India's Economy Resilient Amid West Asia Conflict, Faces Supply & Price Shocks

Trinh Nguyen, Senior Economist for Emerging Markets at Natixis, told ANI that the Indian market is "relatively resilient" compared to its Asian peers.

"What I would say about India, and in general, is that it's relatively resilient compared to the sell-off that you see in other markets. When we think about countries that are much worse affected, India doesn't come to mind, even though it's negative," she said. She explained that "it obviously has more leverage than, say, the Philippines," but noted that "the longer duration of the conflict is challenging for India."

Nguyen divided the escalating West Asia conflict for countries like India into two-fold: securing physical supply and managing a massive price shock. She noted that refineries and the crude they process must match perfectly, making it difficult to switch sources.

"So if you were to even find a new supply, you have to find the right crude for your refineries. And so that is a challenge," she explained. While oil storage provides some buffer, gas reserves across the region are low.

"Some people have days... we don't have a lot of storage. Now, the issue here is that, and then I'm focusing on oil and gas here. But obviously, some derivatives are important, such as fertiliser that feeds into the supply chain," she added.

The implications for India are becoming increasingly tangible. Nguyen points out that authorities have already begun advising gas-dependent sectors to scale back. "Even in India, they are telling gas-dependent factories or people to basically reduce consumption," she said.

She noted that when countries cannot afford or find alternative supplies, they are forced into "demand destruction," which essentially means shutting down parts of the economy to lower consumption. "The only way to balance the equation is especially when you can't even pay for alternative supplies, is to reduce demand, which is what we call demand destruction, to lower the consumption," Nguyen stated.

Beyond fuel, the conflict is battering the essential inputs for India's agricultural sector. Fertiliser production, which relies on nitrogen and phosphate, is facing a direct supply shock.

"When fertiliser prices go up, you have two choices: you either pay the price, right, which means if that means your costs go up, then you pass on the cost to your consumer. So food prices go up, or you don't use it and you have a lower yield," Nguyen said.

India has responded by blocking exports of staples like rice to protect domestic food security. She described the logic as, "Let's just keep domestic prices artificially much lower than international prices and keep for ourselves, at least household inflation and so forth is not going to rise so high and people are not going to revolt on the street."

However, these interventions come with a heavy fiscal price. Nguyen noted that in India, a robust fertiliser policy means the government absorbs the higher costs to shield the public.

"If the government... subsidises a higher cost, and it produces a high cost because it's importing all these things, which means the price of those inputs is going up, then the fiscal policy is going to be pretty stretched," Nguyen said.

She noted that "the more you subsidise, you're not disincentivising usage of it, you're actually incentivising," creating a complex balancing act for policymakers.

The shock also extends to the aviation and services sectors. India, a critical transit hub, is seeing its capacity stretched as airspace is restricted and jet fuel prices climb.

"The aeroplane industry is also facing similar situations where jet fuel has increased costs a lot," Nguyen said, adding that "airlines are charging surcharges" and prices are going up. She noted that discretionary spending on tourism could dry up. "At some point, if it's discretionary spending, which is tourism, you're not going to pay for it. You say suddenly, maybe I will stay very close to home. It's a very COVID effect, you know?"

Furthermore, the conflict puts at risk the livelihoods of nine million Indians in the Middle East. "We haven't even talked about remittances, the people exposed in the Middle East, you know... India is like 1.2 [per cent of GDP], 9 million people," she highlighted.

On the monetary front, while the central bank had previously suggested a "wait and see" approach, the current crisis may force a reassessment. "The market already revised that," Nguyen noted regarding previous policy assumptions. She observed that while India's inflation started from a lower base, the combination of rising energy costs and a depreciating rupee is pushing prices higher.

"I fundamentally think that, you know, the next move is probably going to be a hike for the RBI. But it's not going to do that yet," she suggested, clarifying that "interest rate is... not an appropriate instrument for what we're facing today" while demand is already being crushed by supply shortages.

- ANI