West Asia might see a significant increase in armed conflict after a US attack killed Iranian Quds Force commander Qasem Soleimani in Baghdad on Friday morning. Such a situation could be a double whammy for the Indian economy, as it would hit inward remittances and adversely affect trade deficit and inflation due to a rise in oil prices.
International crude oil prices could see an increase due to a rise in conflict in the region. Reuters reported that Brent crude futures LCOc1 jumped nearly $3 to hit a high of $69.16 a barrel, the highest since 17 September 2019, when the Aramco’s refinery in Saudi Arab suffered a drone attack. Prices could increase further when American markets reopen in the evening.
The Indian economy has enjoyed a relatively benign oil price environment in the last four years. After staying above $100 per barrel from 2011-12 to 2013-14, India’s average crude oil basket (COB) price fell to less than $50 per barrel in 2015-16 and 2016-17 and has been $56 per barrel and $70 per barrel in 2017-18 and 2018-19.
The years when COB prices were above $100, retail inflation in India was at double digit levels. At a time when headline inflation numbers have been rising due to a spike in food prices, an oil price rally could add to the inflation surge at the present juncture. Almost 60% of India’s oil imports come from West Asia, with a negligible amount from Iran.
{{/usCountry}}The years when COB prices were above $100, retail inflation in India was at double digit levels. At a time when headline inflation numbers have been rising due to a spike in food prices, an oil price rally could add to the inflation surge at the present juncture. Almost 60% of India’s oil imports come from West Asia, with a negligible amount from Iran.
{{/usCountry}}A rise in oil prices would also affect the current account deficit, as oil import bill will increase significantly. India imports almost 80% of its crude oil requirements. What will compound this problem is a fall in rupee’s exchange rate. The rupee has lost 0.5% against the dollar in today’s trade according to Reuters.
Chart 1: COB price
In case the situation escalates into a military conflict, this could also spell trouble for thousands of Indians working in the region, who send almost half of India’s foreign remittances. According to an RBI study released in 2018, United Arab Emirates, Saudi Arabia, Qatar, Kuwait and Oman, all countries in west Asia, had a share of 53.5% in India’s total remittances in 2016-17.
Chart 2: Country-wise share in remittances
This could hit the both foreign exchange situation as well domestic demand of those who depend on such remittances in the country.