National

'Prolonged war in Iraq will lower GDP growth'

By P.K. Bhardwaj

NEW DELHI Feb. 12. The country may not be hit much by a possible short war over Iraq, but a prolonged conflict will dampen the growth prospects, according to a CII study.

The study states that India is "well equipped" with enough foreign reserves to withstand a short war of up to 20 days. "A prolonged war may dampen the growth prospects... basically nipping the growth in the manufacturing sector and reducing GDP growth by something like 0.75 to one per cent."

"War in Iraq seems inevitable. Only difference of opinion is on the possible date... late February versus early March," it further states, observing that the war would have an impact on the oil prices and inflation in the domestic economy, besides on the exchange rate movement.

In the scenario of a short-duration war, the impact would be limited to disruption of only two million barrels a day of the oil produced by Iraq. Increase in oil prices was not foreseen. The movement of prices would depend on the duration of the war, the CII said, factoring in only a moderate increase in prices in case of a short disruption in supply.

Since India is an oil importer, any disruption of supplies would necessarily imply higher energy prices, though the impact would depend on the extent of disruption caused. The overall inflation might go up moderately from the 2.5-3 per cent in 2002-03, to 4 to 4.5 per cent in 2003-04, on account of higher oil prices.

For India, a few other concerns are the burgeoning levels of subsidy and the rise in the oil import bill. The subsidy provided on kerosene, LPG and diesel totalled Rs. 25,129 crores in 2000-01.

Remittance by the 3.8 million Indians working in the Middle East may also be disrupted. "These nationals remitted $6.4 billion in 1999-2000."

In any case, irrespective of a short or long-drawn war, software exports from India was likely to be hit as the recovery of the U.S. economy could be delayed.

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