Date:19/02/2003 URL: http://www.thehindu.com/2003/02/19/stories/2003021904121200.htm

National

`A war in Iraq will affect economy only marginally'

By Our Special Correspondent

NEW DELHI FEB. 18. The Government today said that the impact of a possible war in Iraq on the Indian economy would be "critically dependent'' on the duration of the conflict. Things could be "managed" in case of a short and swift action resulting in a decisive U.S. victory.

Responding to the concerns of Manmohan Singh, Leader of the Opposition in the Rajya Sabha, the Government said the major impact would be on international crude oil prices but the country was "well-equipped" to finance a higher import bill in the event of a steep escalation of global oil prices.

However, a temporary setback to exports to the Gulf region could be expected. The official view was that exports in general were unlikely to be affected for too long. Similarly, the remittances from the Gulf might go down temporarily but there had been a probable increase in the remittances in anticipation of the conflict.

The Government had also taken comfort in view of the foreign exchange reserves of over $ 70 billion and the surplus in the current account because of which vulnerability of the balance of payments position seemed to be limited in the short-run.

It was also the official view that with the current inflation rate being low and the level of foodstock adequate, a hike in oil prices need not lead to a sharp surge in domestic inflation.

However, capital markets might witness a slight stiffening of interest rates with some decline in market sentiments, but these were likely to be overcome once the "short and swift'' action was over.

The Government had also noted that depending on market sentiments, the rupee could come under pressure, and due to its possible depreciation along with the impact of oil prices on domestic inflation, the current soft interest rate regime could see some alteration.

The overall official assessment, therefore, was that the impact of a war in Iraq was likely to be marginal in the short-run.