New Delhi, March 19: The finance ministry has started counting the cost of war in the Gulf — and it doesn’t make for pretty reading.

In a study prepared for the Cabinet Committee on Security, the finance ministry has warned that a prolonged war in the Gulf may result in higher inflation, lower tax collections, higher subsidy bills and higher expenditure on internal security.

In its confidential ‘likely scenario’, the ministry says that the rate of inflation, which is hovering around 5 per cent, is likely to shoot up by another 2 per cent if the war lasts for more than six weeks, mostly driven by hardening of the international price of crude to about $ 45 a barrel as well as domestic freight costs.

A 2 per cent rise in wholesale prices could see consumer prices increasing by a far greater extent, causing public resentment in an election year. The finance ministry is already keeping a strict vigil on prices and has asked the revenue department to talk turkey with industry chambers to counsel their members against huge price hikes.

To check price increases, the ministry says it will offer to lower duties on petro-goods. This is expected to cushion increases in prices of diesel and petrol, but will not impact kerosene and cooking gas prices much as taxes on these commodities are far lower. It will also use the huge buffer stock of over 40 million tonnes to keep food prices stable.

A war in the region is likely to strengthen terrorist forces in Pakistan and Kashmir which could lead to significant increase in internal security expenses. However, the ministry does not spell out the expected cost increases on this count.

The government forecast indicates that higher inflation and uncertainty in the region could also see lower investment by both foreign and domestic investors, who will tend to be cautious. However, a huge forex reserves of over $ 72 billion is expected to cushion India’s trade and debt repayments and even pull the rupee up under certain circumstances.

Lower investments, on the other hand, are expected to translate into lower GDP growth to levels far below the estimated 6 per cent, assumed while working out budget figures. “It could be as low as this year’s 4.4 per cent,” top economists working for the finance ministry said.

The ministry is scared that this in turn will hit tax collections, especially excise and corporate tax collections which would be down if the economy does not do well.

The domino effect of crude price hikes will also be felt on cooking gas and kerosene, whose real price will go up by 60 per cent, the study feels. However, to keep this in check the subsidy doled out on this account will be increased. The bill already stands at about Rs 6,300 crore; this could be expected to cross Rs 10,000-crore mark.

The subsidy bill for fertilisers too is expected to go up from the present Rs 12,700 crore as gas prices will go up steeply.

Exports to take a hit

Imports of the US from the rest of the world are expected to suffer even though it will spend about $ 200 billion on this war. As a large portion of Indian exports is meant for US shores, this would imply far lower export growth. And as India’s two biggest export earners are textiles and gems and jewellery, both of which are likely to be hit by war sentiments, prolonged war could even see a temporary negative dip in exports.