Costly energy imports in the wake of the West Asia conflict would weaken , raise inflation, worsen the current account balance and complicate monetary policy as well as fiscal management if they lead to expanded subsidies to help offset the economic shock, warned Moody’s Ratings.
The rating agency said India’s structural exposure to oil price shock is very high. It noted that India stands out among the large Asian economies that rely on and from West Asia, with a high share of West Asian crude among total oil imports, and pressure from the US to cut its energy imports from Russia.
In case of a $30 increase in oil prices to $100/barrel, and inflation will be at 6.8%and 3.5%, respectively, in a baseline scenario.
In the case of an adverse scenario, the deviation in the real GDP growth and inflation from the baseline scenario will be -0.8 to -1.2 percentage points (ppts) +1.2 to 1.8 ppts, respectively.
India’s share of crude oil from West Asia is at 46 per cent. Crude imports as a share of GDP is at 3.6 per cent.
Moody’s Ratings warned that the West Asia conflict poses substantial risk to the global economy, especially if it causes a prolonged dislocation in global energy markets, with the Strait of Hormuz a critical choke point.
“Infrastructure damage has so far been limited and strong inventories provide buffers. But a prolonged disruption in navigation through the Straight of Hormuz, beyond our baseline of few weeks, would likely trigger sustained supply shortages; prices averaging higher than $100/barrel (bbl) for Brent, the main international benchmark crude; higher inflation; tighter financial conditions; and slower global growth. Energy importing regions in Asia and Europe would sustain the most immediate stress,” the agency said.