Tackling the West Asian curveball

The escalating West Asia tensions have thrown a curveball at global economic prospects, and India is feeling the heat.

- ANUBHUTI SAHAY

The escalating West Asia tensions have thrown a curveball at global economic prospects, and India is feeling the heat. The interplay between growth, inflation, and fiscal dynamics has become more complex, leaving policymakers in a tough spot.While inflation is set to jump on elevated energy prices, the key question is whether economic activity can be a bigger casualty. Four out of five global recessions since the 1950s have been preceded by oil shocks.

There’s no crystal ball for answers during such geopolitical events. Some fallout is inevitable, but the hit India takes will depend on three things— how long the conflict lasts, the aftershocks in global energy markets, and policymakers’ agility during and after the war.

The silver lining is that India has entered the West Asian tensions in a position of strength. Growth over the last 12 months has been close to or higher than trend (partially flattered by one-off measures), inflation has been low, and trade diplomacy is shifting from negotiating tables to delivery mode, albeit with a lag. An import cover of around 10 months (more than 3x the prescribed International Monetary Fund metric to assess adequacy of foreign exchange reserves) assures sufficient external buffers.