Iraq war will adversely impact Indian economy: CII

Wednesday, 19 March 2003, 08:00 Hrs
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NEW DELHI: A prolonged war in Iraq would adversely affect the Indian economy, given its dependence on imports for 70 percent of crude oil requirement, business lobby Confederation of Indian Industry (CII) said Tuesday.

A short war could be beneficial for the U.S. and lead to decline in oil prices "as geopolitical uncertainties are eliminated," said CII in its economic outlook report for 2003-04.

On the other hand, a prolonged war and consequent rise in terrorist activities, would affect the stability of Indian economy though the country is not directly involved in the conflict, CII opined.

"While a higher (oil) import bill will be manageable, a greater threat is the pressure on profitability of the manufacturing sector due to a rise in fuel costs," the report stated.

"Second, the increase in uncertainty would dampen global recovery and affect India's export recovery, particularly in the services sector."

The report warned that "India being a key target for terrorist attacks, the country's risk premium is bound to rise."

India's petroleum products consumption have been rising over the last few years with a total of 107 million tonnes in 2001-02 compared to an average of 60 million tonnes in the 1990s.

However, there has been a decline in the incremental GDP produced per unit increase in oil consumption, the report points out.

"Thus the amount of crude oil required for a six percent gross domestic product (GDP) growth is now higher than it was a decade earlier," the CII has stated.

Discounting government estimate of a lower 4.4 percent GDP growth in 2002-03, the industry body maintains that India would clock a growth of at least 5.0 to 5.2 percent.

The industry body disagrees with the estimate that the agriculture sector will clock minus three percent growth, given that the first quarter results have estimated around four percent growth, followed by flat growth in the second quarter.

In the case of a short war, CII estimates global oil prices could come down quickly after peaking at $38 per barrel.

With the possibility of a war looming large, ending the uncertainty, global oil prices reacted swiftly Tuesday witnessing the sharpest fall since early this year. U.S. light crude was down $2.73 to $32.20 a barrel while London's Brent crude dropped $2.58 to $26.90 a barrel.

In the worst case scenario, the industry body estimates that the oil prices could increase to $48-50 per barrel during the hostilities and average $36 over the year.

During the 2002-03 fiscal, Indian basket of crude imports has averaged $28 per barrel, with the total import bill estimated to be $16 billion. In the event of the prices scaling up further to $36 per barrel average, India's oil import bill could reach $22.8 billion in the worst-case scenario, the CII states.

In the last two years, an increase in oil prices has been seen to adversely impact industrial growth.

"While it is difficult to isolate the impact of fuel prices on growth, we fear that the recessionary impact may be similar in case of a sharp and sustained increase in oil prices," the report said.

But all going well, CII is confident that manufacturing, industry and services will continue to show growth in 2003-04 to help India clock six percent GDP growth.
Source: IANS
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