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MARCH 2026

The Reserve Bank of India and its Monetary Policy
Committee, therefore, will have to be a little more focused
on the need for maintaining price stability in its monetary
policy reviews in the coming months.

The government has done its bit to contain retail inflation
in 2026-27. Its decision to slash special additional excise
duty on petrol and diesel has helped provide relief to the
oil refiners and spared the consumers from an immediate
impact of a rise in crude oil prices. But it is not clear for
how long retail petrol and diesel prices can be kept in
check, if the situation on the West Asian war front
worsens. Retail inflation, therefore, is likely to move
northwards during 2026-27, if oil prices remain elevated. The tasks before the Indian government are hugely
onerous and challenging. Even if the war comes to an end
within a few weeks, its impact on oil prices will have to be
At another level, the impact of the duty cut is estimated to
result in a revenue loss of Rs 1.3-1.7 trillion on an managed as normalcy in the West Asian region may not
annualised basis. For the full year of 2026-27, a revenue return soon.
loss of this nature could widen the fiscal deficit by
0.33-0.43 per cent of gross domestic product (GDP) in The West Asian turmoil, therefore, is no ordinary crisis. If
2026-27. Of course, the export duty levied on aviation the Indian economy has to emerge out of it with the least
turbine fuel will reduce the fiscal deficit impact marginally. damage, then there is need for a package of policy
But there is no denying that the task of reducing the fiscal reforms. At one level, the government must refocus its
deficit to 4.3 per cent of GDP, as projected in the 2026-27 energies on increasing its domestic capacity for
Budget, will become formidable. producing energy to reduce dependence on imports.

Another hit on the Union government’s public finances Domestic policy reforms have to be ushered in to make
can be expected from the fertiliser sector, where prices the Indian manufacturing sector more competitive, not
have shot up in view of the crude oil crisis. The demand for just to reduce costs of production to sustain domestic
maintaining fertiliser prices for farmers may have to be demand, but also to boost exports. The need for reducing
met. This will mean a higher fertiliser subsidy bill, which at and rationalising import tariff, particularly for
Rs 1.7 trillion estimated for 2026-27 (a projected cut of intermediates and raw materials, will be no less important.
over 8 per cent over 2025-26) will have to be revised India must actively examine joining global trading
upwards, putting more pressure on the fiscal deficit. arrangements like the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (CPTPP) and
the Investment Facilitation for Development (IFD)
As for the external sector, India’s merchandise trade
deficit had widened to about $280 billion in 2024-25 or Agreement, a plurilateral arrangement under the World
about 7.5 per cent of GDP. The trade deficit in the first Trading Organisation (WTO).
eleven months of 2025-26 has already risen sharply to
$301 billion, which would be over 8 per cent of GDP, and is Most importantly, steps will be needed to encourage
set to be higher by the end of March 2026. Given the way domestic industry to increase investments in the country,
global trade has fared and the way the West Asian crisis whose current pace needs to pick up substantially. And
will dampen further trade prospects with oil prices rising, the government must avoid falling into the trap of
the deficit is all set to be higher in 2026-27. introducing non-tariff barriers for imports. Since there will
be pressure on the government’s revenue and
expenditure, there will be need for a more pragmatic
The current account deficit will also widen from about 1
per cent of GDP in 2025-26 to about 2 per cent of GDP in approach to fiscal consolidation. These steps are all
2026-27, according to some experts. This will be no reforms that the government must examine actively and
comfort for managers of the Indian economy. Overall consider their implementation. This way, the West Asian
foreign investment flows will continue to remain weak and crisis will not remain only a challenge but will become an
there could be a net balance of payments deficit, putting opportunity for reviving the Indian economy’s growth and
pressure on India’s foreign exchange reserves. development.

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