US-IRAN TENSION ESCALATION
In the first week of January, the United States conducted a drone strike that killed Iran’s most powerful military general Qassem Soleimani, whom Washington accused of plotting imminent attacks against US forces in the region. The next day, Trump made autocratic statements by the series of tweets.
After the drone strike the Iranian retaliated by striking two bases housing U.S. forces in Iraq, but there were no casualties in the strike.
But let’s start from where it all began; On 8 May 2018, U.S. President Donald Trump announced that the United States would withdraw from the Iran nuclear deal. In fact, the problem harks back to a time when Trump decided to walk out of the Iranian nuclear deal signed off by the Obama administration. Since then, the US has been imposing crippling economic sanctions on Iran. The US government bans all foreign financial institutions from transacting with the Iranian central bank and this effectively chokes Iran’s primary trading activities.
BUT HOW DOES IT EVEN IMPACT INDIA?
The rising tension between the United States and Iran and its consequent impact on Brent crude oil, which surged further on previous Monday to around $70 per barrel, has only added to the woes of Indian Companies, which are already struggling with the sagging economic situation, now also face the potential threat of higher costs, and therefore, a fall in margins.
The Street’s concern was also noticeable. Stocks pertaining to the sectors with relatively higher co-relation with crude oil prices, such as oil marketing (OMCs), aviation, paints and adhesives, cement, and tyres were also down. The SENSEX and NIFTY dropped 2% from January 3 to January 8.
India, the world’s third-biggest oil consumer, meets more than 80% of its crude oil requirements and around 40% of its natural gas needs through imports. Crude oil and its products have a weight of 10.4% in the wholesale price index. Therefore, any increase in the price of crude oil would tend to impact the WPI inflation.
According to ICRA, every $1 a barrel increase internationally will increase India’s import bill by $1.4 Billion.
It must also be noted that $10 a barrel increase in crude oil will increase the fiscal deficit (the difference between total revenue and total expenditure of the government) of India by 0.1% of the GDP and could make the situation worse.
Crude oil volatility index indicates the expected change in the price of oil within a year. After the top Iranian military Commander Qassem Soleimani was killed, the volatility index of oil inflated to 31.92% directly indicating the rise in the price of oil.
According to the government data, India in the last Financial Year imported 84% of Crude Oil and two of every three of those barrels were from the Middle East. Previously, the crude oil was $65 a barrel and it rose to $70 per barrel after the US-Iran Stand-off on the 3rd of January.
A sudden increase in the price of oil that is often accompanied by decreased supply. As oil is the main source of energy for most of the industrial economies, an oil crisis can endanger the economy globally.
Prices of petrol and diesel always react a
little late to the rise in crude oil prices as state-run retailers fix fuel
prices daily based on a complex algorithm of 15-day average international
benchmark rates. Given the trend in oil prices, it is likely that fuel prices
will increase in the next few days as well, say experts.
Domestic fuel prices are already at a 13-month high, so in the event of a further hike, the government will need to consider slashing taxes on fuel (excise duty by the Centre and value-added taxes by the states), which, in turn, can make a dent on its revenues and widen the fiscal deficit.
India-Iran Energy Trade (US$ Million)
|Year||Oil Imports from Iran||Total Oil Imports||Iranian Share in Total Oil Imports||Imports from Iran||Percent of Oil in Imports from Iran|
|2018-19 (April to February)||11,663.15||–||–||12,724.19||91.66|
Source: Directorate General of Foreign Trade, Ministry of Commerce and Industry, Government of India.
IS THE BRINK OF WAR BETWEEN US AND IRAN ENDED BEFORE COMMENCEMENT?
Initial assessments indicate that no Americans were killed in Iranian strikes, so President Trump may not feel the pressure to punch back and are ready to embrace peace with them.
On January 9, Crude prices fell to $65 per barrel on hopes that a war would not happen, the market also breathed a sigh of relief, with the BSE SENSEX jumped 634.61points. The volatility index or VIX also dropped, suggesting the trader’s concern over the near term prospects of the market have eased after oil prices dropped.
India’s relationship with America has strengthened over the past few years. India cannot lose such an important ally. Simultaneously, however, our energy security is heavily dependent on Iran. If the USA and Iran cannot work this out and war becomes a stark reality, India faces severe drawbacks to growth, progress, and relations.