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Former Chief Economic Advisor Dr Arvind Subramanian warns that India faces a stagflationary shock due to the US-Iran war and the disruption of the Strait of Hormuz.
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00:00Let's tell you what the latest Oxford Economics Advisory Firm forecast is saying and this is
00:07really the critical question. If the Strait of Hormuz remains closed for six months,
00:12global oil supplies could drop by as much as 20 million barrels per day. Brent's crude will surge
00:20to around $190 per barrel by August. Global inflation will hit 7.7% close to the 2022 peak
00:30and the global growth rate for 2026 will slow down to 1.4%. US and most advanced economies will slide
00:39into recession. China's growth will fall to 3.4%. Gulf states GDP down over 8% and India too of
00:48course
00:49will face a tough economic situation. Just how tough? What should we be bracing for if this war
00:56actually lasts longer or the Strait of Hormuz remains shut? Joining me now, very special guest,
01:02former Chief Economic Advisor, Dr. Arvind Subramaniam, Senior Fellow at the Peterson Institute
01:07for International Economics, is joining me. Appreciate Dr. Subramaniam, you joining us.
01:13One month into this US-Iran war, Strait of Hormuz disruption, already pushing
01:18crude oil beyond $112 per barrel. India imports about 85% of its oil. Your estimate of the total
01:27direct and indirect economic cost that India may have to face as a result of this conflict?
01:34Hi, Razeeb. Thanks for having me. Razeeb, I think those are actually quite difficult to estimate
01:42because there's a lot of uncertainty around how long it's going to last, how high the oil price is
01:49going to go, and so on. But I think, remember for India, it is as much natural gas and fertilizer
01:58that are going to be key determinants of what happens as oil itself. What is clear is that,
02:07like in the rest of the world, this is a stagflationary shock. Prices will go higher and
02:15GDP will come down. The only question is, what are the magnitudes? And that's going to depend upon
02:22how long this happens. I wouldn't be surprised if, on certain reasonable assumptions, our GDP growth is
02:31shaved by more than one percentage point, maybe more. And prices also rise. We could see inflation
02:38higher by one to one and a half percentage points quite easily.
02:46So you're saying the threat of stagflation is real? The possibility of stagflation sooner rather than
02:54later? Exactly. This is a stagflation shock of pretty large magnitude. I mean, and remember,
03:04it's not only oil, but for India, natural gas and fertilizer as well. Already, you can see in India,
03:14you know, restaurants are closing down. If anything, the natural gas shortage is being felt
03:19more acutely and more broadly than even the oil price shock. So, you know, in that sense, you know,
03:27you can already see the GDP or the, you know, the stag part of the stagflationary term, the stagnation
03:34part is already being felt in terms of restaurants closing down, you know, households having less
03:42natural gas, and that's already being felt. So the only thing is how much and how do we respond to
03:48the
03:48shock? I'll come back to the India question, Dr. Subramanam again, but let's for a moment look at the
03:59world itself. There's now the possibility of the U.S. entering recession, China slowing down. Do you
04:05therefore believe that we are, it's not just about India at the moment, global economy is much more
04:10interlinked? We really are, in a sense, part of a ever-widening arc of uncertainty and possibly even
04:20the R-word recession in several parts of the world. Would that be right? Absolutely right. I think,
04:28Rajdeep, the one way to think about this is that, yes, you know, globally, we are much more
04:34interdependent. This is a global stagflationary shock, and of course, how big depends upon the
04:42duration and so on. But remember, the big difference now compared to before is that at the global level,
04:52if you look at the major economies, the United States, Europe, China, they also have less policy
05:01firepower compared to the past. So for example, you know, in a situation like this, you may want to
05:07inject more fiscal policy impetus, for example, right? But then debt levels are so high that, you
05:15know, those are no longer as feasible options as they used to be in the past. So it's not just
05:22that
05:22that the shock is very significant, but also the ability of policy to respond globally is much more
05:31limited. And that's very important. You know, you made an important point at the very outset that
05:40it's not just about oil prices. There is the danger of food inflation, which always hits the poorest the
05:46most. There is fertilizer prices set to possibly rise further. So that could affect farmers. We've
05:54already seen jet fuel prices on the rise. Airline prices also now expected to surge. So there's no
06:00segment of economy in a way that's going to be insulated if this war carries on for a month and
06:07longer. Am I? That's the fear, isn't it? There are even those who are saying are equating it to what
06:13happened during COVID, that that was a lockdown. That was a and now we've got this major supply
06:20side disruption, which could affect every sector of the economy. Yeah, in the short run, what has
06:28happened, of course, is that the government has limited some of the price increases, right? It's
06:35cut excise taxes. So, for example, on petroleum, it has not allowed these to go through to consumers,
06:41for example. And similarly, it might do that for a fertilizer as well. You know, fertilizer prices,
06:49remember, are subsidized quite heavily. So in the short run, I think the government is trying to
06:56absorb the shock on its own balance sheet and limiting these price increases. But remember,
07:04there are no good options in this. They're just less bad and more bad options. So in the short run,
07:10the government is taking the hit on the budget. And that's getting reflected in government yields
07:15going up, which is going to be problematic. But I think over the longer run, if these shocks persist,
07:22the government will have no option but to pass on some of these price increases, even in petroleum,
07:30which are now fixed, and in other commodities. You know, I think the broad attitude is that,
07:36you know, jet fuel, because consumers are richer, you allow them to go through. But wherever there
07:42are poorer and vulnerable sections, you want to limit the price increase, and the government takes
07:47the hit on its budget. But that, I think, equation cannot, is not sustainable for too long. At some
07:53point, these price increases will have to be passed through, at least to some extent.
