Chief Economic Advisor V Anantha Nageswaran has told a parliamentary panel that if crude prices remain at $130 a barrel for 2-3 quarters, GDP growth could be reduced by 100 bps. He added that India can sustain its growth momentum if prices are around $90 a barrel.
CEA warns of GDP impact if crude hits $130 per barrel
The CEA made these remarks during an appearance before the Standing Committee on Finance on March 2. The committee’s report was tabled on Tuesday. Giving details of his deposition, the report said the CEA was asked how the government plans to mitigate the “triple whammy” of surging crude prices, market volatility, and maritime delays caused by the West Asian conflict. He was also quizzed about the government’s strategy to protect domestic fuel prices.
Scenario analysis highlights macroeconomic outcomes at different oil prices
In his response, the CEA presented multiple scenario analyses. He shared with Committee members the results of a stress-test exercise, simulating how the macroeconomy would react to oil at $90, $110, and $130 per barrel.
The CEA emphasised that the ultimate impact will depend on how long these prices remain relevant. If the shock is short-lived and temporary, then even if it escalates to $130, it will not matter. “By and large, the answers we get suggest that up to $90 per barrel, the macroeconomic assumptions for 2026-2027 of achieving around 7 per cent to 7.4 per cent real GDP growth, inflation remaining at or around 2 per cent, a current account deficit between 1 per cent and 1.2 per cent, and a fiscal deficit of around 4.3 per cent to 4.4 per cent will be feasible,” he said. In other words, up to $90, the macroeconomic impact is almost insignificant or not relevant.
“At 130 dollar per barrel, if the price of oil remains at that level for about two to three quarters, then the macroeconomic impact will be fairly significant. CPI inflation will rise towards 5.5 per cent. Real GDP growth will decrease from 7.4 per cent to 6.4 per cent. The current account deficit will increase from 1.2 per cent, where we currently are, to around 3.2 per cent. The fiscal deficit may rise from 4.4 per cent to 5.6 per cent,” he said.
Further data and GCC risks to influence macro forecasts
He also added that the analysis will be fine-tuned based on additional data, and as clarity emerges regarding the war’s objectives and its impact on oil prices, the Strait of Hormuz passage will not only be for oil but also for Liquefied Natural Gas (LNG), LPG, and other items.
He said there will be implications for remittances and other factors considered in the current account deficit. For example, when oil reaches $130, the fact that the current account deficit can reach 3.2 per cent also takes into account the possibility of further disturbances and impacts within the GCC countries, given Iran‘s current trend of attacking them, he added.
Parliamentary panel recommends strategic energy framework
In its observation, the Committee noted with serious concern the potential for a “Triple Whammy” of surging crude prices, market volatility, and maritime delays arising from the West Asian conflict. Accordingly, it recommends that the Department of Economic Affairs develop a Strategic Energy Mitigation Framework to protect the economy from oil price shocks exceeding $90.