The ongoing conflict in West Asia may have fiscal implications during 2026-27 (FY27), the Finance Ministry informed the Parliamentary Standing Committee on Finance.
“As the evolving West Asia conflict begins to exert pressure on economic activity, it may have fiscal implications during 2026-27,” the committee’s report presented in Parliament on Wednesday quoted the Finance Ministry’s Department of Economic Affairs (DEA) as saying.
The government has set a target to lower its fiscal deficit to 4.3 per cent of gross domestic product (GDP) in FY27 from 4.4 per cent of GDP last year.
An analysis presented earlier to the committee by Chief Economic Adviser (CEA) V Anantha Nageswaran showed that the fiscal deficit may be around 4.3-4.4 per cent of GDP if crude oil prices rise to $90 a barrel. However, if crude oil prices rise and remain close to $130 a barrel, the fiscal deficit will increase to 5.6 per cent of GDP, the CEA’s analysis showed.
The committee noted that the West Asia war could lead to a “triple whammy” of surging crude oil prices, market volatility and maritime delays. “Notwithstanding these emerging headwinds, the central government enters the fiscal year from a position of relative prudence,” the Finance Ministry’s DEA told the committee. “The fiscal consolidation path adhered to in recent years, coupled with the Budget’s conservative assumption of a gross tax revenue buoyancy of 0.8, which is below the historical average, and the creation of an Economic Stabilisation Fund in the public account, provides room for fiscal interventions.”
The Economic Stabilisation Fund of ₹1 trillion specifically offers the government flexibility to absorb near-term shocks of mild intensity without immediately deviating from the fiscal deficit target, the ministry said.
The fiscal concerns come even as the Centre maintained a tight grip on its fiscal deficit in the first quarter of FY27. The fiscal deficit expanded 9.6 per cent year-on-year to ₹3.10 trillion during April-June, according to government finance data. However, the limited increase in the deficit was largely a function of the timing of tax devolution to states rather than a broad-based improvement in revenue or moderation in expenditure.
To ensure long-term stability amid volatile crude oil prices, the committee recommended that the DEA develop a Strategic Energy Mitigation Framework to protect the economy from oil shocks exceeding the $90 threshold, the report said.
The Finance Ministry also said that fiscal space at the Union level must be complemented by a sound and sustainable fiscal position at the state level, given the states’ critical role in aggregate public expenditure. “The Economic Survey 2025-26 noted that the combined fiscal deficit of state governments, as a proportion of GDP, has gradually edged up over the past three years, reflecting emerging pressures on state finances,” the Finance Ministry said.
The Economic Survey also highlighted a structural shift in the composition of states’ revenue expenditure, with a growing share allocated to unconditional cash transfers and other committed expenditure. As these transfers absorb a rising share of available fiscal space, the scope for expanding productive capital expenditure becomes increasingly constrained, particularly in an environment of limited revenue and elevated deficits, the ministry said.
Among the 18 states analysed in the DEA’s Monthly Economic Review for April, nine have projected a revenue deficit for FY27, while 10 are expected to exceed the 3 per cent fiscal deficit threshold, it said.
