How US-Iran Conflict Will Hike Fuel Prices And Stop India's Economic Growth Plans

The heightened tension between the US and Iran around the Strait of Hormuz has revived the spectre of high oil prices squeezing the headroom for big-ticket federal spending just when the government is gearing up to energise economic activity.

So far, oil and fuel prices have remained in the comfort zone, moving in a narrow band. This has allowed the governmen to plan for large spendings on socila programmes on cleanliness, housing, health and energy justice through houshold electrification as well as free LPG connection to poor households.

Reuters/Representational Image

But this can change with an extended period of oil market volatility and high prices. That will pinch consumers by making fuel costlier and adversely impact government finances. Reports by rating agencies reckon every $10 per barrel increase in crude prices shaves off 0.4% of GDP (gross domestic product) by widening the current account deficit by $12 billion or so.

Costlier crude also pushes up the government¡¯s subsidy liability and India¡¯s merchandise import bill, drains foreign exchange reserves and effect the rupee¡¯s value. All of these affect the government¡¯s ability to raise ability to spend on social sector schemes.

Quick on the ball, oil minister Dharmendra Pradhan has been working the phone through the week, calling his counterparts from Abu Dhabi and Saudi Arabia to express India¡¯s concern over high oil prices since reports of attack on two tankers came in.

Reuters

On Friday, he sought Saudi oil minister Khalid Al-Falih¡¯s to seek OPEC lynchpin¡¯s active support to calm the markets and keep oil prices at reasonable levels. Earlier, he spoke to UAE¡¯s Sultan Ahmed Al Jaber to seek assurance on uninterrupted supply of oil and LPG despite disruptions in the Strait of Hormuz.

Ironically, the only hope of stable oil market appears to lie in the dampened demand scenario due to slowdown in global economic activity and the ongoing US-China trade war. Both are expected to act like a speed breaker for oil prices.

AP

A narrow sea lane between Iran and UAE (United Arab Emirates), the Strait is the transit route for 20% of global crude and refined products shipments as well as 25% of liquefied natural gas supplies. India, which imports 83% of its oil needs, too is heavily dependent on this route as a bulk of oil and LPG shipments passes through the strait.

Oil has been on an upswing almost in line with rising tension in the Persian Gulf, especially since attacks on two tankers earlier in the week. On Thursday global benchmark Brent crude spiked 5%, the highest increase since January, on reports of Iran shooting down a US military drone. Friday¡¯s report of US president Donald Trump ordering air strikes and then calling off the mission further fuelled nervousness in the market, even as oil settled at $65 a barrel.

AFP

India has been steadfast in its demand for a stable and sustainable oil market. New Delhi, along with Washington, has been constantly pushing producer countries to check volatility arguing high crude prices hurt global economic growth ¨C which in turn depress demand and hurt producers.