Virendra Pandit
New Delhi: The Union Finance Ministry late on Friday expressed apprehension about a “significant and long-lasting impact” on the Indian economy as the war escalates in West Asia and the Gulf region, the media reported.
A ministerial report noted that, in the short term, India has sufficient foreign exchange reserves to provide the necessary cushion to the economy.
Oil shock
“The implications of this conflict for India are significant and may be long-lasting in ways that are not immediately understood,” the Monthly Economic Review (MER), prepared by the Economic Affairs Department of the Finance Ministry, said.
It noted that disruptions in the Strait of Hormuz and damage to key energy infrastructure in West Asia mark a pivotal escalation, echoing the 1991 Gulf War oil shocks and potentially reshaping global energy geopolitics for decades.
“This conflict has already driven Brent crude up around 9 percent to near $80/bbl. and LNG prices by around 50 per cent,” the MER said. Nearly 40 percent of India’s crude imports and a large quantity of natural gas move through the disturbed strait.
The MER said the country has sufficient foreign exchange reserves, a low current account deficit (at 0.8 percent of GDP in H1FY26), and low inflation rates, which allow it to effectively mitigate the impact of rising global crude oil prices and ensure domestic energy security.
Inflation
“However, if the crisis persists, it could have material implications for the exchange rate and current account deficit and could stoke inflationary pressures (which otherwise have supportive supply-side dynamics),” the MER said.
Studies show that a 10 percent increase in crude prices could knock off 10 bps in GDP and push the retail inflation by 30-35 bps.
The report also mentioned that subdued capital flows, accentuated by a flight to safety, could put pressure on the currency. “Some sectors dependent on LNG and crude, like fertilisers and petrochemicals, could be affected if the crisis is prolonged,” it said.
The MER noted strong fundamentals but also cautioned for any complacency or basking in the solidity of post-Covid macroeconomic performance hitherto. “That belongs to history. The future has become that much more uncertain, with every indication that it will remain so for quite some time to come,” it said.