India is experiencing a new oil shock with the ongoing war in West Asia, compounded by industrial-scale foreign portfolio investor (FPI) outflows of $20 billion and net zero FDI growth as many major Indian companies invest overseas. According to reports from Business Standard, these developments are putting pressure on the rupee, creating economic conditions reminiscent of the 1973 crisis. The Reserve Bank of India's latest monthly state of economy report confirms that supply-side pressures and weather-related uncertainties are clouding the near-term outlook, while geopolitical events in West Asia could impact domestic prices through second-round effects.
The latest inflation data reveals Wholesale Price Index (WPI) inflation surged to 8.3% in April from 3.9% in March, recording a 42-month high and indicating "incipient price pressures in India," as reported by the Reserve Bank of India. Consumer Price Index (CPI) inflation rose to 3.5% from 3.4% in March, largely driven by food inflation, while core inflation remained steady. The RBI expressed caution about the likelihood of pass-through to domestic prices, stating that "although headline inflation remains firmly within the tolerance band, the pass-through to domestic prices needs to be monitored."
The International Energy Agency has issued stark warnings about the global impact of the current oil crisis, with IEA Executive Director Fatih Birol stating that Europe has 'maybe six weeks of jet fuel left' in a recent Associated Press interview. Birol described this as 'the largest energy crisis we have ever faced,' stemming from the pinch-off of oil, gas and other vital supplies through the Strait of Hormuz. He warned that 'the longer it goes, the worse it will be for the economic growth and inflation around the world,' with the impact expected to be 'higher petrol (gasoline) prices, higher gas prices, high electricity prices.'
Despite inflation pressures, domestic demand continues to be the key driver of growth according to the RBI's latest assessment. Industrial and services activity stayed strong in many segments, with most listed private non-financial companies showing quarter-on-quarter improvement in business performance in the fourth quarter. However, the merchandise trade deficit widened month-on-month in April due to a rising import bill, primarily driven by crude oil and gold prices. In the agriculture sector, rapid progress of summer sowing was supported by above-normal pre-monsoon rainfall, though higher probability of above-normal minimum temperatures and unseasonal rains pose risks to the harvesting of remaining rabi crops.
The Modi government faces challenges similar to those in 1973 but has advantages including lack of credibility among current Opposition leaders compared to their 1973 predecessors. According to Business Standard, the government's space is limited but not eliminated, requiring real reforms including in higher education to address the current crisis. The RBI's report emphasizes that robust services exports, positive net FDI flows, foreign exchange reserve buffers and proactive policy measures undertaken by the government and RBI are likely to cushion the Indian economy against external headwinds. The analysis emphasizes that currency nationalism is illogical and that the government must use its current space wisely to carry out genuine reforms before the situation deteriorates further.
