With 73 per cent of its oil needs being met through imports, a war in West Asia is bad news for India.

While a small fluctuation in oil prices sends the country's oil import bill soaring, the increase of around $12 a barrel in the prices of the Indian basket of crude during the past year could prove to be a nightmare for the government.

It is feared that the price of the Indian basket of crude, which averaged around $19.54 a barrel in February 2002, $27.84 a barrel in September 2002, $29.56 a barrel in January 2003, and is now hovering around $31.47 a barrel, may well cross the $35 mark in case the war in Iraq lasts a week or so.

However, if the war extends beyond a fortnight, the price of the Indian basket could cross $40 a barrel because of the increased demand from the US and other countries involved in the hostilities.

Moreover, the major oil exporting countries in the region will either reduce production or cut down on exports because of the difficulty in moving cargo out from the war zone, which could further push up prices.

As it is, domestic oil marketing companies have been complaining about under-recoveries from almost all the petroleum products.

They have been demanding a sharp increase in the prices of domestic LPG and kerosene sold through the public distribution system.

The government has been told that the companies have already taken a hit of

Rs 2,600 crore (Rs 26 billion) during April-December 2002 on account of under-recovery from domestic LPG and PDS kerosene.

Added to this is another Rs 1,500 crore (Rs 15 billion) in under-recovery during April-December 2002 due to lower retail prices of petrol and diesel.

While so far the government has been able to keep the retail prices of petroleum products under check in anticipation of oil prices coming down soon, there will be no such hope if hostilities break out in Iraq.

In such an event, it could be difficult for the government to ask oil companies not to raise retail prices, at least to a level at which they might be able to recover costs.

A C Muthiah, president of the Federation of Indian Chambers of Commerce and Industry, has predicted a 9 per cent increase in domestic oil prices in the event of a war against Iraq, and has said the Rs 8,116 crore (Rs 81.16 billion) oil subsidy budgeted for 2003-04 is not adequate to bridge the gap.

The persistent rise in oil prices is bound to affect the country's industrial recovery. The spurt in prices will have a direct impact on the country's inflation rate, which, excluding petroleum prices, has been minimal.