The ongoing conflict in West Asia could have significant economic implications for India if tensions persist, the Finance Ministry has warned in its latest monthly economic report for February.
According to economists led by V. Anantha Nageswaran, prolonged geopolitical tensions in the region may widen India's current account deficit (CAD), weaken the rupee due to risk-averse capital flows and create inflationary pressures.
The report noted that recent military strikes involving the United States, Israel and Iran have escalated tensions in the Middle East, disrupting shipping routes through the Strait of Hormuz, which handles nearly 20% of global oil flows.
Following the escalation, Brent Crude Oil prices have risen nearly 9% to around $80 per barrel, while global Liquefied Natural Gas (LNG) prices have surged by almost 50%, raising concerns about higher import costs for India.
The Finance Ministry said that sectors heavily dependent on energy inputs, including fertilisers and petrochemicals, may face increased production costs if global oil and gas prices remain elevated.
However, the report highlighted that India currently has strong macroeconomic buffers, including adequate foreign exchange reserves, a relatively low current account deficit, and moderate inflation, which can help cushion the impact of global energy price shocks.
Despite this, sustained geopolitical instability could eventually affect the exchange rate, increase the CAD and push up domestic inflation through higher transportation, manufacturing and energy costs.
The report also emphasised the need for stable and predictable tax policies to attract foreign investment amid global uncertainty. It added that oil prices would likely need to stay above $100 per barrel for a prolonged period before causing serious macroeconomic stress for the Indian economy.
Economists noted that factors such as global investor sentiment, energy supply availability, and maritime trade security will remain key determinants of India’s economic outlook if the West Asia conflict continues.
CAclubindia
