India's economic slowdown is in danger of becoming a full-blown crisis if the crude prices continue to rise amid worsening tensions in the Middle East. International crude saw the biggest single-day jump in history on Sunday after Saudi Arabia halved oil and gas production following drone strikes by Houthi rebels of Yemen on Aramco's petroleum installations.
With Brent hovering around $72 after a prodigious 19 percent spike early on, international oil prices have hit a sharp trajectory. Mandarins of the North Block housing the finance ministry know this could derail the steps that Finance Minister Nirmala Sitharaman has announced to contain the revenue deficit. Oil is the biggest import for India and its unprecedented rise could cause a spike in the import bill, cutting into the allocations for other major developmental projects, reports suggest. The government may be forced to reallocate a part of the Rs 1.76 lakh core bonanza it is receiving from the Reserve Bank of India on the recommendations of the Bimal Jalan panel to meet the higher oil bills.
Prime Minister Narendra Modi's government that recently celebrated 100 days in office in the second stint enjoyed benign oil throughout its first innings and the first 100 days of the second, helping it to keep the revenue deficit and inflation within manageable limits. However, Sitharaman must be worried that when the economy is in slowdown pain an inflationary turn because of higher oil prices could prove lethal.
The higher oil prices could also put beyond the nation's reach the $5-trillion economy target in five years that Prime Minister Modi has set. The situation could push down the gross domestic product (GDP) growth in real terms below the currently estimated 5 percent, economists say. Former Prime Minister Manmohan Singh, who is a renowned economist who had once headed the Reserve Bank of India (RBI), has criticized the government for the falling GDP growth. Dr Subramaniam Swamy, who belongs to the ruling Bharatiya Janata Party (BJP), has said the $5-trillion economy will remain beyond reach unless the nation grew at close to 14 percent for several years.
In the past, India had a cheaper oil source in Iran which lessened the impact of higher international oil prices. India has been forced to stop Iran oil imports under pressure from the US after President Donald Trump tore up the Iran nuclear deal.
The oil prices threaten to remain high so long as the Iran-centered tensions continue. The US is in no position to wind down the Middle East situation because of the domestic compulsions of its ally Saudi Arabia. Riyadh cannot be seen as weak in responding to the Houthi attacks because its involvement in Yemen, as well as sanctions against former ally Qatar (resulting in a vertical split in the Gulf Cooperation Council), is directly linked to the rise of Crown Prince Mohammed Bin Salman. He is bound to escalate the war to protect his image inside his own country where his seemingly tough anti-corruption drive has earned him powerful enemies.
Saudi Arabia and the US blame Iran for the continuing strikes on Saudi assets in retaliation to the bombing of Houthi targets in Yemen by the Saudi-led coalition with the backing of the US and the UK. Houthis control a large part of Yemen including capital Sana'a and some important ports.
