Evolving West Asia crisis may have fiscal impact in FY27: FinMin to panel | Economy & Policy News

The ongoing conflict in West Asia may have fiscal implications during 2026-27 (FY27), the finance ministry told Parliament’s 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 an aim to lower its fiscal deficit to 4.3 per cent of gross domestic product (GDP) in FY27 from 4.4 per cent last year.

An analysis presented to the committee previously 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 go up to $90 a barrel.

However, if crude oil prices rise and stay close to $130 per 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 can lead to “triple whammy” of surging crude oil prices, market volatility, and maritime delays. “Notwithstanding these emerging headwinds, the central government enters the financial 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 (ESF) in the public account, provides room for fiscal interventions.”

The ESF 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 (Y-o-Y) to ~3.1 trillion during April-June, according to government finance data.

However, limited increase in the deficit was largely a function of the timing of tax devolution to states rather than 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 the 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 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. This is particularly true in an environment of limited revenues and elevated deficits, the ministry said.