Dr Rajiv Kumar and Samriddhi Prakash
The Strait of Hormuz crisis is no longer merely a geopolitical event. It is becoming a full-spectrum macroeconomic challenge for India. Growth is slowing, inflationary pressures are building, fiscal space is shrinking and external balances are deteriorating.
The first signs are already visible in growth forecasts. Moody’s has revised India’s FY27 growth estimate downward from 6.8 per cent to 6 per cent, reflecting the drag from higher oil prices, weakening domestic demand and deteriorating external conditions. A reduction of nearly one percentage point in growth for a large economy like India means a significant loss of output, employment and investment momentum.
The inflationary consequences of the Hormuz crisis are unfolding steadily. Until recently, the government had managed to keep retail inflation relatively contained despite rising global commodity prices. Headline CPI inflation rose only modestly from 3.21 per cent in February 2026 to 3.48 per cent in April 2026. At first glance, this may suggest that inflationary pressures remain manageable. But the wholesale inflation data tells a different story.
Wholesale Price Index inflation surged from 2.26 per cent in February to 8.3 per cent in April—a dramatic increase over just three months. More importantly, the fuel and power component of WPI rose by 24.71 per cent. This divergence between wholesale and retail inflation is significant because it indicates that the eventual pass-through to consumers is only a matter of time.
Once transport costs, logistics expenses and manufacturing input costs begin feeding into final consumer prices, CPI inflation could rise substantially over the coming quarters. The Reserve Bank of India may soon find itself confronting a far more difficult inflation environment than current retail numbers suggest.
Another emerging consequence is in India’s fiscal position. India’s oil marketing companies (OMCs) are reportedly incurring losses of nearly Rs1,700 crore a day. The cumulative under-recoveries for the first quarter of 2026 are already estimated at nearly Rs1 lakh crore. The recent price increase will reportedly reduce these under-recoveries by 25 per cent. Subsequent price hikes are in the pipeline.
At the same time, the government has sharply reduced special excise duties on petrol and diesel by Rs10 a litre in an attempt to cushion consumers from the global oil shock. This decision weakens government fiscal balances, which are already under pressure.
India’s fertiliser subsidy bill, already among the largest subsidy expenditures in the budget, is now poised to rise sharply. The Hormuz crisis has disrupted fertiliser supply chains and pushed up global prices of urea, phosphates and natural gas. Since domestic retail fertiliser prices remain politically and administratively fixed, the government must absorb the entire increase through higher subsidies.
Trade-grade urea prices have more than doubled, while nearly 40 per cent of India’s fertiliser raw material imports remain exposed to the Gulf supply routes. Domestic production facilities are also operating below normal capacity due to input shortages and elevated energy costs.
As a result, India’s fertiliser subsidy burden, already around Rs1.86 lakh crore in FY26, could rise by another 20 per cent if the crisis persists. This creates a difficult policy trade-off: either the government protects farmers and absorbs the fiscal cost, or it allows higher farm-input prices that could eventually fuel food inflation and rural distress.
Another impact is reflected in the external-sector pressures that India is facing. India imports more than 85 per cent of its fossil fuel requirements, and a substantial share of these imports transit through the Strait of Hormuz. Any disruption in this corridor immediately widens India’s import bill, weakens the rupee and worsens the current account deficit.
India’s full-year current account deficit projections for FY27 have been deteriorating. The merchandise trade deficit for April 2026 has risen from $21.7 billion in January 2026 to $28.4 billion in April 2026 (a record high for April). Imports have risen by 10 per cent in April 2026 compared to April 2025, driven largely by energy costs, while exports remain unable to offset the pressure despite moderate growth. The services surplus continues to provide some cushion, but not enough to compensate for the oil shock.
Another dimension of external vulnerability that remains underappreciated is disruption in remittances inflows. While recent data is not available, prolonged instability in the Gulf region could weaken employment and earnings prospects for Indian workers in West Asia. Any slowdown would further worsen external-sector stress.
The pressure on the rupee’s exchange rate further reflects this external sector imbalance. The currency has depreciated by about 6 per cent against a weakening dollar since January 2026. India’s forex reserves have also declined by approximately $38 billion since February as the RBI intervenes to smooth volatility and defend the currency. The depreciating rupee will raise import costs of necessary inputs further pushing up inflationary pressures.
India had recently emerged as the world’s fourth-largest economy, but the growth slowdown and currency pressures have once again altered relative rankings, pushing India back to sixth place in nominal GDP terms.
Prime Minister Narendra Modi has urged citizens and ministries to reduce non-essential expenditure, conserve fuel and reduce consumption of import intensive products and services.
While this is prudent from a fiscal-management perspective, it may not be enough. India is perhaps faced with 1991 type of macroeconomic situation and external account vulnerability. Thankfully, our reserves are in much stronger position with an import cover of eleven months. The servicing of external debt, which is less than 20 per cent of GDP, should also not pose any issues. But uncertainty looms large in the global environment and future prospects are unpredictable.
Perhaps it is time to put together a small group of non-partisan domain experts charged with recommending structural measures that will effectively address the current challenges. In addressing these challenges with requisite boldness and clarity of purpose, there could well be the possibility of converting the present situation into an opportunity for changing the nature of India’s economic growth, making it less vulnerable to energy shocks; far more resilient; generating significantly higher number of jobs; and geared to increase our share in global goods and services flows.
Dr Rajiv Kumar is chairperson and Samriddhi Prakash is associate (strategy & research) at Pahle India Foundation.