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Mint
8 hours ago
- Business
- Mint
US strike on Iran raises oil shock, capital flow risks for India's economy
New Delhi: The flare-up in West Asia following US missile strikes on Iran's nuclear facilities has heightened geopolitical tensions and intensified external risks to India's economy, even as many analysts say the escalation may prove short-lived. At stake for India is the potential fallout from surging oil prices, a widening current account deficit, higher energy and shipping costs fuelling domestic inflation, investor risk aversion, capital outflows, and broader risks to economic growth. 'The bigger impact will be on sentiment. However, oil intensity has been going down structurally. For India too, the share of oil imports in total imports has come down from 21% in 2018 to 16.5% in 2025," said Sachchidanand Shukla, group chief economist at Larsen & Toubro. Read this | Mint Primer: What if the US joins Israel's war with Iran? Shukla added that India can absorb oil prices up to $85 a barrel without triggering large macro imbalances. 'There is no need to panic and one needs to keep an eye on how the situation evolves," he said. In a televised address on Sunday (India time), US President Donald Trump confirmed the direct American assault on Iran's nuclear programme, ending days of speculation about Washington's entry into the Israel-Iran conflict. He warned that further strikes could follow. 'Remember, there are many targets left. Tonight was the most difficult of them all by far, and perhaps the most lethal. But if peace doesn't come quickly we will go to those other targets with precision, speed and skill," Trump said. Oil price spike the immediate risk A sustained rise in oil prices remains the most visible risk for India, which relies on imports for nearly 85% of its crude oil needs. Higher global prices can widen India's current account deficit, fuel domestic inflation, trigger risk aversion among investors, and slow down growth. 'Every sustained 10% rise in oil price versus the baseline can lower India's GDP by 15 basis points (bps) and raise inflation measured by Consumer Price Index (CPI) by 30bps. On the other hand, it can reduce global GDP by 15 bps and raise CPI by 40 bps which can impede the rate cut trajectory," explained Shukla. While crude prices have already risen from $64–65 per barrel to $74–75 since the Israel-Iran conflict erupted on 13 June, some offsetting factors remain in play. Read this | US attack on Iranian nuclear sites roils oil market, India braces for possible price surge Experts noted that oil supply from the Organization of the Petroleum Exporting Countries Plus (Opec+) is improving as members unwind voluntary production cuts. Crude output from Opec+ rose by 180,000 barrels per day in May compared to April, according to the cartel's latest monthly oil market report. This production rebound, experts said, could help cap sharp price spikes, provided the conflict does not escalate further. 'The current flare-up may be short-lived and could even mark a turning point in the West Asia crisis towards its early closure, given the substantial disparity in conventional military capabilities, though the complex regional dynamics suggest multiple pathways for conflict evolution," said Rishi Shah, Partner and Economic Advisory Services Leader, Grant Thornton Bharat. 'As things stand today, there may be regional disturbances but these appear unlikely to translate into a major negative shock for India's economy," said Shah. On the trade front, while treaty negotiations continue, commercial flows seem to be adapting and progressing despite the tensions, he added. "Therefore, based on current developments and assuming the conflict remains contained, we expect the net external impact on India's growth trajectory to be relatively muted in the near term — though this assessment remains contingent on the conflict not escalating significantly or disrupting critical energy supply routes," said Shah. Prolonged conflict could hit growth Economists warn that a prolonged conflict could have deeper consequences. 'For oil-importing countries like India, this means slightly higher inflation and increased fiscal costs. While we have some buffer, with inflation currently below 4%, expectations have suddenly firmed up," said NR Bhanumurthy, director of the Madras School of Economics. Bhanumurthy cautioned that the current account deficit could widen not just due to the oil import bill, but also from potential pressure on remittances and capital flows. 'CAD will be a key concern going forward," he said, adding that fiscal support may be needed to absorb part of the oil price shock. 'A sustained flare-up in the conflict poses upside risks for estimates of crude oil prices, and India's net oil imports and the current account deficit. A $10/bbl increase in the average price of crude oil for the fiscal will typically push up net oil imports by ~$13-14 billion during the year, enlarging the CAD (current account deficit) by 0.3% of GDP," rating agency Icra Ltd had noted in an earlier report. Oil marketing companies and the government can absorb some of the costs in the short term, Bhanumurthy said. 'There will be fiscal implications, but we do have some fiscal space as we have exceeded fiscal targets in the last two years," he added. A sharp oil price rise could also weigh on foreign inflows and hurt domestic investment sentiment, he warned. A similar note of caution was sounded by Madan Sabnavis, chief economist at Bank of Baroda, who said that if crude prices stay above $80 for long, the trade deficit will widen and the rupee will come under pressure. "Wholesale inflation will rise accordingly, but the impact on retail inflation will depend on how the government manages fuel prices," he said, adding that excise cuts, if implemented to shield consumers, would widen the fiscal deficit — 'one that can be absorbed." India's current account deficit edged up to $11.5 billion, or 1.1% of GDP, in Q3 FY25 compared to $10.4 billion a year earlier. Retail inflation eased to 2.82% in May, while wholesale price inflation fell to a 14-month low of 0.39%. Icra Ratings on Friday warned that oil is expected to average between $70 and $80 per barrel in FY26, and any sustained rise beyond current levels could weigh on India's growth outlook. Shipping watches Hormuz chokepoint The Strait of Hormuz remains a key chokepoint for global energy and container trade, with Indian shipping companies monitoring the situation closely. 