Middle East tensions escalate: India braces for economic impact
New Delhi: The intensifying violence in the Middle East has sent shockwaves through global financial markets, with significant implications for the oil and defence sectors. Rising oil prices, driven by fears of supply interruptions, have supported gains in the energy market. At the same time, geopolitical uncertainty has heightened risks for economies such as India, which rely significantly on regional oil imports. Any protracted disruption in Middle Eastern oil supplies might exacerbate India's energy security concerns, resulting in higher fuel costs that directly impact businesses and consumers.
India's economic links with the Middle East extend beyond oil to include commerce in machinery, medicines, natural gas, and fertilizers. A prolonged conflict in the region would not only impede these trade flows but would also result in higher global crude oil prices, putting central banks under pressure to regulate inflation. As energy prices rise, inflation may follow, undermining economic recovery efforts, particularly in emerging nations such as India.
Speculation over impending Israeli strikes on Iran's oil infrastructure has spooked global markets. In India, where stock valuations are already high, the uncertainty may trigger a shift in foreign portfolio investments, with investors potentially migrating to safer assets such as bonds and gold. Although domestic investments have offered some stability so far, market volatility is anticipated to rise in response to future geopolitical developments.
Oil prices are projected to remain highly sensitive to the scenario, with investors anxiously watching the Federal Reserve's next interest rate decision. The combination of geopolitical threats and monetary policy will largely affect the global market mood in the next weeks, with the ongoing Middle Eastern war playing an important role.
A full-fledged battle, especially after Iran's missile bombardment on Israel, may have serious consequences for global trade and economies such as India's. A significant issue would be the security of the Red Sea shipping route, which is an important artery for world commerce. If this route is disrupted due to conflict, freight costs would rise, further raising commodity prices and exacerbating inflationary pressures on economies that rely largely on Middle Eastern oil imports.
Despite increasing imports from Russia, India continues to rely significantly on Middle Eastern oil. As of August 2024, Middle Eastern oil accounted for 44.6 per cent of India's crude imports, with Iraq, Saudi Arabia, the UAE, and Kuwait serving as important suppliers, according to sources. Additionally, Qatar supplies roughly half of India's liquefied natural gas (LNG), making the region critical to India's energy security. Any disruption in the Strait of Hormuz, a vital chokepoint for global oil imports, would jeopardize India's energy supply networks. This narrow channel is responsible for the transportation of a substantial part of the world's oil, and military activity in the region could jeopardize both oil and LNG exports to India.
In the event of a conflict, maritime lines may have to be redirected around the Cape of Good Hope, increasing transportation costs. This would put extra strain on Indian refiners, who rely on both Middle Eastern and Russian oil. As transportation and energy prices rise, India's inflation is expected to rise, challenging economic management efforts and potentially hampering GDP.
Meanwhile, experts believe that the Reserve Bank of India (RBI) would confront a difficult decision on monetary policy. While interest rate reduction is expected by the end of the year, they believe that stubbornly high oil prices would force the central bank to defer such moves. A $10 per barrel increase in crude oil prices could boost India's consumer price index (CPI) by up to 0.5 percentage points, adding to the country's already strong inflationary pressures.
Despite these hurdles, India has maintained strong trading ties with key Gulf Cooperation Council (GCC) members such as Saudi Arabia, the UAE, and Qatar. These countries have mainly remained neutral in the Iran-Israel dispute, bringing some stability to India's trading connections. Reports also stated that India's exports to Iran increased during this time.
However, persistent instability in the region may jeopardize critical infrastructure projects such as the India-Middle East-Europe Corridor (IMEC). This effort, announced at the G20 conference last year, aims to build a strategic transport and commercial network connecting India, the Gulf, and Europe. Furthermore, a conflict in the Middle East could stall the execution of this huge project, jeopardizing India's long-term economic and geopolitical goals.
Other sources indicated that the arrival of Indian naval ships in Iran during this time demonstrates India's strategic efforts to balance its diplomatic and defence partnerships while protecting its energy interests. However, the Indian Navy did not formally confirm the move and instead described it as a 'regular' one. However, as tensions in the Middle
East rise, India will be forced to walk a fine line, balancing its connections with Iran and Israel to defend its interests in a more unpredictable global context.
