Facing Economic Shock

By Dhurjati Mukherjee

The outlook for the Indian economy in the current fiscal sadly does not appear quite encouraging, despite growing 7.8% in January-March quarter of the last fiscal. The Reserve Bank of India left the repo rate unchanged at 5.25% but reduced its growth forecast for FY27 and raised its inflation projections. It even signalled the threat could broaden economy-wide beyond fuel and commodities, if supply-side pressures persist.

While higher oil prices and disrupted supply chains have already started feeding in costs, the Monetary Policy Committee (MPC) has preferred to wait for more clarity on the duration and intensity of the Persian Gulf conflict before acting. Meanwhile, the government stated it would exempt foreign institutional investors and Bank for International Settlements from capital gains tax on receipts arising from interest or sale of government securities. This is aimed at attracting foreign capital as the rupee weakened over 5% this year amid elevated oil prices and equity outflows.

Undeniably, rise in fuel prices and the sharp slide of the Indian rupee, perhaps now the worst performing currency in Asia, have been major causes of worry. The increased fuel price is being felt by all Asian countries, but their currencies have been stable. This apart, the net inflow of foreign exchange has dwindled sharply.

The phenomenon of the flight of foreign investments maybe be attributed to dwindling investment opportunities in the country. In fact, even Indian investors are not quite aggressive, either through expansion or modernisation of existing projects or starting new ones. The sunrise industries of AI, chip making and processing of rare earth minerals haven’t come up as investment in these sectors has been meagre. AI’s rapid advent is making coding and other related jobs somewhat obsolete. The effect has been severe with inflation and unemployment leading to slower growth, perhaps even recessionary type conditions.

While these problems have emerged as a fall-out of the West Asian crisis and the delay in signing of a trade deal with the US, another problem is that India’s macro-economic data has become less credible. Experts note India’s global stature has come down, though from the economic perspective it has been relegated to the 7th position. The large aggregate size of the economy does not have much implication when the per capita income is very poor. India is structurally a weaker economy than is being made out by official narratives of prosperity.

In recent months, high energy and gold and silver prices have pushed up India’s trade deficit as export growth has also moderated. Prime Minister Modi’s appeal asking people not to buy gold for a year or put off foreign travel or consume less fuel, may be in right spirit, there are factors which can’t be ignored. Such as, public transport is poor in most urban areas and people  depend on their own transport for commuting.

The current account deficit may widen to around 2% of GDP in the present fiscal following oil prices hovering around $100 per barrel and averaging $95 per barrel. At a recent CII meet, banker Uday Kotak cautioned there is a ‘major shock’ coming through an increase in oil prices while calling for lowering dependence on foreign capital and focusing on building a strong domestic pool of long-term risk capital to achieve economic self-reliance. While the warning needs to be heeded, it shall take time for India to reduce dependence on oil and gas.

Research by Emkay Global Financial Services states fiscal deficit is already well above the 3% limit and the massive pre-poll promises made in West Bengal and other states could add another 2.2 to 3.4% of state gross domestic product in unaffordable expenses. When ongoing retail prices of petrol, diesel, LPG and kerosene spike, consequences start rippling swiftly through the economy. The poor and the low-income groups are the hardest hit since energy comprises a large share of their household budgets.

However, a deeper concern is structural. India’s strategic petroleum reserves, a buffer against exactly the supply shock now absorbing, are a fraction of those maintained by other economies. They amount to less than 2% of China’s reserves, about 5% of the US and 27% of South Korea’s, with domestic crude production having fallen by around 26% over past decade and import substitution now approaching 89% of total oil needs. The high dependence leaves India acutely exposed to geopolitical developments. Addressing this vulnerability is a long-term, or at least a medium-term strategy that needs to be addressed via an effective plan at the earliest.

In the meantime, the government has taken some measures which include a Ra 1 lakh crore economic stabilisation fund, excise duty cuts on petrol and diesel, reimposition of export levies on aviation turbine fuel and an expanded Emergency Credit Line Guarantee Scheme with an outlay of Rs 15,000 crore. In addition, a Resilience & Logistic Intervention for Export Facilitation package has been approved with an initial outlay of Rs 497 crore aimed at helping exporters. Analysts opine that even the economic stabilisation fund shall not last more than three months at the current pace.

Another aspect of this economic syndrome is the declining foreign investor sentiment towards India in recent months. As per available figures, overseas investors have so far pulled out about $22.17 billion, exceeding the $18.9 billion recorded in all of 2025, underscoring the scale of the shift in capital flows. Additionally, the rupee has depreciated by 5% having reached Rs 96 viz the dollar, further affecting the economy and putting pressure on both the current account ad overall balance of payments in FY27.

Finally, it needs to be stated that oil, fertiliser, gold and cooking oil – the four things the government wants to buy less – along with electronics make up almost half of India’s import bill. While these are intermediate goods, if foreign investment, manufacturing and consumption increase, India’s import bill may go up. Obviously, the only remedy is to increase exports by scouting for new markets. This is easier said than done though it is expected that exports to the Gulf countries would increase steadily in the coming months. In sum, the writing is on the wall—the rise in oil and gas prices along with the trade deficit will be felt in the coming months and can’t be wished away.— INFA