Navigating Economic Crosswinds: Israel-Hamas Conflict's Impact on India

The flare-up in violence between Israel and Hamas has sent ripples across the globe, with India keeping a close eye on the developing crisis. As smoke billows in Gaza, India faces economic and security tremors.                                                                                               How exactly will India be hit by the conflict? It seems a contained conflict that does not last long will not upset India in any significant manner but a longer conflict can destabilise India's economy.

The impacts of this war on Indian markets can be analyzed in the following ways:

1. Oil- First Pinprick for India : With 85% of its crude coming from overseas, India stares at a brewing oil shock as prices leap on fears of a wider conflict. This could single government finances and force a rupee slide. But pump prices are unlikely to surge ahead of state elections. The overall impact can also hurt the GDP growth.

2. Inflation & Growth- Walking the Tightrope : Volatility in global crude and edible oils may nip RBI's latent rate-cut hopes. Alongside a weak rupee, this could fan inflation and throw the growth trajectory off-track. The government has its task cut out on the fiscal front. If the Israel-Hamas conflict disrupts oil supply lines and jacks up prices, the hopes of RBI cutting rates will be dashed.

3. 5G Dreams- Wired for Higher Costs : The strife may initially push up costs of imported 5G gear by ₹2,000-2,500 crore as the rupee dips 3-4%. Rollouts by Jio, Airtel, and Vi could slow down, impacting next-gen network plans. Such a scenario would also increase telcos' foreign-debt-servicing costs and impact profitability in coming quarters as a sizeable chunk of the $7 billion-plus telecom sector debt is dollar-denominated.

4. Trade- An Inevitable Challenge : Exporters bracing for higher shipping costs with the potential to raise shipping and insurance costs, the crisis can hit India's $12 billion annual trade with Israel. To safeguard Indian businesses from potential losses due to geopolitical uncertainties, India’s Export Credit Guarantee Corporation (ECGC) may introduce higher risk premiums for firms exporting to Israel.

5. Vulnerable Gems Trade : The cutting and polishing industries in India — which has a 90% global market share in cutting and polishing natural diamonds — get the raw materials from Israel. This business is largely concentrated in Surat, where it is estimated to directly and indirectly employ about a million people. These workers would face the brunt if the supply chain is disrupted.

6. Pharma- Exports to the Middle East at risk : The Israel-Hamas conflict is threatening to disrupt the Indian pharmaceutical industry by hindering exports to several countries in the Middle East and North Africa (MENA) region. Pharma industry experts estimate that if the war continues beyond two weeks, it is likely to dent the flow of pharma exports to the region, and countries nearby.

7. Home textiles- Margins may Shrink : Hamas' attack on Israel has left Indian exporters of home textiles and furnishings worried about their orders getting deferred and margins getting hit. While Israel is a small market, exporters said that the margins are 10-15% higher than supply to the US, especially on cotton textiles.

8. Security- Drone Lessons from Gaza : Drone attacks by Hamas have raised apprehensions in the Indian establishment about the use of Chinese-made drones by non-state actors along the Indo-Pakistan border. National Security Guard (NSG) director general MA Ganapathy said that anti-terrorism professionals must examine the unprecedented attacks in Israel.

 A key impact of Israel's war could be on the proposed India-Middle East-Europe Economic Corridor (IMEEC). It is an ambitious infrastructure deal to connect India through Saudi Arabia and Israel to Europe, a corridor that would immensely contribute to global trade. But now the war casts a shadow over this ambitious project and has dampened the spirits. The war will create differences between Israel and Arab countries which have been coming closer in recent times, or at least it will freeze any such ongoing efforts

Overall, India must continue to act as a mediator and provide humanitarian assistance to the Palestinian people to address their immediate needs and alleviate suffering in conflict-affected areas.                                                                      

It is to be noted that India has been very keen to preserve a pragmatic balancing act between regional players in the West Asian region like Saudi Arabia and Iran. On similar lines, India should be cautious enough while backing Israel and should adopt a more balanced and pragmatic approach while dealing with Israel and Palestine.