- India’s subsidy burden increases from conflict, elevated commodity prices.
- Fertilizer, fuel, aviation sectors receive temporary government financial support.
- Fiscal targets maintained through stabilisation fund, non-tax revenues.
As the conflict in West Asia enters a prolonged phase and global commodity prices remain elevated, the Indian government is preparing for a sharp increase in its subsidy burden. Yet, despite mounting fiscal pressures from fertilisers, fuel and energy imports, officials remain confident that the economy can absorb the shock without derailing growth or upsetting fiscal targets.
The challenge is significant. Fertiliser subsidies alone could nearly double this financial year, while support measures aimed at shielding consumers and critical sectors from soaring energy costs are expected to add further pressure on public finances.
A Fertiliser Bill That Could Nearly Double
Among the government’s biggest concerns is the rising cost of fertiliser support.
Citing official estimates, fertiliser subsidies could climb to as much as Rs 3.4 lakh crore in FY27, nearly double the Rs 1.71 lakh crore provisioned in the Union Budget, reported The Financial Express.
The surge reflects a combination of elevated global fertiliser prices, disrupted supply chains and geopolitical tensions affecting critical shipping routes.
Officials point to the Strait of Hormuz as a key vulnerability. The waterway remains one of the world’s most important energy and commodity corridors, and disruptions linked to the ongoing US-Israel-Iran conflict have increased procurement costs across global markets.
Yet farmers have largely been shielded from these increases.
The retail price of urea has remained unchanged at Rs 266.5 per 45-kg bag since 2018, even though the subsidy component now exceeds Rs 4,000 per bag. Similarly, DAP prices have been held at Rs 1,350 per 50-kg bag since the pandemic despite rising international costs.
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Fuel Relief Comes At A Price
The government’s intervention is not limited to agriculture.
State-owned oil marketing companies (OMCs) have also been under pressure after absorbing a significant portion of the rise in global crude prices.
Citing sources, the report estimates that measures aimed at supporting fuel retailers and cushioning consumers could cost the exchequer approximately Rs 1.23 lakh crore. A major component of this support stems from the government’s earlier decision to reduce excise duty on petrol and diesel by Rs 10 per litre.
The move helped moderate the impact of higher crude prices on households and businesses, but it also reduced government revenues at a time when global energy markets remain volatile.
Why Airlines Received A Special Lifeline
One of the clearest examples of the government’s crisis-management approach emerged last week when the Union Cabinet approved a Rs 10,000 crore Aviation Turbine Fuel (ATF) Price Stabilisation Fund.
The aviation sector has been among the hardest hit by the West Asia conflict.
International ATF prices surged from Rs 60.50 per litre in March 2026 to nearly Rs 142 per litre by May. At the same time, the closure of Pakistani airspace forced Indian airlines to take longer routes on several international sectors, increasing fuel consumption and operating costs.
Rather than offering a direct subsidy to airlines, the government opted to support fuel suppliers through a stabilisation mechanism designed to reduce volatility.
The scheme will provide temporary assistance to OMCs whenever international ATF prices rise beyond a specified benchmark. Importantly, the support includes a recovery mechanism under which funds will be returned to the government once market conditions normalise.
Officials view the programme as a temporary shock absorber rather than a permanent subsidy.
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Fiscal Deficit Target Remains Intact
Despite these additional commitments, government officials insist there is no plan to alter the fiscal deficit target of 4.3 per cent of GDP.
According to the report, the FY27 Budget was framed with an expectation that global uncertainty would remain a recurring feature of the economic landscape. As a result, policymakers believe existing provisions and contingency mechanisms provide sufficient room to absorb current pressures.
Officials have also indicated that there is no immediate need for supplementary grants or additional borrowing during the upcoming Monsoon Session of Parliament.
The Economic Stabilisation Fund Comes Into Play
A key reason for the government’s confidence is the Economic Stabilisation Fund created last year.
The Rs 1 lakh crore corpus was designed specifically to deal with unexpected shocks, supply-chain disruptions and external crises.
The recently announced aviation fuel support package is being financed from this fund, allowing the government to respond quickly without materially affecting its broader fiscal framework.
The existence of such buffers has become increasingly important as geopolitical disruptions, commodity price swings and trade tensions become more frequent features of the global economy.
Raising Money Without Raising Taxes
To offset part of the growing subsidy burden, the Centre is accelerating efforts to generate non-tax revenues.
Disinvestment and asset monetisation have emerged as important pillars of this strategy.
Officials expect proceeds from these programmes to exceed the FY27 target of Rs 80,000 crore, supported by an active pipeline of minority stake sales and infrastructure monetisation initiatives. The strategic sale of IDBI Bank is also expected to move forward as part of the government’s broader divestment agenda.
Rather than relying solely on higher borrowing, policymakers are increasingly seeking to unlock value from existing public assets.
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A Push To Attract Global Capital
Alongside domestic resource mobilisation, the government is also attempting to attract greater foreign investment.
In coordination with the Reserve Bank of India, it recently announced tax exemptions on interest income and capital gains earned by foreign investors in government securities.
Officials believe the move could strengthen India’s case for inclusion in the Bloomberg Aggregate Bond Index, potentially unlocking substantial passive capital inflows and deepening the domestic bond market. Additional measures aimed at encouraging foreign direct investment are also understood to be under consideration.
Importantly, officials reiterated that there is no proposal to restrict capital outflows.
Growth Story Remains Intact
Perhaps the most striking aspect of the government’s assessment is its confidence in the broader economy.
Despite global uncertainty, elevated commodity prices and disruptions linked to the West Asia conflict, officials believe India’s underlying growth drivers remain strong.
Domestic demand has remained resilient, remittance flows have shown no significant deterioration and economic momentum from the final quarter of FY26 appears to have carried into the current financial year.
The government plans to reassess conditions after first-quarter growth data and monsoon developments become clearer later this year.
For now, however, policymakers appear convinced that while the cost of shielding consumers, farmers and businesses is rising, the economy remains capable of weathering the storm.
