West Asia Crisis Could Widen India's Current Account Deficit to 2% of GDP

The report noted that under an adverse scenario, higher crude oil prices, rising gas costs, and increased fertiliser imports could significantly expand the trade deficit. A 23 per cent year-on-year rise in crude prices alone is expected to sharply increase the petroleum import bill, which already constitutes a substantial share of total imports.

"Higher petroleum import bill due to a 23 per cent year-on-year rise in crude prices, along with higher fertiliser prices, will further increase the import burden," the report noted.

Additionally, disruptions in exports to West Asia, coupled with elevated shipping and insurance costs and softer global demand, are likely to weigh on outbound shipments, further widening the trade gap.

The report also highlights risks to remittance inflows from the region, which account for a significant portion of India's external receipts. Any slowdown in the incomes of Indian workers in West Asia could have a short-term adverse impact on remittances, adding pressure on the CAD.

Despite these challenges, a healthy services trade surplus is expected to provide some cushion to the external balance.

In its base case, the report estimates the CAD at 1.5 per cent of GDP, but warns that escalating geopolitical tensions and sustained energy price shocks could push it up to 2 per cent.

The widening deficit is also seen alongside broader macroeconomic risks, including higher inflation, currency pressures, and tighter financial conditions, if the conflict persists and continues to disrupt energy supplies.

The report further cautions that India's economic growth could also experience a moderate slowdown due to higher energy prices and supply disruptions. As a country heavily dependent on energy imports, India remains particularly vulnerable to such shocks.

"Asia-Pacific is the most exposed to the energy shock in West Asia. The vulnerable ones include India, higher energy prices erode purchasing power and weaken domestic demand," the report said, identifying India among the most affected economies.

As a result, the report outlines a downside scenario where India's GDP growth could ease to 6.8 per cent from the baseline estimate of 7.1 per cent. It added that input cost pressures from crude oil and reduced availability of gas are expected to impact growth, particularly in manufacturing, construction, and services.

- ANI