For India, the costs of the Iran war beyond LPG

The headline impact of the ongoing US-Israel versus Iran war in India has so far largely been limited to gas — LPG for cooking and LNG for industries. Within that, the shortages have been significant in specific segments such as commercial LPG consumers (restaurants, dhabas, canteens and also migrant labour households with no regular cylinder connections) and producers reliant on natural gas feedstock from fertilisers and petrochemicals to ceramics and sponge iron. On the other hand, the supply of petrol, diesel, piped and compressed natural gas for homes and vehicles has seen no major disruptions. The delivery of domestic LPG cylinders, too, has been maintained at pre-war levels, with the government claiming a reduction in panic bookings and no cases of dry-outs at any distributorships. In other words, the crisis has been managed to the extent possible — for now.

But if the war drags on, the second-order effects will start showing. The tiles and sanitaryware units in Gujarat’s Morbi aren’t the only ones that have shut. As gas supplies to petrochemical plants are curtailed, it would force cuts in production of polyethylene, polypropylene and polyvinyl chloride. That, in turn, will affect the manufacturers that convert these polymers, whether into bottles, buckets and pipes and fittings or virgin plastic film for milk pouches and other food and non-food packing materials. The same goes for polyester and other synthetic textile fibres, whose prices have moved up in tandem with crude. Much of the world’s semiconductors come from Taiwan and South Korea. With their foundries overwhelmingly dependent on LNG and helium gas imports from West Asia, the war’s downstream effects on smartphones, consumer electronics, automobiles and artificial intelligence — basically any industry powered by chips — is also a matter of time.

This war isn’t just a demand shock likeCovid-19or an energy price shock that Russia’s invasion of Ukraine triggered. It is rather more of a negative supply shock. Any such shock shifting the aggregate supply curve leftward can potentially both lower output and raise price levels in the economy (“stagflation”). During the pandemic, the government provided money and free food to millions, just as it slashed excise duties on transport fuels and increased the fertiliser subsidy outgo after the Russia-Ukraine war. The usual fiscal or monetary policy levers cannot work when supply chains have broken, with economic agents struggling to access both energy and shipping lanes. The only hope is that the war ends soon. Even if it does, one must prepare for more sluggish growth and structurally higher inflation in the immediate term.