India faces an energy shock but can seize the moment to build a more resilient economy

When covid struck, the blow fell directly on final consumption and production. Today’s shock is upstream, striking at the intermediate inputs that power virtually everything else. That changes the transmission mechanism, policy toolkit and likely duration of pain.

Comparisons with the 1973 Opec embargo or 1979 Iranian Revolution are more useful; the latter saw India turn to the International Monetary Fund in 1981 for its then-largest loan of 5 million special drawing rights.

The magnitude is serious: crude prices for the Indian basket surged to $112 a barrel in March this year from $69 just a month earlier. Even after a favourable change in the mix, household liquefied petroleum gas (LPG) costs jumped from ₹853 per 14.2kg cylinder to ₹913 in a fortnight, and quantity restrictions threaten to compound the damage.

Oil and gas account for nearly a third of India’s import bill. A rise in crude prices widens the current account deficit, stokes inflation and places an additional fiscal burden.

Our projections suggest that if the Indian basket stabilizes near $125 per barrel by end-June, macroeconomic damage will be manageable. The Centre’s fiscal deficit would rise to 4.5% of GDP (from 4.3%), and the current account deficit to 1.2% of GDP (from 0.8%).

Two often-overlooked cushions matter here: ad valorem customs duties boost revenues and India’s position as the world’s fifth largest refined petroleum exporter means higher crude prices are partially offset through export revenues. But if the war persists and the basket reaches $150 per barrel by December, the effects would turn non-linear—with the fiscal deficit approaching 5%, current account deficit near 4% and CPI inflation breaching the 4% target even with limited consumer pass-through.

The government has already reached for excise duty cuts, but that instrument is blunt and finite. The exchequer cannot absorb an open-ended subsidy; a ₹100 increase in the price of a subsidized LPG cylinder after June would reduce the potential subsidy burden by ₹6,000 crore through December, a measure worth considering.

How long will the shock last? Honest forecasters admit they do not know. A three-month baseline is plausible if diplomacy stabilizes shipping lanes and the Strait of Hormuz stays open. But history counsels humility: even after conflicts end, energy market normalization takes months, not days. Tanker routing, insurance premiums and refinery schedules all have their own momentum.

India faces this shock in a relatively enviable position, what the Reserve Bank of India (RBI) governor termed a Goldilocks moment of reasonable growth, declining inflation and a resilient external sector. That buffer is real but not unlimited.

The global economy proved surprisingly resilient through 2025, but 2026 looks fragile. Uncertainty acts as a tax on investment, as firms delay decisions and households cut discretionary spending. The indirect effects through confidence and markets may be worse than the direct hit to the fuel bill.

The immediate policy agenda has three aims. First, monetary policy must balance the inflationary impulse from energy costs against the growth slowdown the same shock induces, a genuine dilemma. Second, RBI has already moved to contain rupee volatility; further intervention may be warranted if capital flows turn choppier. Third, ensure structural resilience.

India’s strategic petroleum reserves cover only 74 days of demand, compared with 96 for Thailand and 173 for Japan. Hedging mechanisms for public sector oil importers are underdeveloped. The push for ethanol blending is directionally right but must be weighed against overall costs as well as fuel efficiency. Building genuine shock absorbers, not just emergency responses, must become a standing priority.

All this lands with uncomfortable force on India’s most ambitious aspiration: Viksit Bharat by 2047—the goal of becoming a high-income economy by the centenary of independence.

The arithmetic is unsparing. India’s per capita income stands at roughly $2,800 today. Reaching the high-income threshold of around $14,000 requires nominal per capita dollar income to grow at 8% or more every year for two decades, implying real GDP growth of at least 8% annually, without interruption. The arithmetic becomes even more demanding if the rupee continues to weaken against the dollar.

Shocks like the current one make that target harder to achieve. Consider the compounding arithmetic: a single year of 6% growth instead of 8.5% does not merely delay Viksit Bharat by one year, it creates a gap that requires above-trend growth in every subsequent year to close.

In fact, we have not fully recovered the output lost to the pandemic. In a world of higher-frequency disruptions, including pandemics, geopolitical crises, climate shocks and trade wars, the sustainable growth rate required between disruptive episodes must be higher still. Viksit Bharat demands not just ambition, but an economic growth model that is more resilient, diversified and capable of bouncing back faster.

India faces a stress test. It is not the first, and in a turbulent world, it will not be the last. The appropriate response is neither panic nor complacency, but a clear-eyed diagnosis and structural reform: build reserves, deepen hedges, accelerate the energy transition and set growth targets that account for the world as it is, not as we wish it to be.

Viksit Bharat is achievable. For that, each shock must be treated as an opportunity to further build an economy resilient enough to absorb the next one before it arrives. The government’s swift measures to support exporters signals exactly this kind of agility. As they say, never waste a crisis.

The author is professor of economics at Ashoka University and director and head of Ashoka Isaac Centre for Public Policy.