'But operations and movement of ships as of now has remained unaffected in the region. We have not yet received any alerts from either UK Maritime Trade Operations that patrols the area or the Indian Directorate General of Shipping," said Anil Devli, CEO, Indian National Shipowners' Association. Even before the latest flare-up, some ships had begun avoiding the strait, pushing up freight rates and crew costs amid rising security risks. Read this | Mint Explainer | Strait of Hormuz: Will Iran shut the vital oil artery of the world? Any blockade could spike global energy prices, disrupt supply chains, and hit container trade across the Persian Gulf, South Asia, and East Africa. India is also watching its strategic asset in the region — Chabahar Port in Iran — closely. 'Operations at the port, located near Iran's southeastern border with Pakistan, remain unaffected and normal," an India Ports Global Ltd official said. Meanwhile, Adani Group's Haifa Port in Israel remains fully functional despite the ongoing conflict. 'Earlier strikes caused minor shrapnel damage nearby, but operations were unaffected," another official said. Haifa handles over 30% of Israel's imports and contributes about 5% to Adani Ports' revenue, though it accounts for less than 2% of cargo volumes. Rice exporters brace for fallouts Beyond oil, India's basmati rice exporters are facing uncertainty as Iran, a key buyer, may scale back purchases if tensions persist. Iran typically imports around 1 million tonnes of basmati rice annually from India, accounting for roughly a fifth of India's total basmati exports by volume. Several shipments are currently lying at Indian ports, with exporters hesitant to dispatch consignments amid growing uncertainty. "We are in a catch-22 situation. Amid escalation of tension, many of the exporters, whose shipments are lying at port have kept shipments on hold. If the current situation persists, exporters would be on the receiving end," said Satish Goel, President, All India Rice Exporters Association (AIREA). India's rice exports to Iran rose to $757.3 million in FY25 from $689.8 million a year earlier, accounting for three-fourths of India's total farm exports to the country. Also read | Javier Blas: An Israel-Iran war may not rattle the oil market The timing makes the situation especially sensitive — mid-June to mid-July is peak season for exports, just ahead of Iran's domestic harvest. 'This is a peak season, as in the middle of July Iran might temporarily ban shipments to protect their domestic farmers and ensure fair prices for their harvest," Goel added. 'This is a common practice, particularly during the harvest season, and is aimed at supporting local agriculture by reducing competition from foreign imports. The ban is usually lifted once the domestic harvest is sold." Vijay C Roy and Dhirendra Kumar contributed to this story
The Hindu
20-05-2025
- Business
- The Hindu
The ongoing oil price tensions
Just when you had your surfeit of headlines screaming of blood and gore, come the drumbeats of a new conflict. However, in this new one, the belligerents do not swap bullets but barrels. Yet, this incipient conflict is shaping to be a 'mother of all battles' perhaps with a more universal impact than the destruction being wrecked in various corners of the world. This prognosis may surprise observers who not only missed the weeks of its run-up skirmishes but also the bugle of war, when on May 3, the Organization of the Petroleum Exporting Countries Plus (OPEC+) decided to go ahead with a collective output increase of 4,11,000 barrels per day (bpd) from next month (June). This was the third month in a row that the oil cartel decided to raise crude production, cumulatively undoing the 9,60,000 bpd or nearly half of the 2.2 million bpd 'voluntary' output cuts eight of its members undertook in 2023, to increase global oil prices in an oversupplied market. There are hints that the full 2.2 million bpd cut would be unwound by October 2025. Though the announced production rise was less than half a per cent of global daily production, the oil market was so jittery that the Brent crude price plummeted by almost 2% to $60.23/barrel, the lowest since the pandemic. It has since recovered to $65/barrel with support from the U.S.-China stopgap trade deal and reports of stalemate in the U.S.-Iran nuclear talks. Saudi's strategy The oil market is still gutted and crude price is nowhere near the triple dollar mark that OPEC+ aimed for. Why, then, has this 23-member producer clique decided to reverse its tactic from reducing supplies to raising production? To find the reasons, we need to deep dive into the oil market of the post-COVID era. Despite the expectation of a quick turnaround, global post-COVID economic recovery was mostly K-shaped leading to an anaemic growth in oil demand. Meanwhile, oil producers were desperate to ramp up their outputs to make up for lost revenue. It also did not help that several new producers, from the Shale oilers to non-OPEC+ countries, such as Brazil and Guyana, also wanted a piece of the shrunken demand. To square the circle, OPEC+ decided to take a collective production cut of five million bpd, nearly 10% of its total pre-pandemic output. When even this move did not shore up the oil price, a further 'voluntary' cut of 2.2 million bpd was taken by eight members. This rope trick also failed to raise oil prices which