New Delhi, India – India’s Ministry of Economic Affairs has warned of a potential decline in domestic demand. This comes amid the fallout from rising energy and food prices stemming from the Iran-Iraq War. The war has caused significant disruption to supply chains and fueled inflation within the Indian economy.
Supply shock puts pressure on growth
The Ministry of Energy, in its monthly economic review, indicated that the Indian economy is facing a “clear supply shock,” reflected in rising prices and a slowdown in economic activity. It also warned that weak demand is becoming a growing concern for the government and the central bank.
The report added that rising energy and raw material costs are putting pressure on manufacturing. As a result, there is a threat of declining production levels in the coming period.
The review emphasized that the closure or disruption of shipping in the Strait of Hormuz has caused significant disruption to India’s imports. A large percentage of oil and gas supplies pass through this strait. Therefore, this has directly impacted import costs and fuel prices.
It has also led to gas rationing for some vital industries. Consequently, industrial activity has been affected, and concerns are rising that the pressure will continue in the coming months.
Rising inflation and fears of its spread to the economy
The report warned that continued pressure could lead to a shift from headline inflation to core inflation. This occurs when companies raise prices to offset increased production costs.
It also noted that the weakening of the local currency, the Indian rupee, exacerbates the crisis by increasing the cost of imports. This is particularly evident in the energy and food sectors.
The Ministry of Finance pointed out that the war has dealt a blow to investor confidence in emerging markets, including India. Despite this, some key economic indicators continue to show strength. The crisis is also likely to push the government to accelerate its plans to diversify supply chains and strengthen foreign trade agreements.
