India Can Withstand Energy Price Shock, But Fiscal Pressure May Rise: Report

A recent report by S&P Global Ratings suggests that India is well-positioned to absorb a sharp rise in energy prices, thanks to strong domestic fundamentals and improved financial health across corporate and banking sectors.

According to the report, Indian companies now have healthier balance sheets, while banks are better capitalised and more profitable than in previous years. These factors are expected to act as a buffer against rising energy costs. Additionally, India’s solid external position provides a cushion to manage the impact of a higher import bill, even amid geopolitical tensions such as the ongoing West Asian conflict.

However, the report also highlights potential risks. In a stress scenario where crude oil prices climb to $130 per barrel in 2026, India’s economic growth could slow by up to 0.8 percentage points compared to baseline projections. This could also temporarily strain the government’s fiscal position.

Corporate earnings may take a hit, with EBITDA projected to decline by 15–25%, while leverage levels could rise modestly. The banking sector might also feel the impact, as asset quality could weaken, with bad loans potentially rising to around 3.5%.

Neel Gopalakrishnan noted that despite short-term pressures, credit quality is expected to recover strongly by fiscal 2028, assuming energy prices stabilise at relatively lower levels.

The report remains optimistic about near-term performance, forecasting strong growth and profitability for both corporates and banks in fiscal 2026. However, it cautions that companies may temporarily slow down capital expenditure due to uncertainties around cash flows and demand in the next 12–18 months.

Meanwhile, the Reserve Bank of India has taken steps to manage currency volatility by capping banks’ net open foreign exchange positions at $100 million. While this move is expected to stabilise the rupee, it may also reduce banks’ foreign exchange income.

The report adds that government interventions to control rising energy costs could lead to a higher fiscal deficit in the short term. Nevertheless, India’s long-term commitment to fiscal consolidation is expected to remain intact.

In summary, while rising energy prices may create temporary economic and fiscal challenges, India’s strengthened financial ecosystem is likely to help it navigate the shock without major disruptions.

With inputs from IANS