With most analysts expecting no quick resolution to the US attacks on Iraq, the economy is expected to be hit on various fronts.
The worst case scenario expected is that of stagflation -- lack of economic growth, coupled with spiralling inflation.
Not only can inflation spin out of control, but the real economy can also take a hit in terms of poorer trade performance, lower government revenues and reduced foreign capital inflows.
"If uncertainty persists, demand for non-essentials in the world economy will fall. This will have an adverse impact on the trade performance of the country," said Pronab Sen, adviser, Planning Commission.
"A large part of our exports are to the West Asian region", said Saumitra Chaudhuri, economic analyst, Investment Information and Credit Rating Agency.
In 2001-02, the region accounted for 12 per cent of Indian exports. In April-October 2002, exports to this region grew 37 per cent. Therefore, any destabilization in the region was bound to affect our level of exports, he added.
The fall in exports growth will lead to a higher trade deficit. Also, since the country imported up to 70 per cent of its oil requirements, a hike in oil prices would mean that the oil import bill would rise and contribute to the worsening trade deficit and have an adverse impact on the balance of payments situation, said B B Bhattacharya of the Institute of Economic Growth.
Even if the oil prices continue at the current level, the cost will be high, Chaudhuri said. "Even $30 a barrel is quite high," he said.
This would put pressure on the foreign exchange reserves in the country which were expected to dip quite sharply in the coming months, Bhattacharya said.
The impact on the forex reserves will be compounded by the fall in level of foreign capital inflows to the country.
If the war is contained in Iraq, remittances may not take a severe hit. But, if it spreads to other parts of the Middle East, as some expect, the level of remittances sent home by the large population of Indians working in the Gulf will also fall, further effecting the level of reserves.
In fact, the cost of getting back Indian citizens, in case of widespread disturbances in the region could push up government expenditure considerably.
The higher oil prices could push up inflation to around 7 per cent if the government decides to pass on the increase to consumers, feels Bhattacharya.
If the oil price hikes are too high to pass on to the consumers and the government decides to cut duties on oil, as is being demanded by the petroleum ministry, government revenues will take a hit.
In areas like defence, where consumption of oil was high, expenditure levels were likely to soar, throwing the government's Budget numbers into disarray, he added.
War impact
- India imports up to 70 per cent of its oil requirements.
- A higher oil import bill will contribute to the worsening trade deficit and have an adverse impact on the balance of payments situation.
- This will put pressure on the foreign exchange reserves in the country which are expected to dip quite sharply in the coming months.
