With 7%-plus growth for two consecutive years and easing inflationary pressures, the Indian economy seems to be ready to continue on its high growth trajectory in the new fiscal year. But fresh geopolitical tensions in the Middle East—the recent skirmish between Iran and Israel—have raised new concerns for India.
As the world’s third-largest crude oil importer, India is keeping a close watch on the developments in the Middle East. Commerce Secretary Sunil Barthwal recently said the ministry would take any remedial measures required after consultations with stakeholders. The ministries of finance and external affairs, too, are monitoring the developments as oil prices briefly touched $90 per barrel.
“Crude oil gets impacted immediately,” says Madan Sabnavis, Chief Economist of Bank of Baroda.
In 2023, Iran’s share in total crude oil production was 4%, with the US, Saudi Arabia, Russia, Canada, China, Iraq, the UAE, Brazil, and Kuwait together accounting for about 68-70% of production, according to the US Energy Information Administration (EIA). “Depending on how Opec or any of these suppliers react, there can be a major shock to oil economics,” Sabnavis notes.
Experts feel a surge in crude oil prices would not just impact India’s oil bill but also require a review of its macroeconomic math vis-à-vis inflation, fiscal and current account deficits, as well as exports. While retail inflation would only be impacted if oil prices pass through, wholesale inflation may increase.
The RBI kept a baseline assumption of $85 per barrel during FY25 for the Indian crude oil basket in its April monetary policy review just days before the conflict started. Based on this, it had pegged real GDP growth at 7% for FY25 and retail inflation at 4.5% for the fiscal.
If oil crosses $100 per barrel, not only would most of these numbers have to be revisited, but it would also create pressure on the domestic currency and possibly delay a rate cut.
The average price of the Indian basket of crude oil in FY24 was $82.58 per barrel.
“The ongoing conflict between Iran and Israel has clearly increased the geopolitical risk levels in the global economy. While crude oil prices are yet to rise sharply beyond $90 per barrel, there is a significant likelihood that it will breach $100 levels if the conflict spreads further over Middle East,” says Suman Chowdhury, Chief Economist and Head-Research at Acuité Ratings & Research. The agency has forecast 6.7% GDP growth and 5% retail inflation in FY25, but these could be revised if the Iran-Israel conflict escalates, he adds.
Policymakers are keeping their fingers crossed that the economy will manage to brave this latest conflict too—after shrugging off the impact of the Russia-Ukraine war and the Israel-Hamas conflict in the past. But, like Game Theory, much would depend on the reactions of the two key players!
@surabhi_prasad