US-Iran war may widen India's CAD, cause inflation: Economist

Escalating US-Iran tensions could widen India's current account deficit, fuel inflation, and weaken its currency, an economist warns. The conflict is raising petroleum prices and creating supply bottlenecks, impacting industries and consumers.

Escalating tensions in West Asia between the United States and Iran could widen India's current account deficit (CAD), and chances are high that the country may face higher inflation, widening fiscal pressures and currency weakness, according to Devendra Pant, Chief Economist at India Ratings and Research.

Economist Warns of Multiple Shocks

"The impact on the Indian economy will be felt through inflation, lower remittances if GCC (Gulf Cooperation Council) economies are impacted, higher subsidy (fiscal impact) and expansion of current account deficit leading to weakening of currency," Pant told ANI.

US-Iran Conflict and Hormuz Blockade

The US and Iran have been at war for over a month, with Iran blocking the movement of shipments of several commodities in the Strait of Hormuz. Only a few friendly countries, including India, are able to pass some shipments through the vital shipping route during the war.

Yesterday, US President Donald Trump threatened to impose a blockade of Iranian ports by the US navy, restricting the movement of any vessel from that sea route for any country, unless Iran lifts the ban from the Strait of Hormuz.

He said the impact of the US-Iran war has increased the prices of petroleum products and supply bottlenecks. "The impact of the US-Iran war not only has increased prices of petroleum products but has also increased supply bottlenecks," he said.

Industries and Consumers to Feel the Pinch

Pant said chances are high that the industries using petroleum derivatives as raw ingredients are expected to get hit by the war. "All industries using petroleum derivatives as raw material are likely to be impacted. Prices of LPG, industrial diesel and petrol have already been raised."

The analyst said that oil marketing companies can bear the ripple effects only upto a certain level. "Oil marketing companies can absorb shock to some extent; beyond that the consumers are likely to feel the burden. The government does not have enough fiscal space to absorb this shock," he said.

Failed Diplomacy and Soaring Oil Prices

On being asked about the Strait of Hormuz, Pant said the price of petroleum products, uncertainty and supply conditions remain important. "Ultimately, what is important is price of petroleum products, uncertainty (supply shock) and restoration of supply chain. Impact will be same whether US blocks it or Iran blocks it," he said.

Responding to a query on the economic impact or the blockade, Pant said, "It will reflect in price and inflation."

Dinesh Somani, Founder, Prointellitrade Services said that with the recent Iran-US talks in Islamabad, Pakistan, ending without an agreement, the prices of crude oil are likely to head up till USD 108-109 per barrel.

"The US statement on fully blocking Hormuz adds to risking geopolitical tensions. Prices of crude oil gained almost 6-7 per cent in the opening session, and a meltdown in equity continued. With no indications of a ceasefire ahead, prices of crude oil are likely to head up till USD 108-109 per barrel," Somani said.

Discussions between US and Iran officials in Islamabad lasted 21 hours on April 11, marking the highest-level direct engagement since 1979. Following the talks, US Vice President JD Vance stated that Iran refused US terms, especially on halting nuclear capabilities and reopening the Strait of Hormuz. Iran blamed excessive US demands, with officials nearly clashing over Hormuz control and tolls.

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