US-Iran war could widen India's current account deficit to 2%
What's the story
India's current account deficit (CAD) could widen to nearly 2% of its gross domestic product (GDP) if the West Asia crisis continues, a report by CRISIL has warned. The projection is based on an anticipated increase in the import bill and a decline in external inflows. Under adverse conditions, rising crude oil prices, gas costs, and fertilizer imports are expected to significantly widen the trade deficit.
Import burden
Rising import burden
The report notes that a 23% year-on-year (YoY) rise in crude prices will sharply increase the petroleum import bill. This comes at a time when petroleum already accounts for a major chunk of total imports. The report states, "Higher petroleum import bill due to a 23% year-on-year rise in crude prices, along with higher fertilizer prices, will further increase the import burden."
External challenges
Export disruptions and remittance risks
The report also highlights potential export disruptions to West Asia, which could further widen the trade gap. This is due to elevated shipping and insurance costs as well as softer global demand. It also flags risks to remittance inflows from this region, a major contributor to India's external receipts. A slowdown in incomes of Indian workers here could have a short-term adverse impact on these remittances.
Trade dynamics
Broader macroeconomic risks
Despite the challenges, a healthy services trade surplus is likely to cushion the external balance. The report estimates CAD at 1.5% of GDP in its base case scenario but warns that escalating geopolitical tensions and sustained energy price shocks could push it up to 2%. This widening deficit also comes with broader macroeconomic risks such as higher inflation, currency pressures, and tighter financial conditions if the conflict continues disrupting energy supplies.
Growth impact
Impact on economic growth
The report warns that higher energy prices and supply disruptions could moderate India's economic growth. As an energy-importing country, India is particularly vulnerable to such shocks. The report states, "Asia-Pacific is the most exposed to the energy shock in West Asia. The vulnerable ones include India; higher energy prices erode purchasing power and weaken domestic demand."