Israel-Palestine conflict: India needs to prepare for the fallout

Israel-Palestine conflict
The escalating Israel-Palestine conflict can have major repercussions for India's economy and businesses.

The ongoing Israel-Palestine conflict will have far-reaching implications for the global economy. As the region is a crucial source of oil and a major driver of energy markets, any instability there can lead to volatility in oil prices. While it is difficult to predict the duration and extent of this conflict, its ripple effects are already being felt across the globe. India, a significant player in international trade, has a vested interest in understanding how this conflict could affect its economy and businesses.

West Asia holds immense economic importance for India. In 2023, the region accounted for a substantial portion of India’s trade, representing 18% of the country’s total exports and 25% of its imports. This underscores the region’s pivotal role in India’s economic landscape. India’s trade with the Gulf Cooperation Council countries, notably the UAE and Saudi Arabia, is particularly robust, amounting to a staggering $260 billion or 22.3% of India’s total trade. In contrast, Israel, Palestine, Lebanon, Iran, Iraq, Egypt, and Syria collectively constitute just 4.8% of India’s trade.

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India has maintained a trade surplus with Israel, totalling $6.1 billion in the last financial year ended March. This surplus is primarily driven by exports of oil, followed by gems and jewellery, and chemical products. India, in turn, imports fertilizers ($403 million), electronic goods ($471 million), and engineering goods ($279 million) from Israel. For both the global and Indian economies, the most immediate impact of the conflict is being felt through oil prices, which have surged in response. As oil prices rise, the global economy faces increased pressure, with ramifications for various sectors.

Inflationary impact of Israel-Palestine conflict

In India, the escalation in oil prices is raising concerns about inflation. Estimates suggest that a 10% increase in global crude oil prices could have a direct impact of around 20-25 basis points (bps) on headline Consumer Price Index (CPI) inflation, coupled with an indirect impact of approximately 10-15 bps. However, these estimates are based on the assumption of complete pass-through of global oil prices to domestic fuel prices. Should this pass-through not occur, India’s inflation is unlikely to see significant changes due to the conflict. As of now, India’s inflation is expected to hover around 5.5% YoY in FY24, with upside risks stemming from food inflation, while core inflation is likely to remain stable.

The Middle East crisis also affects India’s Current Account Deficit (CAD), which fluctuates with changes in oil prices. For every USD 10 per barrel increase or decrease in oil prices, the CAD (% of GDP) is estimated to change by 25-30 bps. Consequently, the current account deficit could increase by USD 10 billion. Presently, India estimates an overall trade deficit of USD 256 billion or 7% of GDP, with oil imports at USD 192 billion and oil exports at USD 76 billion. The current account deficit is projected at USD 57 billion or 1.6% of GDP. It’s important to note that these estimates already factor in the impact of rising crude oil prices.

The conflict’s repercussions are expected to impact India’s GDP growth rate. For every USD 10 per barrel change in oil prices, GDP growth could be impacted by 15-20 bps. As per current projections, India anticipates GDP growth to reach 6.2% in FY24, but this figure may need to be revisited in light of evolving economic dynamics.

The Israel-Palestine conflict and the broader Middle East crisis have significant implications for India’s economy and businesses. As a nation deeply interconnected with the global trade ecosystem, India must closely monitor the situation and proactively adapt to the evolving economic landscape. It is essential for policymakers, businesses, and citizens alike to remain vigilant and responsive to these shifting dynamics to ensure the nation’s economic stability and growth.

Geopolitical tension in the region can lead to investor uncertainty and impact financial markets. Investors tend to seek safer assets in times of conflict, which can affect stock markets and currency exchange rates. The ongoing West Asian conflict underscores the interconnectedness of the global economy. Instability in this region can ripple across the world, affecting energy prices, supply chains, financial markets, and ultimately impacting businesses and consumers on a global scale.