Pessimistic Scenario | Optimistic Scenario | |
A long war spread over 2-3 months | A short, three-week war | |
Disruptions in oil supplies | Prices will go up over $40 a barrel, already hovering at $36-37. They will remain at that high level for 3-4 months. | Prices will reach $40 but come down rapidly |
Increase in India's import bill | Although India buys the bulk of its oil through long-term contracts, a prolonged war can affect these prices | Long-term contracts will remain unaffected |
A rise in domestic prices can... | A 10-15 per cent increase in prices of diesel, petrol and other products | |
... Create inflationary pressures | Inflation may shoot up to a high of 7-8 per cent | Inflation will rise from 2.5-3 per cent to 4-4.5 per cent |
... And Affect GDP growth: | Lower growth in industry reduces GDP by 0.75 to 1 per cent | GDP projections remain unchanged |
Lower Export Earnings | Exports to West Asia will decline; India's software exports too may witness lower growth rates | A localised war may not scare away US software clients; exports to West Asia will pick up soon |
Hit Remittances leading to | Nearly 4 million Indians working in the region will stop remitting money to India | Both NRIs and Indians working abroad may think of India as a safe haven to park their monies |
Decline in forex reserves: | India's foreign exchange reserves may see a downtrend in contrast to the past couple of years | The current comfortable levels of foreign exchange reserves are enough to withstand shocks |
Balance of payments: | Higher import bill, lower exports and drying up of remittances and NRI inflows will affect India drastically | Recent strength of India's BoP will help service its debt |
Bearish Stockmarkets | Sellers will dominate global stock exchanges, including the Bombay Stock Exchange | The bear run will be short, and historical empirical evidence shows markets tend to bounce back after a war |
Impact investments | Corporates’ inability to raise money will force them to postpone investment plans; some projects may also be unable to raise money through bonds | Once the bulls take over after the war, valuations will rise and cash will be easily available |
Result in lower output | The manufacturing sector will face pressures as delayed investments reduce output and demand turns sluggish due to higher prices | Most investment plans are long-term ones, and a few months’ delay will have little impact on deadlines |