Risks to the Indian economy from the escalating Hamas-Palestine conflict

Lata Moni Das

(latadas2020@gmail.com)

Recently, there has been a growing fear that this war will lead to a long-term disruption of global energy and trade infrastructure. In any Middle East conflict, the world anticipates a major economic hit as this region is not only a vital source of energy but also a shipping passage for global trade. Washington is hesitant to use its power against Tehran’s proxies due to fear of prolonged conflict, says former US intelligence official Norman Roule. If there’s a real ground invasion that affects oil supply, this would greatly increase the prices of everyday items in countries like India, which rely heavily on importing fossil fuels. The global oil supply affects India and its household budget. This will affect the consumer-market, especially seasons are coming for festivals and weddings. Though many big companies have enough products for now, if the war continues, prices of items like TVs and washing machines might increase in November. Consumer behaviour, affected by rising fuel prices, can lead to a cutback in discretionary spending, impacting economic activity and inflation dynamics, particularly in consumer-dependent sectors. The increase in oil prices is anticipated to have a significant impact on various aspects of the Indian economy, including the capital market, banking sector, trade deficit, current account deficit, and, to some extent, the fiscal deficit. This could make the rupee’s value drop, requiring the Reserve Bank of India to take action. A weak rupee makes imports more expensive because more local currency is needed to buy dollars for large payments.

Escalation in the Israel-Hamas conflict could impact India’s trade and diplomacy if other Arab countries become involved. The escalation of war means global market will seem unstable, and as a result it could affect foreign investment in India.

Having the third-largest trade relationship in Asia and tenth in the world, Israel is an important trade partner for India. The ongoing Israel-Hamas conflict is unlikely to directly affect the supply of military hardware and spares to India due to established partnerships and joint ventures between Israeli and Indian companies. These arrangements will help maintain the flow of supplies to India despite the war.

When we talk about the agricultural sector, Israel has established 30 centres of excellence throughout India to boost productivity. There are several public-private partnerships between Indian agribusiness firms and Israeli counterparts. The agriculture sector may not be heavily affected by expected sanctions due to Israel’s small role in India’s agricultural exports.

The Israel conflict poses concerns for India’s $1 billion trade with the Middle East, potentially affecting Indian pharmaceutical exports. However, Indian hospitals import medical technology from Israel, and Israel invests in Indian healthcare. The resilience of India’s pharmaceutical sector suggests it can adapt to these challenges, indicating a minimal impact on the industry.

India exports precious stones and metals, chemical products, and textiles to Israel. In contrast, Israel exports considerable amounts of pearls, precious stones, chemical products, minerals and fertilisers, machinery, oil, and defence products. Experiencing escalation in the conflict between Israel and Hamas could disrupt trade between them. During FY2022-23, Indian merchandise exports to Israel were $7.89 billion, while Israeli exports to India were $2.13 billion. The total was over $10 billion. Indian firms like TCS, SBI, Sun Pharma, Infosys, Adani, and Wipro are either investing in or having acquisitions in Israel, which means any further escalation could harm India. Growing Israel-Palestine tensions in West Asia could affect the global economy and impact IT companies, including those in India, despite the region not being a major hub for them.

India’s trade with Israel, which amounted to approximately $10.7 billion in FY23, could face significant disruption if operations at Israel’s three largest ports, Haifa, Ashdod, and Eilat, are affected. The Red Sea port of Eilat serves as the primary conduit for India’s trade with Israel. Fortunately, no reports of port disruptions have been made to date. Companies have invested USD 286 million in renewable energy, real estate, water technology, and setting up R&D centres.

If the Arab world becomes involved in this conflict, as it has before, India must be cautious and consider its actions. India’s economic and strategic connections with the Middle East, especially through the India-Middle East-Europe economic corridor, have grown in significance. In the event of escalating conflict, India needs to proceed with care,” emphasised Biswajit Dhar, a Distinguished Professor at the Council for Social Development. The war might postpone discussions about the economic corridor.

Na Boata from Allianz Trade warns that escalating hostilities between Israel and Hamas could potentially disrupt oil supplies, causing prices to rise to $140 a barrel and risking a global recession. She estimates a 20% chance of this scenario. In India, it is expected that petrol and diesel prices will not rise due to the Indian general elections next year.

India’s economy has remained robust during the pandemic and the Russia-Ukraine crisis, thanks to domestic strength and sound economic policies. Nevertheless, it’s not immune to global uncertainties, with GDP growth expected to slow by nearly 1% in FY24 and pressure on the rupee and exports.

Global growth depends on the war’s scope, duration, and the roles of key players like Iran and Saudi Arabia, making the region a focal point of attention.

A depreciating rupee would increase import costs, potentially leading to inflation, and if inflation rises, the RBI may need to raise interest rates after holding them steady for three consecutive quarterly reviews as part of a wait-and-see approach.

The conflict is making tensions rise globally, even in India. Everyone must work together to fix it. India will try to calm things down and stop them from getting worse.