Potential Rs 70,000 Crore Increase in Fertiliser Subsidy
India's fertiliser subsidy bill could surge by up to Rs 70,000 crore in the fiscal year 2026-27 (FY27) if crude oil prices average between USD 80 and USD 90 per barrel, according to a report by Bank of Baroda (BoB). This projected increase poses a significant challenge to the government's fiscal consolidation efforts.
Impact on Fiscal Deficit and Revenue
The report highlights that elevated oil prices could strain the fiscal deficit ratio, potentially derailing the government's budgeted fiscal deficit target for FY27. The fertiliser subsidy bill alone may rise by 30-40 percent, translating into an additional burden of approximately Rs 50,000 to Rs 70,000 crore if crude prices remain elevated.
The report states: "Challenges for meeting budgeted FD ratio if oil prices remain elevated, Fertiliser subsidy bill can increase by 30-40 per cent (approx. Rs 50-70,000 crore). Shortfall from special additional excise duty cut can be around Rs 1.3 lakh crore."
Revenue Shortfall from Excise Duty and OMCs
Beyond the higher fertiliser subsidy burden, the government could face a revenue shortfall of about Rs 1.3 lakh crore due to a reduction in special additional excise duty collections. Additionally, dividend payouts from oil marketing companies (OMCs) may affect the Centre's non-tax revenue, as nearly 30 percent of public sector undertaking dividend receipts come from OMCs. Corporate tax collections could also come under pressure if OMCs report losses, given that they account for around 5 percent of corporate tax collections.
Capital Expenditure Programme at Risk
The report warns that the government's capital expenditure programme may need to be revisited if fiscal pressures intensify. The Centre's capital expenditure has risen steadily from Rs 5.9 lakh crore in FY22 to a budgeted Rs 12.2 lakh crore in FY27. Fiscal slippage could be between 0.3-0.4 percent of GDP due to these shocks, depending on expenditure management.
Assumptions and Future Outlook
For its FY27 projections, Bank of Baroda assumed that the impact of the ongoing conflict would be felt for the next six months and that crude oil prices would average between USD 80-90 per barrel during the year. The report also cautioned that maintaining the fiscal deficit target may become difficult if oil prices remain high for an extended period.
