Why India should be very worried about Syria

In a few hours from now, we will know whether the US Congress will authorise President Barack Obama to bomb the daylights out of Syria, which is alleged to have used chemical weapons in its civil war against well-armed rivals.

While Obama and many western nations are presenting the whole issue - to bomb or not to bomb Syria - as a moral one, there are also huge economic issues involved. There are certain longer-term politico-economic gains and losses ahead for many of the players involved, both those who want to bomb Syria, and those who don’t. Syria may be a shambles at the end of it, but Saudi Arabia, Qatar, Iran and Israel will also be impacted.

As for India, the bad news will overwhelm the good as oil prices rise, the rupee falls and growth slows.

Consider the stakes for everybody.

[caption id=“attachment_1095011” align=“alignleft” width=“380”]  Bottomline: a war in Syria may put off QE tapering in the short term, but it will not help India.[/caption]

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Saudi Arabia and Qatar are the most enthusiastic backers of a US strike on Syria. Both are Sunni Muslim countries, and the majority of Syrians are Sunni too. Syrian President Basher al-Assad, though, is an Alawite, which reckons itself as a Shi-ite redoubt in West Asia along with Iran and Iraq.

But there is an economic angle to the Saudi-Qatar opposition to Assad too. If he is dethroned, Saudi Arabia and Qatar may be looking to create oil and gas pipelines through Syria to the Mediterranean and beyond - to sell the former’s oil and the latter’s gas.

Russia, which supplies lots of oil and gas to Europe, would be affected by any Saudi bid to muscle into its markets for energy. It is backing Syria. As is Iran, which has a running feud with the US over its alleged nuclear weapons programme. Iran also does not want a Saudi-backed Sunni regime in Syria.

The US also has an indirect economic stake in Syria - both positive and negative. The US has a huge and rising national debt, and is currently a battleground for right and left-wingers in Congress. The former want the debt to be reduced, and the US Fed to taper off its quantitative easing programme; the left-wingers want the QE to continue till the economy is back in rip-roaring form and unemployment is down.

A US-financed war in Syria will put these arguments in cold storage for the simple reason that war always means more spending, which means the Fed has to finance it. It usually takes a prolonged war to end recessions - the Great Depression was ended only by the onset of the Second World War, and the sharp recession after the dotcom bust in 2000-01 was ended by the West Asian war that began after 9/11. George Bush’s big tax cuts and expansionary policies gave the world great economic buoyancy after that - a buoyancy which our own government of Manmohan Singh thought was the result of its own brilliant policies.

But war-time economies also create their own busts. Wars are almost always followed by recessions. Bubbles created by excess government spending have to burst sometime, and the post-9/11 bubble was pricked by the 2008 sub-prime crisis and the fall of Lehman Brothers. The Indian bubble too went phut after 2008, but we continued with our artificial stimulus till 2010-12 - which began to deflate after 2011-12. Our bubble burst in 2012-13 finally.

From the Indian, and even the world’s, point of view, the most direct impact of a war in Syria will be negative - as oil and gas prices start rising.

Unless the Syrian regime falls quickly, a six-month fight to the finish will spike oil prices, and Brent crude - to which we are hitched - is already above $116 to the barrel. India’s oil companies were losing Rs 460 crore a day when Brent was at $112 a few days ago. If war sends oil spiraling to $120-125, the losses will rise to levels above Rs 500 crore a day.

For India, thus, the implications are the following:

First, as oil losses rise, the fiscal deficit will rise steeply. If subsidies are cut, higher diesel prices will push India towards even slower growth.

Second, war always gives a fillip to gold prices. International gold prices are already hovering around $1,400 an ounce. This could spike. Nothing that the government of India does will then convince Indians that gold is not a good hedge against inflation. And gold smuggling will increase, if it hasn’t already, making it easier for terrorists and others to finance their terrorism.

Third, the rupee will surely take a knock again on the back of rising deficits and falling growth. Nothing that Raghuram Rajan can do will help the rupee if Syria is blowing up.

Fourth, a war in Syria, which could escalate beyond its shores with Iran itching to get its own back against the US, will damage global capital flows as uncertainty usually gets investors rushing back to safe havens such as the US.

Bottomline: a war in Syria may put off QE tapering in the short term, but it will not help India.