Topic 3: FRESH WAR SHOCKS

As the world economies were recovering from the COVID-19 pandemic and the Russia- Ukraine war. The world was dealing with high energy prices, global food shortages and inflation because of the Russia-Ukraine war. Both the developed world and the emerging economies are growing far slower than expected. The International Monetary Fund (IMF) estimates that global growth will slow down from 3.5% in 2022 to 3% in 2023 and to 2.9% in 2024, well below the historical average of 3.8%. IMF reported that despite war-disrupted energy and food markets and unprecedented monetary tightening to combat decades-high inflation, economic activity has slowed but not stalled. Even so, growth remains slow and uneven, with widening divergences. After considering the impact of Israel Hamas war, global inflation spurted to 9.2% in the aftermath of the Russian invasion of Ukraine and fell to 5.9% in 2023 as central banks across the world raised as central banks across the world raised interest rates to cool down the high prices. The IMF projected inflation at 4.8% in 2024. A report by Bloomberg Economics considers the Israel-Hamas war's likely impact on global growth and inflation under three scenarios- Confined war, multifront war and direct war. For the Indian economy, the oil prices and rising US bond prices are major concerns. India is a net importer of crude unstable prices would affect the future macroeconomic stability. Currently, India continues to have economic stability but the spike in crude prices can put India in difficult economic conditions. The impact of the Israel-Hamas war on India can be summaries as:

· High import bill which would widen the current account deficit- high crude prices would worsen the government’s fiscal deficit and widening the current account deficit would impact currency adversely, in turn affecting sectors like auto, aviation, paints and chemicals. Every 10-dollar rise in Brent crude prices widens India’s current account deficit by 0.5%. Consequently depreciating the Rupee leads to imported inflation.

· Weakens the Indian Rupee – paying for high crude oil can increase the demand for dollars hence weakening the rupee against the dollar.

· Oil Marketing companies incur losses- rising crude prices would have a significant impact on some specific stocks and the broader economy. The Indian crude oil basket has averaged ~ $80.1 per barrel in the first five months of FY24. Instead, the price of the Indian crude basket touched $90.7 per barrel in the first week of September. High international oil prices will raise the average Indian crude basket price and the oilmarketing companies (OMCs) including Indian Oil, Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL), will register losses in gross refinery margins.

· Inflation pressure - According to the Reserve Bank of India (RBI), the sustained increase in prices is expected to lead to a lower aggregate demand as households and firms are left with less disposable incomes to spend on non-energy goods. This is how domestic consumer prices respond to an oil supply news shock.

· Higher fiscal deficit – The government often subsidizes fuel prices to protect consumers from the impact of rising oil prices, if crude continues to rise the government may need to subsidise a part of the price increase which would lead to a higher fiscal deficit. The country’s GDP numbers would be affected.

ECONOMIC IMPACT OF WAR
Global growth and inflation impact of three scenarios for how the Israel- Hamas conflict could evolve



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