- Jefferies warns India's non-defence capex growth may stall in FY27 due to fiscal squeeze
- Oil price drop increases petroleum and fertiliser subsidies, shrinking oil tax revenues
- Oil marketing companies need higher pump prices to break even at $85-87 per barrel
Global brokerage Jefferies has flagged that India's non-defence capital expenditure growth could stall in FY27, as a slide in oil prices triggers an unexpected fiscal squeeze and pushes up petroleum and fertiliser subsidy outgo even as revenues from oil taxes shrink.
In its India Strategy note, Jefferies estimates the combined fiscal impact at Rs 1.25-1.5 lakh crore, a burden it expects to be shared between the central government, state governments, and oil marketing companies (OMCs).
The brokerage believes the government will be compelled to offset the shortfall by trimming expenditure elsewhere with non-defence capex the most likely candidate, potentially leaving its growth flat year-on-year in FY27.
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On the OMC side, Jefferies notes that at current retail prices, oil marketing companies are at a breakeven of $85-87 per barrel, implying pump prices will need to rise further from present levels to restore viability. The brokerage also expects a renewed push on PSU disinvestments as a compensating fiscal measure.
What Other Top Brokerages Are Saying
Jefferies is not alone in sounding the alarm. Morgan Stanley has estimated a potential fiscal slippage of 0.3-0.5% of GDP in FY27, driven by higher fertiliser subsidies and weaker tax collections, and has trimmed its India GDP growth forecast to 6.2%.
Research firm BMI, a unit of Fitch Solutions, has gone a step further — warning that India's fiscal deficit could overshoot the budgeted 4.3% target and widen to 4.5% of GDP in FY27, as higher subsidy spending reverses recent fiscal consolidation efforts that had reduced energy and fertiliser subsidies to around 1.5% of GDP.
Macquarie has flagged a broader tail risk on the oil market itself, warning that crude could surge to $200 a barrel if the Iran conflict persists and the Strait of Hormuz remains shut — a scenario it puts at a 40% probability. Were that to materialise, India's subsidy burden would be compounded considerably.
Ratings agency ICRA, too, has cautioned that elevated crude prices could derail India's FY27 deficit target despite existing fiscal buffers, and warned that energy prices are likely to remain above budgeted assumptions even if geopolitical tensions ease.
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