The ongoing war between Israel and Palestinian terrorist group Hamas has thrown a shadow of uncertainty over the Middle East’s geopolitical stability. This development is concerning not only for the global economy but also for India, given its dependency on crude oil and its strong trade ties with Israel.
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Costlier crude oil, higher inflation
It is no secret that one of the immediate impacts of this conflict is the surge in oil prices. Now, this hits India hard because it’s the world’s third-largest importer of crude oil.
When oil prices soar, it often leads to higher prices for everything, and that’s not good news for a country that relies heavily on oil imports. It can trigger inflation and slow down economic growth.
Palka Arora Chopra, Director of Master Capital Services Ltd, said, “Increasing geopolitical risk in the Middle East could raise oil prices. This could have a lasting and significant impact on oil markets, potentially resulting in a sustained reduction in oil supply. A surge in crude oil prices could affect domestic inflation and may lead to prolonged elevated interest rates.”
Jayden Ong, Senior Market Analyst, APAC at Vantage, echoed Chopa’s views, stating, “Presently, there is a prevailing concern within the financial markets regarding the potential protraction of the ongoing conflict, leading to sustained upward pressure on crude oil prices.”
“In conjunction with the OPEC+ production reduction agreement, this scenario is anticipated to contribute to a persistently elevated inflation rate. Consequently, central banks in diverse nations are expected to uphold elevated benchmark interest rates, a measure that may exacerbate the economic downturn,” Ong added.
Simply put, higher crude oil prices could have a negative impact on India, where many sectors are already under pressure due to the rising energy costs. Any further increase in crude oil prices could stoke inflation, which has been on a downward trend but still remains significantly above the Reserve Bank of India’s upper limit of 6 per cent.
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Trade complications
India’s close relationship with Israel adds a twist to the tale. Israel is a significant trade partner for India, ranking as the third-largest in Asia and tenth globally.
According to the Ministry of External Affairs, bilateral trade between the two countries has diversified into several sectors such as pharmaceuticals, agriculture, water, IT and telecom.
Major exports from India to Israel include precious stones and metals, chemical products and textiles. On the other hand, major exports from Israel to India include pearls and precious stones, chemical and mineral/fertilizer products, machinery and electrical equipment, petroleum oils, defense, machinery and transport equipment.
So, any escalation in the conflict between Israel and Hamas could disrupt the trade between these two nations, affecting a broad spectrum of industries.
In FY2022-23, Indian merchandise exports to Israel amounted to $7.89 billion, while Israeli exports to India were $2.13 billion. Therefore, the total stood at over $10 billion.
India also has substantial investments in Israel. According to data, the cumulative overseas direct investment from India during April 2000 to May 2023 was $383 million.
Indian firms like TCS, State Bank of India, Jain Irrigation, Sun Pharma, Infosys, Tech Mahindra, Adani, and Wipro are among the major Indian companies that operate in some capacity or have made acquisitions or investments in Israel.
In simpler terms, the Israel-Hamas conflict isn’t just a regional issue that impacts the Middle East. Further escalation could have a drastic impact on several countries around the globe, including India.
