West Asia tensions spell uncertainty for economy
Costlier commodities, higher inflation, and swelling fertilizer subsidies: the Indian economy looks poised to enter a period of fresh uncertainty, after tensions in West Asia flared up over the weekend. While an escalation in commodity prices may disrupt calculations in the interim budget, potential supply chain snags may force the government to take trade policy actions, analysts said.
While costlier crude oil broadly spells ill for India, it also paves the way for higher windfall tax collections. Prices of crude oil and natural gas which is used to make urea move in tandem, although specific demand and supply conditions can influence prices of the two commodities. India provides significant amount of subsidy for fertilizers to protect prices, and is also heavily dependent on imports for phosphatic and potassic fertilizers, which raises the exchequer’s vulnerability to a surge in global prices.
Oil prices have already touched $90 a barrel and a further escalation may push it above $100, Moody’s Analytics said on Monday. India, being a net importer of crude oil and about 85% of its energy requirement being imported, any increase in the oil prices raises its import bill. According to Moody’s Analytics, oil prices may add another $5 per barrel taking the prices up to $95 per barrel. The average price of the Indian basket so was $84.49 in March. “Now that the attack has happened, we expect oil prices to add another $5 per barrel to the risk premium, pushing oil to the $90 to $95 per barrel range,” it said.
Sharp changes in commodity prices may force the government to take a long, hard look at the numbers in the interim budget, a policy expert said.
The Indian economy is expected to have expanded by at least 7.6% in FY24, and policy makers have been hoping for a normal monsoon and less uncertainty on the external front to continue the growth momentum in FY25. The interim budget for FY25 had set aside ₹1.64 trillion for fertilizer subsidies, 13% lower than the revised estimates for FY24.