Till sometime back, the rising crude prices did not make sense. The surge was blamed on speculations rather than a shift in demand supply dynamics. However, Iran is now threatening to block a fifth of global oil supplies in case sanctions over its nuclear program kick in. Further the chances of Israel launching a pre emptive military attack are high. Given these, it is hard to imagine where the crude oil prices will head. India has dealt relatively well with any crisis in the past as compared to other countries. However, currently, it stands at a vulnerable spot with a slew of odds stacked against it. Unlike other emerging markets, twin deficit in the country has crowded out spending and growth in other areas. In case the worst fear of oil crisis comes true, the country will not only go short on physical supply of crude, but also will be the worst hit victim of a resultant increase in oil prices.
The reasons are not hard to fathom. India is struggling really hard with fiscal and budget deficits on rise. A regulated fuel price scenario and subsidy system complicates the situation further. The value of domestic currency has already fallen significantly against the dollar. If global fuel prices rise further, the situation will become worse and will have to be balanced by an increase in domestic interest rates. The latter will be highly detrimental to well being of domestic industry and equity markets. Further this will quell any chance of revival in investment and growth in economy spurred by central bank's easing monetary policies. Passing fuel price hikes is not a solution either as it will only raise inflation or will lower the threshold levels for onset of a crisis. To conclude, Iran oil crisis has the potential to spell a full blown economic crisis for India. Moreover, the Government's ability to keep the economic concerns under the lid is much weaker than before.