08/01/2020 - International Relations

KEY POINTS

·        There are three axes along which the Indian government will need to prepare.

·        The supply of oil, India imports 84 per cent of the oil it needs. Thus, a spike in the price of oil makes a big difference not just to domestic cost conditions but also to the balance of payments.

·        An increase in oil prices will naturally cause inflationary pressures throughout the economy; the Reserve Bank of India will, therefore, be forced to exercise greater caution than it would have otherwise when it comes to setting interest rates.

·        In the past, high oil prices have severely weakened the external account; a previous crisis in West Asia was, in fact, part of the reason for the balance of payments crisis that precipitated the 1991 liberalisation.

·        Today, India’s foreign exchange reserves are relatively comfortable, at over $450 billion, and can easily cover 9-10 months’ imports at current prices. An increase in the price of oil would have to be both sharp and sustained in order to erode this buffer.

·        However, there are two other axes of concern for the government, and both are related to the large Indian diaspora in West Asia, and particularly the Persian Gulf.

·        Their safety will have to be a priority. India has in the past organised big evacuations — famously from Kuwait at the time of the first Gulf War, and more recently from Libya.

·        In 2016-17, for instance, 27 per cent of remittances into India came from the United Arab Emirates, and 27 per cent from other Gulf states.

·        This inward flow is concentrated geographically as well, with more than half flowing to Kerala, Maharashtra, Tamil Nadu, and Karnataka.

·        A sharp decrease in remittance income would further stress the external account and the economies of these states. The Indian government should thus keep a wary eye on developments in the Gulf and make its own preparations.

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