Middle East conflict & impact on Indian economy

The escalating discord between Israel and Iran, which has garnered widespread attention due to its potential ramifications on global stability, has multifaceted implications for India.

1: Dimension- Impact on Macroeconomic Stability:

• Expensive Oil: India is the world’s third-largest consumer of crude oil and depends on imports to meet over 85% of its requirements. Given heavy reliance on crude oil imports, any disruption in the supply chain could significantly escalate inflationary pressures.
  • Vulnerable sectors:Automobiles, transportation, aviation, paints, tyres, cement, and chemicals could take the greatest hit.
• Threatened routes:While India does not import any crude from Iran (due to sanctions imposed by the US in 2019), there is a threat that Iran may close the Straits of Hormuz, the main route of transport for crude oil from the Middle East.
• High transportation cost: Higher oil prices not only pose risks to inflation forecasts but also exert a ripple effect on transportation costs, thereby influencing the prices of goods and services.
• Assessment of Inflation Trajectory: While the Wholesale Price Index (WPI) is more susceptible to fluctuations in crude oil prices, the Consumer Price Index (CPI) experiences a relatively smaller uptick.
• Impact on growth: A sustained surge in crude oil prices could also exert a drag on GDP growth due to curtailed consumption and weaker corporate margins.
• Current Account Deficit and Financial Flows: Even a modest increase in crude oil prices could exacerbate the Furthermore, the impact on foreign portfolio investments and remittances from Middle Eastern countries underscores the interconnectedness of geopolitical developments with India's economic fundamentals.

2: Dimension- Growing proximity between India and the Middle East region

• IMEC Project: The Indian government has been actively engaging with stakeholders in the region advocating for initiatives like the India-Middle East-Europe economic corridor.
• Market for emerging gulf industries: Transition of the Gulf economies away from their dependence on hydrocarbons. That shift naturally positions India as an attractive market for the emerging industries in the Gulf countries.
  • Notable in this context is the Gulf countries’ investment in India’s agriculture sector, which plays a crucial role in ensuring the Gulf’s food security.
• Non-oil trade:Exemplifying this shift is the significant boost to non-oil trade between the UAE and India after Joint Comprehensive Economic Partnership Agreement.
• India’s ascent as a global economic powerhouse: Western powers are facilitating the deepening of India’s relationship with the Middle East. It can be seen through IMEC, Quad, I2U2.

Concluding Assessment

The Israel-Iran tensions present a formidable test for India's strategic acumen and resilience in navigating geopolitical complexities. By adopting a pragmatic and forward-looking approach, India can not only mitigate immediate risks but also harness emerging opportunities for long-term growth and stability.