Israel Iran conflict: The escalating war between Israel and Iran could impact the growth momentum of economies around the world significantly and India will be no exception. The full-blown war in the Middle East is intensifying each passing day with Israel targetting key Hezbollah leaders. India has high stakes in the West Asian region and has voiced concerns over Iran and Israel being on the brink of an all-out war. Prime Minister Narendra Modi also chaired a meeting of the Cabinet Committee on Security on Thursday to discuss the outbreak of fresh hostilities.
The ongoing war will hamper trade and economy globally, as the vital Red Sea shipping route may remain inaccessible. This will push the cost of freight and other items. One of the most pressing issues for India in the coming times will be the increase in crude oil prices as New Delhi meets most of its oil and gas requirements via imports. A spike in crude oil prices will not only lead to inflation but will also impact economic growth.
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The Indian stock market has already taken the beating with the D-Street witnessing a bloodbath amid concerns of escalating tensions in the Middle East. Before the start of the war, the Indian stocks were trading at premium valuations, and a prolonged conflict could prompt global investors to shift their focus away from India. Presently, India is currently one of the world’s top-performing stock markets, but, investors might be spooked from the Middle East development, and move their capital from riskier assets like Indian equities into safer havens like bonds or gold.
While Foreign portfolio investment (FPI) inflows into Indian equities surpassed Rs 1 lakh crore so far this year, experts caution that this trend could reverse as regional tensions escalate, potentially disrupting global trade and driving up crude oil prices.
India’s oil conundrum
India is highly dependent on the Middle East for its energy needs. While oil from Russia dominated India’s import basket for a while, the trend was reversed when the share of Middle Eastern oil in India’s August crude imports rose to 44.6% from 40.3% in July. Iraq, Saudi Arabia, the UAE and Kuwait are main Middle Eastern suppliers of oil to India. Nearly half of India’s LNG requirements are met via imports from Qatar.
Even Russian imports will be impacted by a full-blown war as oil from Russia is shipped through the Red Sea, but it may be rerouted due to the war through the Cape of Good Hope to avoid attacks. The blockade of the Strait of Hormuz could be another challenge. Hormuz is the world’s most important oil chokepoint because large volumes of oil flow through the Strait. Along with China, Japan and South Korea, India is among the top destinations for crude oil moving through the Strait of Hormuz to Asia.
The threat of spiking crude oil prices will be a big worry for the RBI which has been working to keep inflation down. While it was highly anticipated that the MPC could introduce rate cuts in December this year, a heightened inflation will prevent RBI from cutting interest rates.
India’s net oil import bill is projected to increase to between $101 billion and $104 billion in the current fiscal year, up from $96.1 billion in 2023-24. Any escalation in the Iran-Israel conflict could further drive up the value of these imports, which will trickle down into consumer prices.
Despite the ongoing war, India has found a silver lining in the fact that regional players like Saudi Arabia, the UAE, Kuwait, and Qatar have remained neutral in the Iran-Israel conflict or its proxy wars. A report by the Global Trade Research Initiative (GTRI) highlights that India’s trade with these Gulf Cooperation Council (GCC) countries saw a significant boost, increasing by 17.8% from January to July 2024 compared to the same period the previous year. India’s exports to Iran also experienced a notable growth of 15.2% during this time.
Moreover, experts believe that India’s record foreign exchange reserves will shield the country from immediate shocks. While geopolitical uncertainties and energy price volatility could have repercussions, India’s substantial reserves will provide a cushion from immediate negative impacts. Given the sufficient reserves, the short-term consequences will likely be minimal. India’s forex reserves surged to $692 billion for the week ending September 20.
Nonetheless, a long-term impact of the war would also depend on India’s economic diplomacy.
Israel Iran conflict impact on global economy
The escalating tensions in the Middle East will dampen global investor sentiment and impact the future policies of major central banks. While the world was beginning to experience a cycle of monetary easing, with central banks around the globe lowering interest rates after a prolonged period of maintaining decade-high levels to combat inflation, the ongoing conflict poses a significant threat to this economic recovery.
If more nations decide to jump in the war, it would severely disrupt global trade and supply chains.