continued to slide downwards. While these processes were ongoing, Saudi Arabia, OPEC+'s largest producer, which took nearly three million bpd or 40% of the total production cuts, got increasingly infuriated by endemic OPEC+ overproducers, such as Kazakhstan, Iraq, the UAE and Nigeria. The Kingdom, often called a 'swing producer' for its large spare production capacity, prefers stable and moderately high oil prices to ensure a steady oil revenue. However, it has made exceptions in 1985-86, 1998, 2014-16, and 2020 to pursue a market share chasing strategy to punish perceived overproducers. In the past, this market flooding strategy of Saudi enabled Riyadh to eventually impose production discipline among its peers, allowing prices to return to Riyadh's desired levels. Now, when repeated pleas failed to stop overproducers, and when Saudi Arabia's average production fell below nine million bpd in 2024, its lowest level since 2011, Riyadh decided to repeat the playbook: an oil price war in the guise of accelerated restoration of voluntary production cuts. An oversupplied oil market However, many observers are less sanguine about the outcome of the Saudi campaign this time owing to several unique and different fundamentals. To begin with, this time the Saudis do not have the usual deep pockets needed to prevail. The oil market is more fragmented with large flocks of freelancing producers. High Capex has been sunk in ultra-deep offshore fields and other difficult geographies which need recovering, even at marginal costs, to avoid adverse political and economic consequences. Moreover, the crude exports by major oil producers such as Russia, Iran and Venezuela are currently hobbled by U.S. economic sanctions which may not last long. The global oil demand is approaching a plateau and the International Energy Agency (IEA) expects it to grow only by 0.73% in 2025 despite sharply lower prices. The controversial 'peak demand' theory does not appear as outlandish now as it did only two years ago when the IEA predicted that global oil consumption would peak before 2030. The signs in that direction are ubiquitous — from the global economic slowdown to the growing popularity of non-internal combustion engine vehicles, particularly in China, the largest oil importer, and growing climate change mitigation. These pessimistic projections are likely to be further compounded by the huge disruption unleashed by U.S. President Trump's tariff war. The S&P Global agency lowered its global GDP forecasts to 2.2% for 2025 and 2.4% for 2026 — historically weak levels since the 2008-09 recession except for the pandemic period. The World Trade Organization recently predicted a 0.2% annual decline in world trade in 2025 unless other influences intervene. The aforementioned bearish factors can create an inelastic situation causing oil prices to not return to previous levels even after supply-side impetuses are reversed. All this background begets the question: why has Riyadh picked this moment to unleash the oil war? To some observers, the likely rationale lies in a mix of economic and political factors. To begin with, faced with the inevitable long-term prospects of a buyers' market for the foreseeable future, Saudi Arabia may be trying to frontload and maximise their oil revenue. They may also be aiming at positioning themselves at the lower end of the oil price spectrum in anticipation of sanctions being removed from Iran, Russia and Venezuela, three of the biggest producers as well as the full rollout of Mr. Trump's 'Drill, Baby, Drill' campaign. Last, but not least, the move was probably intended as a curtain raiser for President Trump's high-profile state visit to the Kingdom with Al-Saud wishing to be seen as heeding Mr. Trump's call for lower oil prices to help contain U.S. domestic inflation despite his higher import tariffs hurting consumers. With defence guarantees, a nuclear agreement and over $100 billion in American weapon sales lined up, the Saudis have a lot to gain from the U.S. President's successful visit. The impact on India Although the low-intensity oil war may not hit the headlines the way shooting wars do, it is arguably far more consequential. It is particularly true for India, the world's third-largest crude importer, which shelled out $137 billion in 2024-25 for crude. India's crude demand rose by 3.2% or nearly four times the global growth. A U.S. study last year predicted that in 2025, nearly a quarter of global crude consumption growth would come from India. Even further down the line, India's oil demand is widely expected to be the single largest driver for the commodity till 2040. Consequently, although we may not be a combatant in the oil war, we have high stakes, with a one-dollar decline in oil price yielding an annual saving of roughly $1.5 billion. While the downward drift of crude prices in the short run due to the ongoing 'oil war' may be in our interest, the picture is not entirely linear. Lower oil revenue hurts our economic interests in several ways. It causes a general economic decline of oil exporters which are among our largest economic partners, affecting bilateral trade, project exports, inbound investments and tourism. Lower crude prices also affect the value of our refined petroleum exports, often the largest item in our export basket, and could push down refinery margins. Moreover, the lower unit price of oil and gas reduces our pro rata tax revenues. The Gulf economies sustain over nine million of our expatriates, many of whom may lose their jobs. Their annual remittances, estimated at over $50 billion, may suffer, hurting our balance of payments. Irrespective of the outcome of the ongoing oil war, unless we find a new set of drivers to replace hydrocarbons, the lower synergy may become the 'new normal' across the Arabian Sea. Mahesh Sachdev, retired Indian Ambassador, focusses on the Arab world and oil issues. He is currently president of Eco-Diplomacy and Strategies, New Delhi.
