Impact of Israel-Iran Conflict on the Global Economy and India

The ongoing conflict between Israel and Iran is creating global economic uncertainty, especially impacting oil prices, with significant implications for the Indian economy.

Oil Price Surge

• Brent crude prices increased by approximately 9% in the past week due to fears of escalation.
• Analysts predict oil prices could potentially double to $150 per barrel.
• Historically, oil prices exceeded $100 per barrel for over five months during Russia's attack on Ukraine.

Potential Causes of Price Disruption

• Production Side:
  • Israeli attacks may target Iranian oil facilities, disrupting supply.
  • OPEC has the capacity to make up shortages, but rapid expansion is uncertain.
  • Involvement of other regional powers may worsen the situation.
• Strait of Hormuz:
  • About 25% of global oil supply passes through this route.
  • Supply of gas could also be severely impacted.

Impact on the Indian Economy

• Trade and Deficit:
  • High oil prices may significantly widen India's trade deficit.
  • The current account deficit (CAD) projected at 1% of GDP could increase substantially.
  • While India's foreign-exchange reserves are robust, a large CAD could present financing challenges amidst tighter global financial conditions.
• Growth and Inflation:
  • RBI projects a 10% oil price increase could raise inflation by 30 basis points and reduce growth by 15 basis points.
  • A larger oil price surge would have a more pronounced impact.
• Government Fiscal Position:
  • Reducing excise duty or burdening oil companies with costs might affect fiscal health.
  • Slowed economic growth could reduce revenue collection.
• Market Uncertainty:
  • Uncertainty from conflict and oil prices may delay consumption and investment decisions, affecting growth.

The Indian government and policy managers must remain vigilant to mitigate fallout from these economic challenges.