India's government is weighing spending cuts across multiple budget areas as higher oil prices inflate subsidy bills and threaten to derail fiscal consolidation plans, according to officials familiar with the matter. The options have been reviewed in meetings with Finance Minister Nirmala Sitharaman over the past month, although no decision has yet been made, the officials said, asking not to be identified because the discussions are private. There's little appetite to reduce the budget on capital expenditure or defense, they said, with officials instead reviewing other areas where spending could be trimmed, such as allocations for water resources and loans to states. A spokesperson for India's Finance Ministry didn't respond to a request for comment.
India's fiscal deficit has reached 21.4% of the budgeted target in just the first month of fiscal 2027, representing a dramatic escalation from the previous fiscal year. According to the latest Controller General of Accounts data, the fiscal deficit stood at ₹3.62 lakh crore in April, nearly double the fiscal deficit recorded in the previous fiscal. As per ICRA's analysis, the West Asia conflict has cast clouds on the fiscal outlook for FY2027, with higher expenditure requirements and potential revenue misses creating a fiscal slippage. The revenue deficit has reached 30.8% of the fiscal target at ₹1.82 lakh crore, while revenue receipts stood at ₹2.03 lakh crore or 5.7% of the budget estimate. The total expenditure for April was ₹5.75 lakh crore, representing 10.8% of the budget estimate. For the full fiscal year 2026, the deficit stood at 4.4% of GDP, reaching ₹15.19 trillion ($159.91 billion) or 97.5% of the government's revised estimates presented in February. However, the Centre achieved its fiscal deficit target of 4.4% of GDP for 2025-26, marking an improvement from the previous financial year's deficit level, according to provisional data released by the Controller General of Accounts.
Prime Minister Narendra Modi's government is facing mounting economic challenges as the Middle East conflict drags on, with oil import bills surging and the currency plunging to a record low. The inflation threatens to exceed the central bank's 4% target, creating additional pressure on the government's fiscal position. Economists warn that elevated oil prices could jeopardize the government's goal of narrowing the fiscal deficit to 4.3% of gross domestic product in the year ending March 2027, potentially resulting in the first fiscal slippage since the pandemic. Data last week showed the fiscal deficit nearly doubled from a year earlier to ₹3.6 trillion rupees ($37.8 billion) in April, the first month of the financial year, as spending far outpaced revenue receipts.
India has budgeted ₹1.71 trillion for fertilizer subsidies this fiscal year, but officials estimate the bill could almost double if global energy prices remain elevated. The West Asia conflict has created a fiscal slippage of approximately ₹1.3 trillion, according to ICRA's analysis, with the net impact on the Government of India's finances assuming an average oil price of $95 per barrel in FY27, with a decline to an average of ~₹80 per barrel in the second half of the fiscal. This would entail a fiscal slippage of ~30 basis points, in addition to the ~10 basis points estimated on account of a lower nominal GDP print vis-à-vis that used at the time of the presentation of the Union Budget for FY2027. The war has severely impacted crude oil prices and forced India to implement windfall tax cuts, with Oil Marketing Companies raising Retail Selling Prices of petrol and diesel by around ₹7.5 per litre each, though this remains relatively modest. The companies may continue to incur losses if crude oil prices persist above $95 per barrel for a sustained period, leading to lower dividend and corporate tax pay-outs to the government and necessitating higher fuel subsidies including LPG.
Any decision to prune spending could be politically tough for Modi as it risks hurting the government's key welfare programs for rural areas. Reducing funds to states could also turn into a political flashpoint, with many opposition-ruled states in the south having previously raised concerns over what they say is the unfair sharing of tax revenue from the federal government, limiting their ability to spend on roads, ports and highways. The government is wary of increasing borrowing beyond budgeted levels because additional debt issuance could push bond yields higher, officials familiar with the matter said. For now, the deliberations remain at an early stage, with officials expected to re-assess the situation in the second-half of the year, the people said. Even if spending reductions are eventually implemented, the people said it may not be enough to keep the deficit in check if oil remains around current levels. The government has already announced a series of measures aimed at stemming foreign outflows, supporting the rupee and attracting foreign capital, while the Reserve Bank of India has sought to bolster its foreign-exchange buffers amid sustained market volatility.