08:01Because if I put to our viewers five major impacts on India after one month of this West Asia war
08:07on the
08:08economy, LPG shortages, some artificial, but others real on the ground, rupee at record lows,
08:15there's been a major stock market correction, there's a manufacturing slowdown in specific sectors,
08:21and that the GDP growth forecasts are also declining, all of which leads to a very bleak picture. Are we
08:28looking at the glass half empty? Is there any ray of hope amidst all these dire forecasts that are
08:34being put in there, Dr. Subramaniam? Yes. Razli, before I answer that question, can we talk about the
08:44rupee for a second? You know, it's an important point, right? The rupee has declined, and it's, you know,
08:49creating some turmoil in foreign exchange markets. But I think viewers should know that since the war
08:58began, the rupee is not the worst performing currency amongst peers. You know, because all countries have
09:06been affected, Philippines, Bangladesh, Vietnam, you know, Korea, Taiwan, Japan, they've all been
09:12affected. And India has been somewhat middle of the pack in terms of how much the rupee has gone
09:19down. But what is important, and it's really a lesson for policymakers in India, is the rupee was the
09:27worst performing currency in the one year before the war began. So the question is, why? Why did that happen?
09:37And
09:37what does it say about what policymakers do now? So if I would say there's a ray of hope in
09:44this, it is a wake up call to
09:47build up the resilience of the economy, and to undertake the reforms that will give us long term
09:55resilience. Remember, it's a bit like the Trump shock, you know, when Trump hit us with tariffs, I think the
10:02government to its credit did galvanize and undertake reforms. So I think this should be viewed as a real
10:08wake up call to build up long term resilience, and to do the things that will contribute to that.
10:18Give me an example. Give me an example that you believe that should be done right at once.
10:22If you were advising the government, what would you advise them to do right away?
10:30Rajdeep, remember, in all these things, there are things you need to do right away. And there are
10:34things that are arguably more important that you do need to do over the medium term, right? I mean,
10:40right away, I think what the government needs to do is try and find globally every possible source of
10:49supply for fertilizer, oil and natural gas. You know, I think, you know, we should go all out hunting
10:56everywhere to secure these supplies as quickly and as cheaply as possible. So that's one. I think that,
11:05you know, the question arises is also, why did China have a bigger stockpile of petroleum than we did?
11:14So I think in the short to medium term, we also need to focus on, do we need to build
11:21up buffers of
11:22these very important commodities, like gas, fertilizer and oil? Now, the last thing I will say,
11:33Rajdeep, which is probably, see, the most important is long term resilience. What do we need to do?
11:39That's, I think, the key point. And I think we need to reduce our dependence on fossil fuels in the
11:48long
11:48run, which means building up our electricity and renewable sector in the long run. That is the way
11:55to go for the medium term.
12:01Can I, though, ask you, are India's current foreign exchange reserves, Dr. Subramaniam,
12:07sufficient to ensure economic stability, help achieve projected growth rate targets? Should that
12:12again be a cause of concern if this war gets prolonged?
12:16I think, no, at this stage, not really, Rajdeep, because I think foreign reserves are there just to
12:24limit excessive volatility and very sharp and precipitous declines. I mean, a combination of
12:32allowing the rupee to find its true level and, you know, intervening only to control volatility is the
12:39way forward. And for that, we have ample reserves. I think reserve shortage today is not a major issue.
12:50But do you fear that if the U.S. goes into recession, as there is some, as some observers suggest,
12:58India will also suffer a blowback that if the U.S. goes through a recession, China slows down.
13:05Invariably, our economy is also going to slow down. And therefore, those projections for 25-26
13:10could go very awry or 26-27 could go very awry. Yeah, absolutely. I think that if the world economy
13:18goes into recession, I think we will be affected. You know, to quote John Donne, no man is an island
13:24entire of itself in this interdependent global economy. And that's, you know, true in spades for
13:29India and increasingly so. However, Rajdeep, thinking about the light, you know, some of the light at the
13:38end of the tunnel. I mean, remember, if the exchange rate goes down, our exports will become more
13:44competitive. So there are, you know, there are kind of responses that can help us adjust to this.
13:51And we need to make the right policy choices so that we can respond to what is inevitably going to
13:58be
13:58a difficult situation, not just for India, but for all countries around the world.
14:07Just as a final question, because I was struck by when you said stagflation, the possibility of a slowing
14:13growth and inflation picking up. One of the successes of the Modi government is seen that
14:18they've been able to control inflation over the last decade. Could this be a situation which is
14:24an uncontrollable? If this war persists, the government will invariably be facing a challenge that
14:31they haven't so far, which is inflation and which is, you know, in a country like India,
14:36can also be politically very, very difficult to manage. So is that going to be managing inflation?
14:43The first target, let's say there's an RBI monetary policy coming next week as well,
14:47that managing inflation now will be at the top of the mind.
14:52Rajdeep, all central bankers in the world are struggling with this because, you know,
14:58you raise interest rates to contain inflation, that's going to take a toll on economic activity.
15:04This is just a reality of stagflation. But so that's why I think policymakers will see. So for
15:11example, if we limit price increases and take the hit on government budgets, in the short run,
15:18the inflationary shock will be muted. So I think the government and the central bank will have to work
15:24together to cope with this problem. I think in the short run, a few interest rate increases are
15:32probably inevitable, given the size of the shock. But a lot will depend upon how New Delhi and Mumbai
15:41coordinate policy together.
15:47Dr. Subramaniam, we're going to leave it there for now. You've given us a sense of some of the warnings,
15:52some of the challenges and possibly, as you said, some of the opportunities that might lie ahead
15:58in this period of grave shock and the uncertainty, of course, of when the war will end. But for joining
16:05me today, thank you very much, Dr. Arvind Subramaniam.
16:09Dr. Arvind Subramaniam Thanks, Radheed.
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