India can withstand a possible short war over Iraq but a prolonged conflict may dampen growth prospects, says a Confederation of Indian Industry study.

Expressing concern over fiscal health of the Indian economy in case of a long-duration war in Iraq, the CII said that "India is well-equipped with enough foreign reserves to withstand a short war of up to 20 days."

"A prolonged war may dampen the growth prospects; basically nipping the growth in the manufacturing sector and reducing GDP growth by something like 0.75 to one per cent," the apex industry chamber said in a study in which various war scenarios and their impact on the Indian economy have been presented.

"War in Iraq seems inevitable. Only difference of opinion is on the possible date... late February versus early March," CII said, adding the war would have impact on oil prices and inflation in the domestic economy besides exchange rate movement.

In one of the scenarios assuming a short-duration war, the chamber said the impact was limited to disruption of only two million barrels per day of oil produced by Iraq with no other disruptions, increase in oil prices was not foreseen.

The movement in oil prices would depend on extent of duration of the war, CII said: "We are factoring in only a moderate increase in oil prices in case of short disruption in oil supply."

CII said any impending war for replacing Iraqi President Saddam Hussein could lead to a disruption in oil and gas supplies around the world.

Since India is as oil importer, CII said that any disruption in oil supplies would necessarily imply higher energy prices, though the impact will depend on the extent of disruption created by the war.

CII further predicted that overall inflation may rise moderately from 2.5-3 per cent in 2002-03 to 4-4.5 per cent in 2003-04 in case of rising fuel prices on account of higher oil prices.

For India, a few other concerns are the burgeoning levels of subsidy and the rise in the oil imports bill, it said, adding that "the subsidy provided on kerosene, LPG and diesel totalled Rs 25,129 crore (Rs 251.29 billion) in 2000-01. Any further rise in prices would mean a further deterioration in the fiscal position of the Indian government."

CII also said that the 3.8 million Indians working in the Middle East remit significant amounts to India, which may be disrupted.

"These nationals remitted $6.4 billion in 1999-2000," it said.