How Oil Shocks Transmit Through the Indian Economy

India's vulnerability to oil price shocks operates through multiple transmission channels. First, the direct import bill channel: higher crude prices widen the trade deficit and current account deficit (CAD). Each $10/barrel increase in crude oil is estimated to widen India's CAD by approximately 0.4-0.5 percent of GDP. Second, the fiscal channel: the government may partially absorb the price increase through subsidy (under-recoveries for LPG, kerosene) or allow full pass-through to consumers, which raises retail inflation. Third, the inflation channel: fuel is an input across the production chain — higher fuel costs raise transportation and manufacturing costs, feeding into WPI and CPI. Fourth, the currency channel: higher import bills increase demand for USD, weakening the rupee; rupee depreciation further amplifies the import cost spiral. Fifth, the growth channel: high inflation erodes real incomes and consumer spending, while uncertainty dampens investment.