Economic impact of West Asia shock

A month ago, Crisil released projections on key macro parameters with a very different macro backdrop in place. Domestic demand scenario was robust, and the external environment was somewhat improved particularly due to a reduction in US tariffs on India’s exports. The West Asia conflict was in its early days but fraught with uncertainty on the duration, intensity, and impact.

With the West Asia conflict now in the second month, the economy is feeling the heat from the energy shock. Domestic demand remains resilient and policy is swiftly moving to mitigate the adverse impact on the economy. Still, elevated energy prices and supply shortages are creating challenges. The risks have tilted to the downside on growth and to the upside on inflation.

Our assessment of the situation:

Things seem rapidly transitioning towards our alternative case, which is predicated on the West Asia conflict continuing till April-end, and the destruction of energy infrastructure and consequent gas supply shortages slowing industrial production in India in the first quarter of this fiscal.

Brent crude oil is seen averaging $82-$87/bbl in this fiscal. While the Strait of Hormuz is selectively open for tankers going to a few countries including India, shipping, insurance and energy costs have risen materially.

To boot, specific information on the exact damage to key energy assets in Iran, Qatar, the UAE, Kuwait, Bahrain, Oman and Saudi Arabia is not available. While risks are high, near-term shortages faced by India are seen improving gradually as the government rushes to secure supplies from other regions and routes. These transactions, however, have longer transit times and are facing tanker shortages. So, in addition to pricier crude oil, the logistics bill—comprising shipping, insurance and transit costs—will be higher, too.