India is facing supply shocks from the Middle East war, and the resulting hit to domestic demand is a serious concern, the Finance Ministry said in its monthly economic review. “A ‘supply shock' is apparent in the economy,” the ministry's Department of Economic Affairs said in the report. “An accompanying demand compression is a serious concern, given high prices, rising inflation, and a reduced pace of economic activity.”
The closure of the Strait of Hormuz has hit India hard, disrupting a route that carries nearly half its crude, and about 90% of its gas imports. The shock has forced gas rationing to critical industries, weighing on economic activity.
Repairing oil and gas infrastructure in the Gulf “may take several months,” according to the report, released Wednesday. If below-normal rains also hurt agriculture, “headline inflation might spill over to the core measure” as producers raise prices to protect margins.
Reserve Bank of India Governor Sanjay Malhotra has also recently warned of an inflation spillover risk to the economy, which is a real concern for the central bank.
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The economic review said a range of downstream industries rely on the petroleum sector, and “it is likely that input cost pressures will be felt widely across the economy.”
The conflict has “seriously dented investors' confidence” in emerging markets, including India, the ministry said in the review, adding that a weaker rupee could further stoke inflation by raising import costs.
The Reserve Bank of India took aggressive steps recently to curb speculation, yet the currency fell to a record closing low on Wednesday. With oil prices elevated, and capital inflows muted, economists are widening their estimates of the nation's balance of payment deficit.
However, the crisis may not threaten financial stability as key indicators remain strong. It “can be an opportunity” for India, given strong domestic fundamentals and strategic autonomy, according to the report, pointing to scope for more ambitious trade deals and diversified supply chains.
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(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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