Jayanta Roy Chowdhury
New Delhi, Mar 14 (UNI) What will be the real cost of the Iran-US conflict on the Indian economy?
The war in one of India’s key export regions which accounts for a sixth of its exports and about USD 50 billion in remittances has already started creating black holes in Indian balance sheets.
“Gas-burning factories across Gujarat, Maharashtra and several other states have fallen idle. The entire secondary steel sector has been hit,” said Pankaj Chadha, chairman of EEPC India. “First, there is not enough gas available to smelt iron into steel. Second, the scrap that we used to import for melting down is no longer arriving. Then the export orders are in jeopardy. Containers are lying empty all over the place.” The shipping squeeze, where sending containers through the Straits of Hormuz has become impossible, not to speak of the crude and gas shortage and its inflationary impact is liable to hit the Indian economy for billions of dollars in just the week gone by. “It’s all up in the air, we really do not know how much it will cost us, a mere bystander in the war,” said Prof Biswajit Dhar, former WTO Chair at the Indian Institute of Foreign Trade (IIFT).
Industry experts believe the ongoing conflict in the Gulf region could cost India between USD 2-3 billion in electronics exports alone. Up to USD 4 billion in monthly shipments are at risk due to rising freight costs and logistics delays.
“The conflict threatens $50 billion in remittances, creates potential for skyrocketing oil prices, and disrupts key trade routes, putting Indian electronics, garments, and agricultural exports like rice and tea are at severe risk,” said Dhar.
India receives USD138 billion in annual remittances, with roughly 38 per cent (about USD 50 billion) coming from Gulf nations, which is now threatened.
India’s basket of crude for the month of March now costs USD 101.25 a barrel. While Brent crude prices have shot up in the spot market to USD 103.86, the month’s highest.
“The Strait of Hormuz, the narrow maritime corridor connecting the Gulf to our energy markets, has today effectively become a geopolitical fault line,” said Commodore Ranjit Rai, former Director of Naval Intelligence and a security analyst.
Shipping disruptions are adding further strain. Insurance costs for tankers moving through the Strait of Hormuz have climbed sharply as insurers factor in heightened war risk. At the same time, shipping delays are increasing the cost of moving goods both into and out of the country.
India’s strategic petroleum reserves offer only a modest safety net, covering about 74 days of consumption at current demand levels. However, these reserves serve only as a short-term safeguard rather than a sustainable long-term answer.
The Rupee, which traded for 92.54 on Saturday, has been under constant pressure as foreign investors continued to sell equities in the Indian market on the one hand and as the cost of India’s crude imports rose sharply. The Sensex closed on Friday at 74.563 points, down from 83,277 a month ago.
Analysts are now pitching figures for a possible scenario of crude prices going up to USD 150 a barrel if the war stretches with the Straits impassable and much of the oil infrastructure in the Gulf under threat. Dhar points out that a “USD 1 rise in global crude oil prices typically inflates India’s annual import expenditure by about USD1.3–1.4 billion.”
This escalation tends to widen the current account deficit and intensify downward pressure on the rupee. Already, analysts feel the rupee is headed for Rs 95 to the dollar but could go up to Rs 100 to the dollar in worst-case scenarios.
“The problem for India is that the vulnerability is structural. The country imports the vast majority of its oil, consuming roughly 2.5 to 2.7 million barrels of crude per day from overseas suppliers and increases in prices or constraints on supply tell on the economy,” pointed out Dhar.
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