If Oil Prices Hit $200/BBL: What Will It Mean For India's GDP Forecast?

India's growth outlook projected at 7.6% for the current fiscal year could be adversely affected if the Israel-US conflict with Iran continues, placing rupee under pressure, and significant imported inflation.

Oil Prices At $200/BBL: What It Mean's India's Economy?

Recently, Iran’s Islamic Revolutionary Guard Corp spokesperson noted that oil prices would surge up to "$200 per barrel".

Considering crude oil prices at $100 per barrel witness a 100% surge, India's 7.6% GDP projection for this fiscal year would have to brace itself for a 150-basis points (bps) impact, translating into a 1.5% decline to 6.1% GDP.

"Every 10 rise in oil prices, if passed onto consumers fully, affects GDP growth by 15 bps, inflation by 30 bps, fiscal deficit by 0 15 of GDP C/A deficit by 0 4 of GDP," according to a Union Bank of India report.

The volatility in oil prices began after continued US-Israeli attacks against Iran, which in retaliation fired missiles, and launched drone attacks on several targets across the Middle East region.

Earlier, oil prices breached the $100 per barrel mark, nearing the $120 per crude oil barrel level. While it declined below the $90 BBL after Trump signalling de-escalation, it again rose over $100 BBL on Thursday, March 12 as Iran escalated attacked on oil and transport facilities across the Middle East.

Meanwhile, two tankers carrying Iraqi fuel were hit by unidentified attackers in the West Asian country's territorial waters.  

Strait Of Hormuz Crisis: The Impact On India's Energy Security

The Strait of Hormuz disruption risks blocking nearly 50 of India’s crude oil and LNG imports and potentially 100 of LPG flows, highlighting the scale of the energy security challenge," according to the UBI report.

Direct impact via Iran is capped as it’s share in oil imports is down to negligible vs 12.5% in FY17. Hence the more important channel of impact is via spike in oil prices with 85% of India’s oil requirements imported, and the conflict has already pushed oil prices 27% higher since the war began.  

Also Read: The Global Oil Tap: Which Nations Are Opening Reserves for Iran Crisis?

Israel-US-Iran Conflict: How Will It Impact India Inc?

West Asia has a share of 15% in India's goods exports, 20% in goods imports, 40% in remittances and 10% in foreign direct investment (FDI).

Sectors reliant on key commodity imports like oil are aviation, auto, and transportation among others with 45% share of West Asia may face margins pressure.

Also, 70% LNG import share has affected adversely on supply production halt in Qatar Chemicals and fertilizers also facing pressure on import disruptions, which if sustained, may spill over into food inflation pressures. The escalating tensions in the Strait of Hormuz has also impacted sectors such as gems and jewellery (45%), auto (25%), and food and beverages (20%). 

Overall, the Middle East tensions has resulted in spiked commodity prices, trade disruptions apart from rupee depreciation.