The prolonged conflict between the United States and Iran has begun to impact India's economy significantly. Economists warn that the longer the crisis persists, the more challenging the situation will become for the country. Finance Minister Nirmala Sitharaman, speaking at the 37th foundation anniversary of the Small Industries Development Bank of India (SIDBI) on Monday, stressed the need to closely monitor three critical areas: fuel, fertiliser, and foreign exchange (forex). She asserted that the Indian economy remains resilient but requires careful policy responses to protect domestic growth.
The Importance of the 3Fs
Sitharaman highlighted that the government's policy response has been carefully calibrated. The recent reduction in excise duties on petrol and diesel will have a revenue impact of nearly Rs 1 lakh crore. She also noted that apart from higher crude oil prices, fertiliser prices have reached "unimaginable" levels, while elevated gold prices are creating challenges on the external sector front. Prime Minister Narendra Modi's appeals for conservation should be viewed in this context.
Fuel: Rising Costs and Inflation
India's imports of crude oil, LPG, and LNG are substantial. With global energy prices rising, the cost is being passed on to consumers. Petrol prices increased by Rs 2.61 per litre and diesel by Rs 2.71 on Monday, marking the fourth hike in less than two weeks. Total fuel price increases since May 15 have reached nearly Rs 7.5 per litre. Fuel prices are now at their highest since May 2022, after remaining largely unchanged for over two years, except for a Rs 2-per-litre reduction in March 2024.
Global crude prices surged over 50% since late February following US-Israeli strikes on Iran and disruptions to shipping through the Strait of Hormuz. State-run oil retailers had refrained from passing on higher costs for several weeks to protect consumers. Since the conflict began, domestic LPG cylinder prices have increased by Rs 60 per 14.2-kg cylinder, and CNG prices have risen by Rs 4 per kg since mid-May. These repeated increases are expected to intensify inflationary pressure and raise transportation and logistics costs.
India's retail inflation rose to 3.48% in April from 3.40% in March, while wholesale inflation climbed to a 42-month high of 8.3%, driven largely by higher fuel and energy prices. Prime Minister Modi has urged citizens and government departments to conserve fuel, promote remote working, and reduce non-essential travel to ease pressure on forex reserves and the current account deficit.
Fertilisers: Fiscal Strain Ahead of Monsoon
Soaring fertiliser prices are a concern for the agriculture sector, especially ahead of the monsoon season. India imports a substantial portion of its fertiliser needs, and rising international prices have strained the government's finances, as fertilisers are heavily subsidised for farmers. Government officials last week indicated that the fertiliser subsidy burden for FY27 could rise sharply to nearly Rs 2.4 lakh crore, an increase of around Rs 70,000 crore over current estimates, due to rising import costs of urea and other fertilisers amid the West Asia conflict.
Aparna S Sharma, speaking at an inter-ministerial briefing, said the subsidy bill is expected to increase, though the exact percentage cannot yet be quantified. When asked if the rise could be around Rs 70,000 crore, she responded that it "may be." The Union Budget had estimated fertiliser subsidies for 2026-27 at Rs 1.7 lakh crore. Despite supply chain disruptions, availability for the upcoming Kharif season remains comfortable, with current stocks at nearly 201 lakh tonnes, about 51% of the estimated requirement of 390 lakh tonnes. Domestic production continues at roughly 80,000 tonnes per day, with output since March reaching around 86.2 lakh tonnes, compared with 93 lakh tonnes in the same period last year.
Forex: Reserves Under Pressure
Foreign exchange reserves serve as a frontline buffer against external shocks. India's forex reserves have been resilient but are now under strain as the rupee depreciated to nearly 97 against the US dollar, prompting RBI intervention. India's forex reserves declined by $8.094 billion to $688.894 billion in the week ending May 15, after increasing by $6.295 billion to $696.988 billion the previous week. Reserves had touched a record high of $728.494 billion in February, but following the Middle East conflict, they have declined as the RBI sold dollars to support the rupee.
Prime Minister Modi has made multiple public appeals since May 11, urging citizens to conserve forex by reducing overseas travel, cutting fuel consumption, and avoiding gold purchases for a year. Economists say India's reserves remain strong enough to support the rupee during the current depreciation phase. However, investors are paying greater attention to reserve adequacy as the rupee repeatedly hits fresh record lows. A Bloomberg report estimated that the RBI could deploy close to $150 billion from its $690 billion reserves before India's import cover falls to levels seen during the 2013 taper tantrum.
In conclusion, the US-Iran conflict is exerting pressure on India's economy through the three critical areas of fuel, fertiliser, and forex. While the government remains vigilant, the situation demands continued monitoring and calibrated policy responses to safeguard economic stability.
