Economic Impact Of Gulf War II

Written by Subhash Agrawal | Updated: Mar 27 2003, 05:30am hrs
A major war is on, the efficacy and role of global rules and institutions is being challenged, many erstwhile alliances and blocs, such as the European Union, are in a mess, and a post-Iraq world looks hazy at best and in turmoil, at worst. But through it all, there is a remarkable absence of worry in India about the economic impact of the current Gulf war. In fact, till the Iraqi show of defiance in Basra last weekend, our stockmarket rose with the onset of hostilities.

First, the good news. Gulf nations continue to host a large number of Indians but this number is down from its 1995 peak, and is sliding each year. The socio-economic relationship between Indian immigrants and these nations has come under stress since the 1991 Gulf war. There are increasing visa restrictions, falling wages and a larger shift towards Arabization of these economies. Added to that is Indias huge foreign exchange reserve. Consequently, while hard-currency remittance from these Indians was a domestic multiplier in the past, in states such as Kerala, it is no longer a critical national economic lifeline.

As a sign of changing times, a temporary ban issued two years ago by the United Arab Emirates government on further import of South Asian labour, which normally would have become a major issue, was ignored by much of the Indian press. The Gulf countries of Saudi Arabia, Oman, Bahrain, Qatar, UAE, and Kuwait have already become a lesser consideration in the Indian foreign policy calculus, visibly so.

Now the bad news. As India becomes that much more integrated into the global economy, the fallout of the Iraq war will likely be felt in more ways than initially realised. First, there is our huge petroleum import bill. The government may have allayed immediate fears by disclosing reserves enough to last a three-month supply disruption but the medium-term picture is less rosy. India is the worlds eighth largest net petroleum importer at 1.2 million barrels per day. It is already ahead of China, and is probably set to overtake Korea, France, Italy and Spain in the next few years to become the worlds fourth largest importer. Despite disparate moves in recent years to reduce reliance on Gulf oil, this dependency remains a fact of life. In the medium term, and especially given the demands of 6 per cent growth, our dependence on imported oil and gas will only grow. In the immediate context, there is real danger of extreme volatility in oil price expectations, if not the prices themselves, leading to unexpected and ultimately unprofitable oil contracts. All this risks inflation coming right back with a bang.

Second, there are many false hopes in India about the rebuilding of Iraq. If newspaper reports are to be believed, our industry chambers are set to paratroop into Baghdad, contracts in hand, the minute Saddam is ousted. But these hopes should be taken with huge dollops of salt. Given the experience of Afghanistan and splits among anti-Saddam voices, reconstruction of Iraq is neither going to be easy nor quick nor huge. Few people realise how the western occupation of Afghanistan has been botched up, and that hardly any house has been rebuilt with international assistance in Kabul. In Iraq, too many companies and countries are already positioning for post-war reconstruction, and there will be some very stiff lobbying and competition, not to mention other factors at work. Despite the promise of billions, Iraqi reconstruction will very likely be messy and slow.

Lastly, the economic implications for both the US and Europe are bleak. While the euro will, over the medium term, benefit from multiple US debt bubbles and a soaring US external deficit, it cannot provide the military, political and economic leadership demanded of a strong international reserve currency. Eurozone economies are already weak, and may become even weaker as a result of political fracture over Iraq. Simultaneously, the US economy will get worse before it gets better if at all it receives a shot in the arm from reconstruction and cheap oil.

And so, what we have are dubious benefits, probable oil insecurity and almost certain western economic gloom. Whats the good news for India

The author is an analyst of Indian political and business trends and the editor of India Focus, a political risk report for international investors