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    Posted June 21, 2014 by

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    Iraq Unrest: Will India Falter Or Shun It

    History repeats itself. The ongoing Iraq crisis has just proved that. Whenever a crisis in Middle East nations have erupted it has in fact changed the world order of super powers. Be it the Syria war or the Iraq war of 1991 and 2003, it has never ended well, especially for Indian economy. Indian economy is one of the largest consumers of crude and oil. In fact the demand is so high that nearly 80% of the crude has to be imported from Middle East nations. Thus it goes without saying that even if an attack takes places which is pretty minuscule in nature it has a tendency to make Indian investors nervous. India's bill of oil imports directly affect the Current Account Deficit and inflation, which by the way is every common man's problem in India. Things just get expensive, they never roll back.

    The ongoing Iraq crisis might effect the Indian economy or not can be put up for a debate but as of now it is shunning away the Bull run created by NDA's win. The crude oil prices have been continuously on the rising mode and if nothing is done too soon the cost of per barrel might soon hit $120 which is equal to Rs 7200 a barrel, that too in spot price. As far as value of the Indian currency is concerned, India has foreign exchange reserves in excess of $300 billion. This could support the current fluctuation. Now the question remains, say if the Iraq crisis escalates then what are the immediate effects and what are our options.

    Right now the crude prices is at a 9-month high, hovering around $114 a barrel. If things continue at the normal pace in Iraq, it might soon touch $120 a barrel. This will increase the Indian Current Account Deficit and will kick off high inflation for a short term. If Current Account Deficit and inflation increases the Government of India will have to shell out extra Rs 20,000 crore as a part of subsidy for crude. This figure is just assuming that crude touch $120 a barrel. Moreover, there are talks going on for diesel de-regularization which will only add to economic woes.

    On the long run, however, there the threat of high inflation and high Current Account Deficit might minimize. Lets see how:

    1) Iraq, being the second largest exporter of crude to India, has taken care of 13% of India's crude requirement in 2013. The figure shot up to 20% this year. However, in light of the ongoing Iraq crisis the number was halved. Apart form this, if we look geographically, the ISIS militants have attacked the Northern portion of Iraq, whereas imports are made to India from Indian government vessels from Baghdad, which is located south of Iraq.

    2) Countries like the US, Australia and France have agreed to send small troops to Iraq to defend from the militants. They will be working with the Iraqi military to keep their embassy and militants from further invading.

    3) In a scenario were the Iraq is totally shut down, India has options of importing crude from OPEC nations. The OPEC nations include Iran, Kuwait, Saudi Arabia and Venezuela. The OPEC nations combined produce twice the crude produced by Iraq.

    4) Of-late India's economic numbers have started improving. The Current Account Deficit is low, the inflation is slightly on an upper hand and the Indian Rupee is also as per expectations. Additionally, the Indian government has Dollar reserves of in excess of $300 billion which provides a cushion to the economy. Indian also have enough oil reserves to cover for a short period and the oil companies have also been instructed to be ready with a back up plan in case the whole scenario changes.

    Till the time the Iraq crisis doesn’t get over knife will be over the Current Account Deficit, inflation and growth rate. But there are options which if taken by the Indian government can shrug off the looming threat to Indian economy.
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