India calculates economic cost of Iraq war
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India calculates economic cost of Iraq war

Tuesday, 18 March 2003, 08:00 Hrs
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NEW DELHI: The Indian economy, which is struggling to come out of the impact of the worst drought in three decades, is now haunted by the spectre of U.S.-led military action against oil-rich Iraq.

Analysts say while India may manage to absorb the impact of a short war with little damage to oil supply, a long and messy military campaign would result in soaring oil prices, quashing the economy's attempts to right itself.

"If the war is very short then it won't make much of a difference. The impact of a war that lasts for say one week or 10 days can be absorbed by the economy very easily," said D.H. Pai Panandiker, an economist with think tank RPG Foundation.

"But if it is a prolonged war then the impact will be very adverse. This will have two major implications. First the oil prices will shoot up, secondly India's exports to other countries will take a hit," Panandiker told IANS.

"The increase in oil prices will get reflected in the cost of operation of the industry, and industrial recovery, which was showing signs of gaining momentum, will be adversely affected."

For months, the prospect of military action against Iraq, which has the world's second-largest oil reserves after Saudi Arabia, has driven up oil prices and weighed heavily on the financial markets across the globe.

Experts say India, which imports 70 percent of its oil requirements, has enough oil stocks to ensure normal supplies if war breaks out in Iraq, but a sustained rally in global crude prices will boost inflation and widen the fiscal deficit.

Indian refiners have raised oil products inventories to meet demand for 35-40 days if there is disruption in supplies from the Middle East, which accounts for two-thirds of the country's imports.

"A prolonged war against Iraq may shrink the global economy and result in soaring oil prices. India can't remain untouched by this," said Jayati Ghosh, who teaches economics at the prestigious Jawaharlal Nehru University.

"The threat of war against Iraq, which comes close on the heels of severe drought in some parts of the country and sharply lower agricultural output, will also weigh on domestic industrial production and exports," she added.

Oil prices charged over $1 higher Monday taking the London's Brent crude to $31.38 a barrel after U.S. President George W. Bush gave the U.N. Security Council one more day to use diplomacy to disarm Iraqi President Saddam Hussein peacefully.

The U.S. and Britain have massed at least 225,000 troops in the Middle East with a view to carry out an invasion to strip Iraq of its weapons of mass destruction and oust its leader.

Iraq has denied accusations it is hiding weapons of mass destruction and says it is cooperating with U.N. inspectors.

The Indian government has exuded confidence that a possible war in the Middle East would not have an adverse impact on the country's economy in view of a revival in domestic consumption.

"The possibility of hostilities breaking out in the Middle East has cast doubts over the pace of global recovery in 2003," said the government in its annual economic survey for fiscal 2002-03.

"Notwithstanding a marginal compression in export prospects, the overall growth performance of the Indian economy in the coming months is unlikely to be seriously affected by the developments in the Gulf," said the survey.

"The country is capable of financing higher import bills in the event of steep escalation in global oil prices or other exogenous developments."

India's foreign exchange reserves surged by $863 million in the week to March 7, taking the total to a whopping $73.74 billion, up from $72.87 billion a week earlier and $51.4 billion a year earlier.

While some economists think the economy will manage to show growth over the year on an expected rise in farm output, another section believes a prolonged war can expose the economy's vulnerabilities.

"People living in metros may not get affected much by an Iraq war but consumer spending of people living in rural areas, who are already reeling under poor agriculture production and unemployment, may plummet sharply," said Ghosh.

The government has lowered the economic growth target for the fiscal year ending March 2003 to 4.4 percent from an earlier estimate of 5 to 5.5 percent following a sharp dip in agriculture output.

"From the economic point of view, we need to take the war very seriously," said T.K. Bhaumik, a senior economist with the Confederation of Indian Industry (CII), one of the premier business lobby groups.

"Although it would be a bit premature to revise the economic growth targets in the short to medium term due to a possible war, its impact on a host of visible and invisible sectors of economy cannot be wished away."

Source: IANS
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