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How US-Iran Tensions Affect India Economically?

IndianMoney.com Research Team | Posted On Wednesday, January 08,2020, 11:46 AM

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How US-Iran Tensions Affect India Economically?

 

 

The Middle East is on the boil. After the US assassinated the Iranian General Qasem Soleimani in a drone strike at the Baghdad Airport last week, tensions between Iran and the US has never been this high. Iran has promised strong retaliation, even as the US says more strikes could follow if Iran carries out the threat.

Iran has put an end to its Nuclear Deal Commitments. Iraq wants all foreign troops out of the country, even as the US threatens never before sanctions against Iraq. In all this, the Crude Oil Prices have surged by 2% as oil hits $70 a barrel.

Iran has launched missiles at two Iraqi bases housing US forces in revenge for Soleimani’s death.

Petrol and Diesel prices in India have been hiked for the 4th straight day on Sunday. Delhi Petrol Prices were Rs 75.54 a liter which is highest in a year. Delhi Diesel Prices were Rs 68.51 a liter.  In all this comes a question. How will US-Iran and now US-Iraq tensions impact India economically?

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How US-Iran Tensions Affect India Economically?

Petrol and Diesel Prices Shoot Up:

India imports more than 80% of its Crude Oil needs. Now, Brent Crude tops $70 a barrel. So how does this affect India?

  • A Crude Oil Price increase of $10 a barrel increases inflation by nearly 50 basis points.
  • Every $10 a barrel Crude Oil Price increase brings down GDP by 0.3 percentage points.

As these points show, a rise in Crude Oil Prices is definitely bad for the Indian Economy. Looking at past history, Iran has often threatened to close the Straits of Hormuz. The Straits of Hormuz is the only sea passage between the Persian Gulf and the open ocean and is a strategically important choke point. Nearly 21 Million barrels of Crude Oil passed through the Straits of Hormuz each day in 2018. In September 2019 drones attacked the Saudi Arabia Aramco Oil Processing facility at Abqaiq and Khurais in Eastern Saudi Arabia in an attack widely blamed on Iran. This reduced Saudi Arabia oil production by half and the Global Oil Production by 5%.

US-Iran and US-Iraq tensions are high leading to a spike in Crude Oil Prices which would impact India’s GDP and send inflation soaring.

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Rupee Crashes Against the Dollar

The Rupee has crashed to below 72 marks against the Dollar. 1 Dollar is Rs 72.02. If rupee crashes against the Dollar, imports get expensive. This is bad for the Indian Economy. Inflation goes up. So how does this affect you?

Well for one, the foreign trip just got costly. When you travel to countries like US and UK and even South East Asian countries, you spend in dollars. If rupee crashes against the dollar, you end up spending much more on that trip abroad.

Let’s understand this with an example. You need $1,000 for that trip to Thailand. If 1 Dollar is Rs 66, this trip costs Rs 66,000. Now, the Dollar has crashed to Rs 72. You end up spending Rs 72,000 on that foreign trip.

Your son’s and daughter’s foreign education just got costly. If you are sending money to them to spend abroad or even tuition fees of that great MBA college, the rupee crashing against the dollar means you spend more.

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Inflation is Going to Shoot Up

India and Iran are trading partners. India exports tea, cereals, coffee, basmati rice, spices, and organic chemicals to Iran, while it imports crude oil. India exports $3.5 Billion worth of goods to Iran, while it imports $13.5 Billion worth of goods from Iran. This balance of trade imbalance is because of India’s oil imports from Iran. If this export-import business is affected, inflation would rise in India.

When Crude Oil Prices rise, the nations which import oil are severely impacted. The higher import costs worsen the current account deficit (CAD). Firms pass on higher expenses to the general public. This means inflation measured by CPI shoots up. November retail inflation at 5.54% was at a 3-year high.

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India’s crude oil imports from USA have jumped more than 72% in the last few months as India looks to diversify crude oil supplies. This would reduce dependency on Middle Eastern Crude Oil. Sadly, this also increases shipping costs as US is geographically far from India. This would boost inflation; making goods and services costly in India.

Gold Prices have shot up in recent times. It has risen by Rs 2,000 per 10 grams in just 4 days as it hits a record Rs 41,278 per 10 grams. Gold is a safe haven in these inflationary and uncertain times. Though, gold could soon be out of reach of most Indians at such high prices.

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