Govt readies Rs 1 lakh crore war chest to counter Middle East fallout
The Centre on Tuesday sought Parliament’snod to create a Rs 1 lakh crore Economic Stabilisation Fund (ESF) as part of the second supplementary demand for grants for gross additional spending of Rs 2.81 lakh crore in FY26. For the ESF, the Centre initially provided Rs 50,000 crore outlay in the revised estimate for FY26 on February 1.The allocation for the contingency buffer has doubled in the wake of the West Asia conflict. Besides revenue shocks, the ongoing crisis could inflate subsidies on fertilisers and cooking gas next year if the war between the US-Israel alliance and Iran continues for months.
A stabilisation fund is a reserve fund set aside by governments to maintain fiscal stability and reduce the impact of sudden economic shocks.
Of the gross outgo from the second supplementary demand, the net cash outgo aggregates to Rs 2.1 lakh crore and the rest would be through savings in expenditure.
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Additional allocation of Rs 23,641 crore
The outgo also involves an additional allocation of Rs 23,641 crore for food and Rs 19,230 crore for fertiliser subsidies. The extra spending is unlikely to exceed the revised estimate for FY26 because there will be savings in other spending areas, such as the Jal Jeevan Mission.
Post-Covid 19, the Odisha government was the first to establish a budget stabilisation fund at the sub-national level to create fiscal buffers for challenging periods.
The state has already built a corpus of around Rs 21,000 crore by diverting a share of surging mining revenues since FY23 and intends to eventually increase the corpus size to Rs 50,000 crore to mitigate budget disruptions.
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This was showcased as “best practices” to state finance secretaries at a CAG-organised conference in Delhi last year. Just two months into 2026, the global economy faces renewed uncertainty.
A Chain of developments
A chain of developments—including legal turmoil in U.S. trade policy, revisions to India’s economic statistics, and a sharp military escalation in the Gulf involving the U.S.-Israel alliance and Iran since February 28—has unsettled expectations of stability and heightened volatility across global markets.
In the supplementary demand for grants, Rs 30,117 crore were provided for transfer to states to meet additional expenditure towards Grants-in- Aid-General under Rural Local Bodies Grants, Urban Local Bodies Grants, State Disaster Response Fund Grants, State Disaster Mitigation Fund Grants, etc.
Although the net cash outgo under the second supplementary demand for grants is pegged at a sizeable Rs 2 lakh crore, this is likely to be offset to a large extent by expenditure savings across ministries, rating agency ICRA said.
For instance, the Centre’s revenue expenditure needs to expand by a steep 30% on-Year during February-March 2026 to meet the FY26 RE, entailing an incremental amount of Rs 2.3 lakh crore. “Consequently, we do not expect a material fiscal slippage on this account,” said ICRA chief economist Aditi Nayar.
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