ICPP - Vantage | 4th Edition

The US-Israel military operation against Iran began in late February 2026 and the disruption to shipping through the closure of Strait of Hormuz sent crude prices from roughly $69 per barrel to over $119 within weeks. A brief ceasefire brought prices back towards $70 by July, but since re-escalation, they have climbed again. For India, the world’s third-largest oil importer, and imports 88 per cent of its crude, half its natural gas and 60 per cent of its LPG, the fiscal consequences are substantial and accumulating. 

ICPP analysis highlights that India's fiscal deficit is likely to overshoot its 4.3% budget target and reach 4.8% of GDP if the disruption eases by September, or 4.9% if it continues through December. More than 70 per cent of that gap traces to the SAED excise cut, with a rising fertiliser subsidy bill remaining the main variable between the two scenarios.

The Isaac Centre for Public Policy (ICPP) estimates the impact of continuing conflict on the current fiscal year. The Union Budget for FY 2026-27 set a fiscal deficit target of 4.3 per cent of GDP, about Rs 16.4 lakh crore. Using actual prices through July and conservative assumptions thereafter, including a rupee at 98 to 100 to the dollar late in the year against 92.8 in March, the deficit overshoots the target in every scenario. If the disruption ends by September, the deficit rises to 4.82 per cent of GDP, an overshoot of roughly Rs 2 lakh crore. If it persists through December, the figure reaches 4.91 per cent, or Rs 2.3 lakh crore. Add the losses absorbed off-budget by oil marketing companies and the combined cost of the shock comes to Rs 3.1 to 3.4 lakh crore, close to 0.8 per cent of GDP.

The single largest driver of the overshoot is the Rs 1.69 lakh crore revenue loss from the SAED excise duty cut announced on 26 March 2026, which reduced the special excise on petrol from Rs 13 to Rs 3 per litre and eliminated it entirely on diesel. This loss is the same regardless of when the war ends because the cut has not been reversed. 

The fertiliser subsidy is where the two scenarios diverge, the subsidy accounts for about a fifth of the overshoot if the disruption ends by September, rising to roughly a third if it runs through December, because the Rabi sowing season triggers a large and unavoidable import bill for urea and DAP at elevated world prices. Higher customs collections on costlier crude claw back a modest Rs 5,700 to 11,600 crore, while the LPG subsidy adds Rs 6,400 to 12,500 crore.

Separately, oil marketing companies have absorbed about Rs 1.1 lakh crore in off-budget losses, almost entirely in March through May when petrol and diesel pump prices were still frozen at Rs 94.77 and Rs 87.67 per litre, respectively. Increases of about Rs 7 on both fuels since mid-May, taking petrol to Rs 102.12 and diesel to Rs 95.20, have largely staunched the bleeding at current crude prices. These off-budget losses do not appear in the fiscal deficit, but they represent a real contingent liability that will eventually need to be addressed through recapitalisation, oil bonds, or further price increases.

These estimates capture only the price channel of the shock. The quantity effects, including lower GDP growth, reduced industrial gas allocation, and supply chain disruptions across sectors dependent on Gulf inputs, would widen the deficit further if incorporated. The price assumptions used are summarised in Table 2 below.

These estimates highlight that the duration of the disruption is the fiscal variable that matters most. Every additional week adds to the cost, and narrows the options available at year-end.