How A War Can / Not Impact India's Economy

Updated on: 7 February 2024 7:09 pm

	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