Source : INDIA TODAY NEWS
Even as the United States and Iran went into a huddle in Islamabad to thrash out a peace deal, their fragile ceasefire announced on April 8 continued to be tested. The two-week-long pause in the conflict was greeted with relief across the world since it gave both sides room to negotiate their demands. But with Israel continuing bombardment of targets, including civilians, in Lebanon, the truce appears tentative.
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This means the threat to the global economy posed by the energy-supply disruptions in West Asia has simply refused to abate. For India too, uncertainty abounds as around 45-50 per cent of its crude oil is imported from the region.
Qatar, which meets 65 per cent of India’s liquefied natural gas (LNG) needs, has had its energy and petrochemical assets attacked by Iran. At the same time, around 13 per cent of India’s exports go to West Asia, including engineering goods, gems and jewellery, food products, chemicals and construction material.
“In a more adverse scenario, we assume the conflict to prolong beyond two months, causing sharper disruptions and a slower recovery in energy supplies from West Asia,” said a research note from Crisil on April 10.
“After an initial spike, Brent [crude] is likely to average $100 a barrel in this fiscal while the Strait of Hormuz remains partially operational for select countries, including India,” added the note.
Brent crude prices, which had weakened after the ceasefire announcement, were at $96.4 a barrel on April 10.
Around a quarter of the world’s oil and gas is shipped through the Strait of Hormuz, which Iran has reportedly choked again following Israel’s relentless attacks on Lebanon since the ceasefire announcement. Iran says stoppage of strikes on Lebanon is part of the peace formula, but both Israel and the US think otherwise.
Any further escalation in the war would lead to a “supply shock”, from what had been a “demand shock” so far, said Crisil.
The other impact would be slower growth on the domestic front and high inflation. Consumption, which has been a strong driver of growth, could soften due to slower agricultural income growth and rising retail inflation. Consumer price inflation is seen averaging at 5.4 per cent in this fiscal, driven by higher fuel costs and second-round effects on core inflation.
The Reserve Bank of India (RBI) has already maintained a status quo on interest rates to rein in inflation, and could even hike interest rates in case the disruption in energy continues and inflation shoots up.
The central bank also said the ongoing conflict and large volatility in international energy and commodity prices made near-term inflation outlook uncertain. It also highlighted the possibility of El Nio conditions this year, which would add further uncertainty to food prices.
Taking all this into consideration, consumer price inflation for FY27 is projected at 4.6 per cent (as against average of 1.9 per cent in the 11-month period of FY26). The RBI has also given a core inflation (which excludes the highly volatile food and fuel) projection for the first time and expects it to average at 4.4 per cent in FY27.
Meanwhile, the current account deficit (CAD) will widen due to weaker exports. The import bill could rise (particularly due to oil, gas and fertiliser imports) and remittance inflow soften, with the CAD ratio moving to 2.5 per cent of the GDP.
The rupee will come under more pressure. Crisil expects the rupee to average around 93 to a dollar by March 2027, assuming the RBI employs tools to check currency volatility.
Amidst the uncertainty, a research note from HDFC Mutual Fund pointed out a few positive factors for the economy. One is the fall in oil prices, which would ease the pressure on CAD and the rupee, and could improve capital flows and lower the pressure on India’s balance of payments. Also, helped by the RBI’s intervention, inflation could remain in a comfortable range and reduce the risk of any major rise in policy rates.
However, re-escalation of tensions in West Asia, a deficient monsoon and a fiscal slippage due to higher oil price, more fertiliser subsidy and lower revenues for the government due to excise duty reduction remain key risks.
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SOURCE :- TIMES OF INDIA
