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The economic impact of the Iran conflict could hit Indian producers before consumers as higher oil prices feed into wholesale prices, with the pressure eventually passing through to consumption, Ran Li, Senior Economist at the World Bank, told ANI in an exclusive conversation in Delhi on Tuesday.
Li said the main channel through which the conflict could affect India's economy is through oil imports and prices. The increase in oil prices has already started showing up in wholesale inflation, which affects producers more directly. "The main channel from the Iran conflict will be through the import of oil and then through the price," Li told ANI. "The WPI which affected the producers most has surged already since June. So that will have more immediate impact, if not already, on the industrial sector producers," she said. According to Li, the pressure could later move from producers to consumers as businesses pass on higher input costs. This could then have an impact on consumer spending, although the extent of the impact would also depend on other factors supporting domestic demand. "As the transmission to pass on to the consumers, yes, that will affect consumer consumption a little bit," Li said. The comments come as the World Bank has raised its forecast for India's economic growth in financial year 2027 to 7.1 per cent. However, Li identified the Iran conflict as one of the two major factors that could put greater pressure on India's growth outlook. The other is the rainfall deficit linked to El Nino. "If we see at the August inflation data, we already see that impact is becoming more visible. So we expect that impact will become even larger toward the second half of the fiscal year," Li said, referring to the Iran conflict. On agriculture, Li said the rainfall deficit is currently around 12 to 15 per cent compared with the historical average. The World Bank has already downgraded its agriculture forecast because of the deficit. "I think that impact will show up a little bit on the agriculture output and that will in turn affect the consumption, especially in the rural areas," she said. Despite these headwinds, Li said India's domestic economy has remained more resilient than expected. She attributed the stronger outlook partly to timely government responses and economic buffers accumulated over the past decade. At the global and regional level, economies have also adapted better than expected, while oil prices have not risen as sharply as initially anticipated, she said. "We also see the high-frequency indicator. They all point to the better-than-expected outcome across a broad segment of the economy," Li said. She pointed to two-wheelers as an indicator of rural consumption and four-wheelers as an indicator of urban consumption, saying both have held up relatively well. Investment indicators have also performed better than expected. Li said these positive factors could partially offset the impact of higher oil prices on consumption and investment. "The positive contributor to consumption investment we observed this year will also support offset that impact partially," she said. The World Bank's outlook therefore points to a stronger-than-expected Indian economy, but with growing pressure from external shocks as the financial year progresses. The immediate impact of the oil shock could be felt by producers through higher input costs, while a broader pass-through to consumers could emerge later and weigh on consumption. (ANI)
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