A Warning From 1991: Is India's Next Big Shock Hiding In Its Oil Bill?

India's oil bill is reviving fears of a slow motion replay of the 1991 balance of payments crisis, as a prolonged conflict in West Asia threatens to keep crude prices painfully high and foreign capital on edge.

Bloomberg Economics' Abhishek Gupta laid out a stark scenario in a note. If tensions escalate and the Strait of Hormuz faces prolonged disruption, crude could average 125 dollars a barrel through March 2027. The impact would be severe, with more than 130 billion dollars drained from India's balance of payments, the broadest measure of money flowing in and out of the economy.

The shift is already underway. Gupta had earlier expected a modest 10 billion dollar surplus. Instead, Reserve Bank of India data show a sharp reversal, from a 63.7 billion dollar surplus in fiscal 2024 to a 5 billion dollar deficit in fiscal 2025, with projections sliding further into negative territory.

"India's balance of payment will be in deficit for the second successive year in this financial year which has never happened before," Anubhuti Sahay, India economist at Standard Chartered, said in a Bloomberg report. "Risk of a third year of balance of payment deficit has increased in the next financial year beginning April," she added, pointing to mounting pressure on the rupee.

What has economists invoking 1991 is not just expensive oil, but a dangerous convergence of risks. A swelling import bill is colliding with the possibility that capital inflows, long a cushion, could turn into outflows.

"India may also face a capital account deficit this fiscal year as foreign investors flee emerging markets for safer havens," Soumya Kanti Ghosh, chief economic advisor at State Bank of India, said in the same report. "This has never happened since 1991." 

That comparison carries weight because the 1991 crisis remains India's most severe external shock, a moment when multiple vulnerabilities collided.

What happened in 1991?

Back then, India was spending far more than it earned. A widening current account deficit, driven in part by oil imports, combined with large fiscal deficits at home. The gap was financed by external borrowing through the late 1980s, steadily increasing the country's exposure to global shocks.

Then came a cascade of disruptions. The Gulf War sent crude prices soaring, sharply inflating India's oil import bill. At the same time, remittances weakened, exports faltered, and global lenders grew cautious. Political instability compounded the problem, eroding investor confidence and making fresh borrowing harder and more expensive.

By mid 1991, the situation turned critical. Foreign exchange reserves collapsed to roughly 1 billion dollars, barely enough to cover three weeks of essential imports. India stood on the brink of default, struggling to pay for oil and meet external debt obligations.

The government responded with emergency measures that reshaped the economy. It pledged around 67 tonnes of gold to raise foreign currency, secured a 2.2 billion dollar IMF loan, and imposed austerity by restricting imports, raising fuel prices, increasing interest rates, and cutting spending.

Out of that crisis came transformation. The moment triggered sweeping liberalisation, including devaluation of the rupee, dismantling of the Licence Raj, reduction in tariffs, and a decisive opening to foreign investment and global markets.

India today is, however, far better equipped. Foreign exchange reserves are substantially larger, the currency is more flexible, and domestic financial markets are deeper. A sudden, textbook crisis like 1991 appears unlikely.

Yet the parallels are unsettling. A potential 125 dollar oil environment, consecutive balance of payments deficits, and the looming threat of capital flight are combining into a rare and volatile mix.