The drip-down effect of the Iran war is beginning to inflict pain on Indians. Retail inflation rose to 3.4 percent in March from 3.21 percent in the previous month, mainly driven by higher fuel and food prices. Though still below the Reserve Bank’s red-flag level of 4 percent, the March inflation was at a 13-month high, according to the revised Consumer Price Index. Food inflation rose to 3.87 percent in March from 3.47 percent in February, mainly driven by the rising prices of fresh vegetables. The difference between rural and urban inflation widened, with rural food inflation racing to 3.96 percent in March over 3.46 percent the previous month.
The disruption in energy supplies was visible through March. Despite New Delhi managing to get a concession from Tehran to get some India-bound oil tankers through the Hormuz Strait, what arrived was far lower than the share of India’s needs that usually passes through the waterway. Government assurances notwithstanding, the shortage of gas and consequent higher cost of alternative fuel are taking a toll on the wider economy.
Unfortunately, the war clouds on the horizon seem darker despite a brief ray of sunshine. The first round of talks between the US-Israel axis and Iran has failed; mediator Pakistan has floated hopes of another round. Meanwhile, a petulant US President is threatening to turn the partial Hormuz blockade into a complete one. India has so far protected the pump prices of fuel sold by state-owned companies by forgoing nearly ₹1.5 lakh crore in excise duty, thanks to the ongoing assembly election. But this is unlikely to persist once voting is over on April 29. The market expects the April retail inflation to creep up to 3.8 percent and the average for the April-June quarter to surpass 4 percent.
These estimates will seem conservative if the Gulf conflict lingers. The cascading downstream impact has serious implications, too. The shortage of liquefied natural gas, on which fertiliser production depends, will bear heavily on farm budgets and push up food prices in a season the monsoon is expected to be sub-par. One can only hope the current shaky ceasefire moves to a permanent settlement so that normal trade lines are restored. In the long run, diversifying our energy sources further is a necessity so that shocks on the scale being witnessed at present are avoided.