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A perfect storm? High energy prices, the West Asia war, and India’s narrowing fiscal space

Even if there is an early agreement on a cessation of hostilities in Iran, the price shock will not go away easily. Global prices of oil and gas will remain elevated.

The ongoing conflict in West Asia will undoubtedly deliver a major shock to the Indian economy. This is due not only to India’s huge dependence on imported oil and gas, but also to the country’s fiscal constraints and its vulnerability on the balance of payments front.

As many economists and media reports have pointed out, the supply shock is already becoming visible in different segments of the Indian economy. The price shock has been contained somewhat by the government’s decision to take a hit on its own finances by reducing the special additional excise duty on petrol and diesel. This response is understandable because the conflict situation is highly unpredictable, and the government has contained the price impact on the economy through what seems to be a temporary measure. That several states in the country were going into Assembly elections also influenced this decision.

But even if there is an early agreement on a cessation of hostilities in West Asia, the price shock will not go away easily. Global prices of crude oil and gas will remain elevated, higher than what India was used to over the last few years. This will have an all-round effect on the Indian economy, even as the government considers allowing a gradual increase in retail prices for petroleum products after the Assembly elections conclude next week.

How serious will that price shock be........

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