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Informist, Wednesday, Jul. 29, 2026

 

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--Fin min: Amid evolving global challenges, India must reimagine responses 
--Fin min: Amid evolving global challenges, India must reinvent itself 
--Fin min: Global challenges show no sign of letting up 
--Fin min: India econ sustained growth momentum Q1 despite global risks 
--Fin min: Swift policy responses, implementation key for foreign investment 
--Fin min: Downside risk to growth remains from West Asia war 
--Fin min: Upside risk to inflation, fisc gap, CAD remains from West Asia war 
--Fin min: Crude oil price rise, if sustained, can put pressure on CAD 
--Fin min: Crude oil price rise, if sustained, can put pressure on fisc gap 
--Fin min: Recent policy steps to give impetus to capital inflows near term 
--Fin min: India's external sector exhibits notable resilience amid risks 
--Fin min: Building energy, industrial metal buffers key for econ stability 
--Fin min: Govt steps seen strengthening manufacturing, industrial sector 
--Fin min: CPI outlook remains cautious, well-supported 
--CONTEXT: Fin min releases Monthly Economic Review for July 
--Fin min: Domestic demand expected to continue supporting economic activity 

 

NEW DELHI – The recent resurgence in global crude oil prices, if sustained, could re-emerge as a source of pressure on both the fiscal deficit and the current account deficit, the finance ministry said Wednesday. The "persistent stand-off in the Gulf region (West Asia)" also poses upside risks to inflation and downside risks to growth, the ministry said in its Monthly Economic Review for July.

 

"Global economic uncertainty resurfaced during the month as geopolitical tensions in West Asia escalated, leading to renewed upward pressure on crude oil prices after a brief period of easing," the ministry said in the report. "However, the increase remains contained compared with the sharp spike witnessed during the initial phase of the conflict," it said.

 

Crude oil prices have been volatile in July and have risen over the past two weeks, breaching even $100 per barrel with flare-ups in the West Asia conflict. Brent crude oil price rose overnight Wednesday after the US military said it had intercepted multiple missiles launched by Iran, while Tehran's military stopped vessels from passing through the Strait of Hormuz. Brent crude for October delivery was at $86.77 per barrel, up from $84.27 per barrel at the end of Indian trading hours Tuesday. "The renewed escalation has heightened uncertainty around the global growth and inflation outlook," the ministry said.

 

The government's finances have been under pressure this year, with some economists expecting the Centre to miss its fiscal deficit target for the financial year 2026-27 (Apr-Mar). Economists also unanimously expect India's current account deficit to widen in FY27, though they diverge on the extent of the deficit amid persisting global uncertainties and fluctuating crude oil prices.

 

For Apr-May, the government's fiscal deficit was over 12 times the year-ago figure. The sharp rise in the fiscal gap was due to 18% growth in total expenditure and a 2% drop in revenue. The Union Budget had pegged the fiscal deficit for FY27 at 4.3% of GDP, or INR 16.96 trillion. The fiscal deficit target for FY27 will, however, be 4.5% of GDP, based on the downward revision in India's nominal GDP in the new series with FY23 as the base year. Higher energy and commodity prices will increase India's import bill as well as its subsidy expenses.

 

Current account deficit, on the other hand, is estimated at 0.8-2.0% of GDP, against 0.6% of GDP in FY26. India's current account was in a deficit of $25.2 billion in FY26, slightly higher than $22.9 billion in FY25. As a share of GDP, the deficit remained unchanged in FY26 at 0.6%. In the first two months of the current financial year, India's current account recorded a surplus of $2.8 billion, compared with a deficit of $4.1 billion in the corresponding period in FY26. In Apr-Jun, India's merchandise trade deficit widened over 26% on year to $86.86 billion.

 

INFLATION, GROWTH

Inflation in India has already seen upward pressure after the war broke out in West Asia at the end of February. According to the finance ministry, two factors underlie current inflationary pressures--unfavourable weather conditions that are exerting upward pressure on food inflation and the transmission of higher global fuel prices to energy commodities at the retail level. As per the latest data, India's headline inflation rose to an 18-month high of 4.38% in June, above the Reserve Bank of India's medium-term target of 4%, primarily because of higher food and fuel inflation. At 4.38%, India's retail inflation exceeded the RBI's medium-term target for the first time in 17 months.

