Iran-Israel conflict: India walks diplomatic tightrope to escape economic fallout

India is on friendly terms with both Iran and Israel and hence cannot take sides.

Iran-Israel conflict: Amid ongoing conflicts between Russia and Ukraine, and Israel and Palestine, the world now confronts another potential crisis as Iran launched retaliatory attacks on Israel. This escalation threatens to ignite a full-scale war, a development that poses significant concerns for India given its proximity to West Asia. The ministry of external affairs quickly expressed serious concern and urged immediate de-escalation.

India, which maintains friendly relations with both Iran and Israel, finds itself in a precarious position, needing to address the issue diplomatically without compromising its strategic interests. Historically, Tehran has been a major supplier of crude oil to India, though this has been complicated by Western sanctions. Conversely, India and Israel share robust strategic partnerships, particularly in defence and security. India is one of the largest buyers of Israeli military equipment. Bilateral trade between the two nations stands at approximately $7.5 billion, with India importing primarily diamonds, electronics, and telecom components from Israel.

As tensions rise between Iran and Israel, the military implications for the region cannot be overlooked. Increased military activity could lead to greater instability across West Asia, particularly if other regional powers become involved. For India, this could complicate its defence strategies. Enhanced military readiness in the region might also require India to reconsider its own security postures, affecting its broader strategic calculations in the area.

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India’s stake in Iran-Israel war

According to a report by the Global Trade Research Initiative, shipping disruption in the Red Sea could get worse because of the new conflict between Iran and Israel which will exacerbate India’s trade problems. India imports 80% of its crude oil from West Asia and an escalation in the region may disrupt oil supplies as well as push up prices. The Russia-Ukraine war had also stirred energy security but New Delhi was able to minimise the impact of oil prices by buying Russian oil at discounted prices, but this conflict will have an adverse impact on energy prices. However, the impact on consumers may be minimal if the government chooses to offset price increases by reducing taxes.

It may mean higher inflation in the long run which is presently higher than the RBI’s target range. As of now, the inflation is trending downwards and the current account deficit is also manageable. Economists believe that while the economy can hold for sometime, it won’t be long before the impacts of the war start showing up in inflation and current account. Followed by slowing down of the economy will be delayed monetary easing.

However, India’s interests in West Asia are no longer restricted to oil imports and labour exports as New Delhi maintains strategic partnership with major Arab countries as well. Arab states are economic and political partners for India and a wider conflict could draw them in. This will be at a time when these countries are pushing for the India-Middle East-Europe economic corridor which is vital for New Delhi. A possible wider conflict may dampen plans for the future. The GTRI report warns that the ongoing conflict throws a wrench into West Asia’s stability, potentially derailing projects like the IMEC Trade Corridor indefinitely.

Iran on Saturday captured a container ship near the Strait of Hormuz called MSC Aries which had 17 Indian crew members and was en route to the port of Nhava Sheva in Mumbai. The safety of the Indian crew is a big worry for India. After intervention from External Affairs Minister S Jaishankar, Tehran has issued that Indian representatives will soon be allowed to meet the Indian crew members of MSC Aries.

Other than this, India is also tasked with ensuring the safety of a large diaspora in Israel of around 97,467, according to the MEA. More than 18,000 Indians work in the country, as caregivers and agricultural workers. India had recently signed an agreement with Israel for 1,500 citizens to be flown to the Jewish nation to be employed as construction workers. While the first batch was sent on 2 April, India has decided to put a hold on the agreement until the situation is brought under control.

There is also a sizable population overseas in Iran at over 4,000. In case of an Israeli counter-strike, their safety would be at stake.

India will find itself in a difficult position should war intensify. For decades, the South bloc has successfully navigated the two sides and it would be difficult for New Delhi to maintain an ambivalent position further. India’s calls for “immediate de-escalation” is, therefore, crucial to its national interest.

The development is causing a further rift between the world as Israel is supported by the US, and Iran is drawing closer to China and Russia. Naturally, the situation will not be contained within the immediate region and will break out beyond West Asia and will affect global security and economic stability, including crucial shipping routes through the Red Sea and the Suez Canal.