased.
The fiscal outlook comes as the Union Budget for 2026-27 targets a fiscal deficit of 4.3 per cent of gross domestic product (GDP), according to the government's official Budget documents. The government has also estimated its debt-to-GDP ratio at 55.6 per cent for 2026-27.
On the government's borrowing plans, Nayar said even a modest fiscal slippage of 20-30 basis points may not require an increase in borrowing during the second half of the financial year.
She said small savings collections had been running higher than last year and were expected to exceed the budget estimate, providing another source of support to government finances.
"Even if there is a modest fiscal slippage of 20-30 basis points, we don't think that the H2 borrowings need to be revised," she said.
Nayar's assessment suggests that expenditure savings and stronger-than-expected receipts could help the government manage the fiscal impact of the crisis without immediate spending cuts or a revision to its borrowing programme.
On the monetary policy front, Nayar said ICRA expects retail inflation to cross 6 per cent in October and anticipates another rate hike by the Reserve Bank of India (RBI) in its December policy.
She said a further increase in February was possible if higher crude oil prices led to an increase in petrol and diesel prices.
On consumption, she said high-frequency indicators remained healthy despite declining urban and rural consumer confidence.
ICRA expects GDP growth to exceed 7 per cent in the second quarter of FY27, following growth of 7.8 per cent in the first quarter.
However, Nayar cautioned that the impact of monsoon conditions on rural demand and food inflation could become more visible in the second half of the financial year, particularly after the festive season.
She also warned that persistently high commodity prices could affect corporate margins and consumer spending. On employment, Nayar said hiring trends would vary across sectors, with some industries potentially benefiting from new free trade agreements, while others could face greater pressure from artificial intelligence.
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Figures reflect the source report and its stated period. This article is for information and is not investment advice.