 

To add to this, India is facing super El Nino weather conditions this year. The India Meteorological Department has projected the southwest monsoon rainfall to be below normal at 90% of the long-period average. Severe monsoon deficits can translate into elevated food CPI inflation, weakened rural demand, and fiscal pressure from higher subsidy burdens, the ministry said. "...mitigating these macroeconomic risks requires proactive food stock management, calibrated trade interventions, operationalisation of district contingency plans, promotion of drought-tolerant seeds, close monitoring of reservoir allocations, and coordinated inter-ministerial action".

 

That said, while global crude oil price fluctuations from geopolitical events and potential El Nino weather patterns are being monitored carefully, the domestic inflation outlook remains cautious and structurally well-supported, according to the ministry. This is anchored by active measures to support price stability with robust agricultural commodity procurement and targeted contingency plans in place.

 

Other external factors also pose downside risks to India's economic growth, but India's macroeconomic fundamentals and domestic demand are expected to continue supporting economic activity, the ministry said. "The global economy continues to face heightened uncertainty amid geopolitical tensions and evolving trade and financial conditions, with risks to the outlook remaining tilted to the downside," it said. Despite the uncertain environment, the Indian economy sustained its growth momentum during the first quarter of FY27, supported by resilient domestic demand, the report said. However, some high-frequency indicators, such as e-way bills and the manufacturing purchasing managers' index, witnessed some softening in momentum, it added. 

 

The RBI had cut India's FY27 growth forecast by 30 bps to 6.6% in June, reflecting the risks arising from the West Asia war. Earlier this month, the International Monetary Fund and the Asian Development Bank cut their forecasts for India's GDP growth to 6.4% and 6.6%, respectively.

 

EXTERNAL SECTOR, WAY FORWARD

According to the finance ministry, while geopolitical tensions and heightened global uncertainty continue to pose risks through trade, commodity prices, and capital flows, the external sector has demonstrated "notable" resilience. Strong export performance, a sustained services surplus, and robust remittance inflows have supported the current account while recent policy measures are expected to strengthen capital inflows in the coming months, it said. "Together with comfortable foreign exchange reserves, these developments are expected to help preserve external sector stability amid an uncertain global environment," it added.

In June, the central bank announced a host of measures to attract foreign capital, including concessional foreign exchange swap facilities for banks' foreign currency non-resident deposits and for public-sector borrowings, expanded routes for government securities, and changes to export realisation norms. The finance ministry also rolled out tax concessions for investments in Indian bonds to draw foreign capital.

 

The full impact of the RBI and government's steps will take longer to appear in balance of payments data, but early responses show the measures have been encouraging, the ministry said. Despite these measures, foreign portfolio investment flows continue to reflect persisting investor caution amid renewed tensions in West Asia, the ministry also noted. "Swifter policy responses and their implementation are vital to encourage foreign and domestic investment in the Indian economy," it said.

 

As part of policy intervention, the ministry also said in its report that continued implementation of strategic initiatives across sectors is expected to strengthen domestic manufacturing capabilities, enhance supply-chain resilience, and improve the competitiveness of India's industrial sector. Building adequate buffers across energy and industrial metals is likely to remain important for India's industrial and macroeconomic stability, it said.

 

In the report, the ministry also noted that global challenges show no sign of letting up, with uncertainties mounting. In that case, India has to reinvent itself and reimagine its responses to global imperatives if it has to achieve strategic leverage. "As external conditions evolve, the continued interplay of domestic reforms, prudent macroeconomic management, and swift policy responses, backed by consistent on-ground implementation, will remain important in shaping India's economic trajectory," the finance ministry said. 

 

To conclude, according to the report, India has shown resilience in the midst of recurring external uncertainties and must be prepared for the challenges to continue in the future as well. "Recent years have been a time for hunkering down and battening down the hatches. Coming years will be no exception," the finance ministry said.  End

 

US$1 = INR 95.64

 

Reported by Priyasmita Dutta

Edited by Rajeev Pai

 

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