India’s economy up despite West Asia conflict, but dangers loom

A YEAR has elapsed since the Israel-Hamas conflict erupted on the world stage. There were worries that it would stall India’s trajectory towards a higher growth path in the post-Covid recovery phase. These fears have been put to rest as the gross domestic product (GDP) rose by a surprising 8.2 per cent in 2023-24. The first quarter of the current fiscal has been subdued, at 6.7 per cent, but the central bank expects an overall growth of 7.2 per cent in 2024-25.

However, external headwinds could still be a spoiler, given the latest developments in West Asia. Israel’s attacks on Hezbollah in Lebanon have been followed up by Iran’s flurry of retaliatory missiles. The situation remains tense in the region amid fears over the prospects of a wider regional conflagration. In case this becomes a reality, it would be a big blow to the global economy and India, too, would face the consequences.

Even in the past year, India has not remained unscathed by geopolitical tensions. The disruption of the movement of merchant shipping through the Red Sea has led to a diversion of most Europe- and US-bound cargoes to the longer and more expensive route via the Cape of Good Hope. This has come as a double whammy for exporters as they simultaneously face new carbon emission rules laid down by the European Union for a wide range of products.

The Russia-Ukraine war also continues to have ramifications in the form of depressed demand in critical western markets. Import costs are similarly rising as many shipments from the west are now moving through the longer route to avoid the Suez Canal and the ongoing depredations of the Yemen-based Houthis.

The situation remains an irritant, with roughly two-thirds of all merchant shipping reported to be avoiding the traditional passage through the canal. It must be remembered that 12 per cent of the global trade uses this key shipping lane.

On the other hand, oil markets have moved to the bearish mode after the initial shock of the onset of the Israel-Hamas conflict. Prices have been drifting lower partly due to the fact that the oil-producing areas have not been directly affected, at least as yet. The other factors, including reduced demand from China and excess supplies in the market, have weighed more heavily on the crude oil prices. Currently, despite a spike after missile attacks by Iran, the benchmark Brent crude is ruling at around $77 per barrel while the West Texas Intermediate crude is around $73.

These are manageable levels for India which imports over 85 per cent of its fuel needs. The fact that oil prices have not shot up over the past year despite the challenging geopolitical scenario has been a considerable relief for this country.

The situation is now changing in several respects. Most important is the prospect of an economic revival in China. One of the main factors behind the softening of oil prices was the slowdown in the world’s largest importer. The latest monetary stimulus package announced by the Chinese government seems to be the first step in bringing the economy back to better health. In case these measures succeed, the demand for oil could pick up significantly and this, in turn, would push up global prices.

The Indian equity markets are already facing the brunt of the enthusiasm of foreign institutional investors (FIIs) for stocks in China, where valuations are considered more lucrative. The FIIs have turned sellers in the past month, lured by the fact that the Hang Seng index shot up by 26 per cent.

At the same time, the scenario on the Israel-Iran front has become even more ominous, with reports emanating that more strategic attacks may be on the way. These indicate that Israel could be thinking of launching missiles at Iran’s oil installations or ports.

Most of Iran’s crude is sold to China owing to the sanctions imposed on it by the US. But its availability has been a moderating factor in the world markets. Attacks aimed at cutting off Iranian crude supplies would immediately lead to a spurt in the prices.

In case this happens, a region that produces most of the hydrocarbons needed to run the global economy will be engulfed in a war.

As far as India is concerned, it will be worried about the fate of millions of expatriate citizens residing in the Gulf region who may be at risk due to the conflict. Rescue operations may be needed to evacuate them in some cases. Any strife will also affect the flow of remittances to this country which have been a major source of revenue in recent years.

The outcome of the hardening oil prices will be inflationary pressures on the domestic economy. Costs will rise for industries reliant on oil and gas as feedstock. The power sector could face serious shortfalls in availability, leading to outages in parts of the country. Fertilisers is another key area that would bear the burden of higher costs and this could potentially affect the agriculture sector.

Disruption in the global supply chains would affect countries around the world, including India. It is difficult to make a detailed assessment of the impact as it would depend on the extent to which the conflict widens in West Asia. There is no doubt, however, that it could potentially create an even bigger shock to the world economy than the Russia-Ukraine war, owing to the energy resources located in the region.

In this context, it must be noted that the biggest oil producer in the world is now the US. Yet, the Gulf region accounts for a sizable amount of oil and gas supplies to the rest of the world, with Saudi Arabia being the largest exporter. It is also the midway point for trade flows between Europe and Asia. Even a regional conflict will, obviously, spill over to create ripples elsewhere.

As far as India is concerned, it has so far managed to push ahead with economic recovery despite mounting geopolitical challenges. In case the Israel-Iran conflict remains sporadic, the domestic economy is resilient enough to sustain the pace of growth. But if it expands into a wider war, there could be wider and as yet unknown repercussions. In its own self-interest, therefore, India should make a strong push for peace in the region.