Elevated oil prices could drag India's growth to 6%: Gopinath

India's economic growth, currently projected at 6.5% by the International Monetary Fund (IMF), faces a potential slowdown to approximately 6% due to persistently high oil prices, according to Gita Gopinath, former IMF Deputy Managing Director and Chief Economist. Gopinath indicated that the elevated cost of oil is likely to continue impacting the economy well into next year, with prices potentially stabilizing around $70-$75 a barrel only by mid-2025.

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We are not going to see the price of oil come down all the way very quickly. It's going to take probably till the middle of next year for oil to come back to say $70 or $75 a barrel. So there is going to be an effect lasting into next year.

The sustained higher energy costs are expected to dampen both consumer spending and business investment, leading to a slower economic expansion than initially forecast. Gopinath cautioned that the situation could deteriorate further if geopolitical tensions in the Middle East intensify, disrupting oil supplies. She suggested that markets might be underestimating the risk of a prolonged conflict in the region.

In a more severe scenario, Gopinath warned that a prolonged conflict could drive oil prices to $120-$140 a barrel. This could lead to a significant reduction in global growth, potentially falling from the current 3.1% projection to as low as 2% or 2.5%. Such a global downturn would place additional pressure on India's economic prospects.

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If this continues for another month, we're looking at oil prices that could go up to like $120 and $140 a barrel and could stay there for much longer. In that scenario, we could have global growth, which is now projected at 3.1 per cent, going down to say 2.5 per cent and even closer to 2 per cent.

To mitigate these risks and bolster India's growth, Gopinath emphasized the need for supply-side reforms. These include increasing the use of renewable and nuclear power to reduce dependence on imported energy and improving the ease of doing business to attract investment. She also highlighted the potential for India to benefit from shifting global trade patterns and expanding trade agreements, which could strengthen its position in global supply chains.

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Having a positive story on AI in terms of the fact that AI can be net positive for India. These are the kinds of actions that would help increase interest in India as a destination for investment capital and that would also take the pressure off the rupee.