India Needs Not Only Immediate Relief But Long-Term Plan To Survive Middle East Conflict

(MENAFN- Khaleej Times)

India is threatened with disruptions to supply of oil, gas, fertilisers; higher import prices, logistics costs, possible decline in remittances by workers in the Gulf region

By: Nithin Belle

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The ongoing US-Israel-Iran war is having a massive negative impact on South Asian economies, and analysts fear that the sharp slowdown in growth will hit badly the region that is home to a quarter of the world’s population.

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The trade deficit will rise significantly in the fiscal ending March 2027, warned V. Anantha Nageswaran, India’s chief economic adviser. This will lead to the widening of the current account deficit.

“Keeping it manageable will require burden-sharing between the government, via fiscal absorption, and households and businesses,” he noted, adding: The pass-through of higher import prices to end-users“will also moderate demand growth."

The impact of the conflict on India will be felt through four channels: supply disruptions to oil, gas and fertilisers and to exports; higher import prices; higher logistics costs and a possible decline in remittances by Indians in the Gulf countries.

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“The combined impact across the four channels on growth, inflation, the fiscal balance, and external balances is likely to be significant,” noted Nageswaran.

While immediate relief needs to be given to the most affected and vulnerable businesses and households, fiscal space has to be created to meet strategic and long-term needs that the war has underscored. These include the need to build long-term buffers in commodities and materials, not just energy-related ones.

India’s growth forecast of 7.0 per cent to 7.4 per cent for the financial year ending March 2027 will also face considerable downside.

The government has cut excise on petrol and diesel for domestic use to prevent a spurt in prices. It has also raised duties on exports of diesel and aviation turbine fuel.

This was done to ensure adequate availability of the products for domestic consumption, said finance minister Nirmala Sitharaman.“This will provide protection to consumers from a rise in prices,” the minister posted on X.

Global brokerage Nomura, however, pointed out that if crude oil prices stay elevated, retail prices will eventually have to be increased. But this will happen only after results for the April state assembly elections.

India’s real GDP growth for the next fiscal could dip by around a percentage point, and retail inflation rise by about 1.5 per cent from baseline estimates if the Middle East conflict persists through the next fiscal, said an EY report said.

The EY Economy Watch report said that several sectors, including employment-intensive ones such as textiles, paints, chemicals, fertilisers, cement and tires, could be directly impacted.

India, which imports almost 90 per cent of its crude oil requirements, is also dependent on imports of natural gas and fertilisers and is vulnerable to external shocks. According to analysts, India’s crude basket cost has shot up to $140 from $80, and will impact its current account deficit.

Similar impacts on the economies of Pakistan and Sri Lanka are also expected. Fuel prices have skyrocketed and transporters report doubling of freight costs. Exports to the Gulf and other parts of the world are also expected to fall substantially in both the South Asian economies.

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