S&P economist sees a ‘green’ future – Firstpost

India’s economy remains resilient despite mounting pressure from soaring oil prices, a weakening rupee and widening external imbalances triggered by the Iran war, but the longer the energy shock persists, the greater the risks to growth and inflation, said Vishrut Rana, Asia-Pacific economist at S&P Global Ratings.

In an interview with Firstpost, Rana said India entered 2026 from a position of relative strength, supported by strong domestic demand, healthier private sector balance sheets and improving investment activity. However, he warned that the country’s structural dependence on imported energy continues to leave it vulnerable to external shocks.

“The economy absolutely needs these energy imports to continue functioning normally,” Rana said, explaining why concerns around the current account deficit and the rupee have intensified as crude prices surged following the conflict in West Asia.

His remarks come as policymakers move aggressively to contain pressure on India’s external sector. Over the past week, the government has raised
import duties on gold and silver, restricted silver imports, urged fuel conservation measures and, after the interview was conducted on May 13,
raised retail fuel prices for the first time in four years.

Oil shock revives current account fears

India’s merchandise trade
deficit widened sharply to $28.38 billion in April as crude imports surged amid supply disruptions linked to the Iran conflict. The rupee has weakened past the 96-per-dollar mark, becoming Asia’s worst-performing currency this year.

Rana said the concern is rooted in the nature of India’s energy dependence.

“The current account needs for the economy are inelastic,” he said. “Whether energy prices go up or down, there’s a certain amount of fuel the economy must import.”

India imports more than 80 per cent of its crude oil requirements and around 60 per cent of its cooking gas needs, making elevated oil prices particularly damaging for inflation, fiscal management and external balances.

“When current account financing needs rise sharply in a short duration, it causes strains on the currency and on foreign exchange financing,” Rana said.

Still, he argued that India’s macroeconomic position remains stronger than during previous external crises.

“The domestic economy has considerable resilience,” he said, citing post-pandemic recovery in consumption and stronger private sector balance sheets.

He also pointed to India’s foreign exchange reserves and relatively stable external financing position as buffers against near-term volatility.

“If the current account deficit widens for a couple of years, the economy can weather that,” he said.

Government response not necessarily panic

The government’s recent moves — including raising tariffs on gold and silver imports from 6 per cent to 15 per cent and restricting silver imports — have fuelled speculation that policymakers are increasingly worried about external pressures.

But Rana said the measures should be seen primarily as attempts to reduce strain on the current account.

“Energy and gold are two of the big-ticket imports for the economy,” he said.

India imported more than $50 billion worth of gold in 2024, second only to crude oil in terms of major import categories.

“That makes import duties more attractive because they can substantially reduce current account financing needs,” Rana noted.

He declined to comment on the political messaging around the measures but said policymakers were clearly attempting to manage short-term external pressures stemming from the energy shock.

Growth outlook remains intact, but risks rising

While several economists have flagged downside risks to India’s growth outlook, Rana said the broader medium-term trajectory remains favourable.

“We continue to project relatively strong growth for the Indian economy, not just in FY27 but actually improving beyond that,” he said.

According to Rana, favourable demographics, improving manufacturing competitiveness and sustained investment flows continue to support India’s long-term outlook.

However, he warned that prolonged high oil prices could begin to erode economic momentum.

“Estimates by the RBI and the Ministry of Finance suggest that a sustained $10 energy shock can reduce growth between 10 and 20 basis points,” he said.

He also cautioned that delayed pass-through of higher fuel costs cannot continue indefinitely.

“The longer the shock goes on, the more severe the economic impact becomes,” Rana said.

“Eventually, some of these costs have to be passed on to consumers because the sustainability of subsidising energy imports becomes more difficult over time.” That, he said, could eventually weaken both household consumption and corporate production as margins come under pressure.

Diversification helping reduce vulnerability

Rana said India’s efforts in recent years to diversify crude sourcing beyond traditional suppliers in West Asia have helped reduce risks associated with supply disruptions.

“Diversification of sourcing is a key risk mitigator,” he said. “It definitely mitigates risk to some extent.”

India has significantly increased oil purchases from Russia, Latin America and Africa since 2022, reducing dependence on any single route or supplier.

Still, Rana stressed that the biggest risk would emerge if supply disruptions become severe enough to restrict physical availability of fuel.

“If energy supplies are not available at any price, that becomes the key risk,” he said, noting that tightness is already visible in parts of the LPG market across Asia-Pacific.

Energy crisis may accelerate green transition

Rana said the current crisis could ultimately accelerate India’s push towards renewable energy and green hydrogen as policymakers seek to reduce structural dependence on imported fossil fuels.

“Episodes like this highlight the vulnerabilities in the system,” he said.

He pointed to initiatives such as the National Green Hydrogen Mission and renewable energy expansion as long-term strategies that could improve energy security and reduce recurring current account stress.

“The emphasis on energy security will naturally increase because of this episode,” Rana said.

For now, however, India’s ability to navigate the crisis will largely depend on how long elevated oil prices persist and whether geopolitical tensions in West Asia intensify further.