Mint Explainer: How the Israel-Iran conflict can crash India’s growth party
India will face multiple challenges if the Israel-Iran conflict escalates into a full-fledged war or, worse, a regional conflict.
The Indian economy is primed for a faster pace of growth because inflation is easing, consumption is rising, and borrowing costs are declining. However, the sudden flare-up of tensions in West Asia could play spoilsport.
Mint looks at the crisis closely and the possible fallout for India and its businesses with a particular focus on how oil prices will play out.
Is India's economy in a sweet spot?
It is. The factors holding back the Indian economy are easing, setting the stage for an accelerated pace of growth. Domestic consumption is reviving as reflected by goods and services tax (GST) collections in the last three months. In April and May, it exceeded ₹2 trillion. Growth in GST collections from domestic goods rose by 13.7% in May and 10.7% in April.
Rural demand has seen a sharp revival thanks to good harvests and prospects of yet another normal monsoon. Urban consumption is also improving on the back of lower inflation and sops such as reduction in income tax rates, both of which will leave more money in the hands of the people. Inflation, too, is easing. In May, it was just 2.82%, the lowest since February 2019.
The Reserve Bank of India (RBI) has cut interest rates too…
Yes. With inflation on a declining trend, the RBI recently cut the benchmark interest rate by 50 basis points to 5.50%. It was the third consecutive cut since February. Lower borrowing costs coupled with higher consumption can trigger private consumption, which, in turn, can accelerate India’s economic growth, which in 2024-25 clocked 6.5%.
Can the Israel-Iran conflict spoil the party for India?
Possibly, if the conflict turns into a full-fledged war between the two nations and worse, widens to become a regional conflict. In such a scenario, India will face multiple challenges. Most importantly, it will trigger a sharp increase in oil prices. Immediately after Israel attacked Iran, oil prices shot up on Friday. Brent Crude, the global benchmark, increased by 8% to $74 per barrel.
Also Read: Escalating Israel-Iran conflict to keep markets on boil in near term
The rise is not because the supply has been impacted, but due to the fear of future disruptions. As India imports 80% of its oil needs, the rise in oil prices will prove costly as it will fuel inflation. If inflation rises, it will impact domestic consumption, and the RBI would be forced to tighten its monetary policy. In other words, the sweet spot that the Indian economy finds itself in today will be neutralized. Also, if the conflict affects the movement of ships through the Suez Canal, Indian exports will be hit.
How will the oil prices play out?
Experts have drawn up multiple scenarios. If the conflict de-escalates quickly, oil prices are expected to hover around $65-70 per barrel. That looks unlikely as Israel has said the attacks would last “as long as it takes". Iran has promised severe retaliation.
If the conflict lasts for weeks but stops short of a full-scale war, oil prices would be around $80 per barrel. Experts have painted worse scenarios as well. If Israel hits Iran’s oil and gas infrastructure, the Iranian oil supply would be hit. Even if other oil producers compensate using their spare capacity, oil prices would cross $90 per barrel.
Also Read: India concerned about crude oil supply disruptions in Strait of Hormuz as prices surge after Israel's attacks on Iran
Iran could respond by closing the Strait of Hormuz, the waterway that connects the Persian Gulf and the Arabian Sea, through which 30% of global oil passes. In such a case, oil prices would top $100 per barrel. That's not all. If a desperate Iran chooses to attack its neighbours' oil fields, then oil prices could shoot past $120 per barrel, experts have warned.
What should Indian companies watch out for?
Significantly higher oil prices will add to Indian companies’ cost of production. As retail oil prices rise, it will eat into the disposable income of consumers. This, in turn, will affect domestic demand. Exports, too, could be hit. Iran, using its proxy Houthi rebels, can attack ships plying through the Red Sea and Suez Canal. That will mean India's exports will have to take a longer route around the Cape of Good Hope. Such a move will hit the volume of exports and also make them costly.
Also Read: Mint Explainer | Strait of Hormuz: Will Iran shut the vital oil artery of the world?
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