New Delhi: The war between Israel and the terrorist group Hamas has once again raised the spectre of disrupted trade, high oil prices, and a slowing global economic recovery, even as the economic impact of the Russia-Ukraine conflict lingers.
During the early hours of Saturday, Hamas, the Palestinian militant group in control of the Gaza Strip since 2007, launched an unprecedented aerial and ground attack on Israel, with members of Hamas’ military wing Izz ad-Din al-Qassam Brigades reportedly taking over parts of the southern Israeli towns of Netivot and Ofakim.
In response, Israel launched a large-scale counter-offensive — ‘Swords of Iron’ — with reports suggesting Israeli Air Force fighter jets targeted multiple locations linked to the Palestinian militant outfit.
According to media reports, so far around 700 people have been killed in Israel and around 400 in Gaza.
The economic impact of the new outbreak of violence in Israel on India will depend on how long it lasts — from stock market impact to trade disruptions and resultant hikes in crude oil rates.
ThePrint looks at various possible scenarios to figure out how India will be impacted.
Also read: Muslim countries on Hamas attack: Condemnation & calls for ‘restraint’, but some blame Israel
Short-term impacts
If the war is resolved in a few days, then the impact on India will most likely only be felt in the stock market during this period.
The Hamas attack on Israel commenced Saturday, and so the impact on the stock market could only be seen in Monday trading. At the close of trading Monday, the Bombay Stock Exchange’s Sensex was down 483 points (0.73 percent) and the National Stock Exchange’s Nifty was down 141 points (0.72 percent).
“An unforeseen escalation in the Middle East has rekindled pessimism in global markets,” Vinod Nair, head of research at Geojit Financial Services said.
He added: “Moreover, the rapid surge in oil prices presents a significant threat to the global market, which is already dealing with elevated inflation and interest rates.”
If the war persists for longer…
An analysis by the economic research division of the Bank of Baroda released Monday shows that problems could start for India if the war persists for longer than about a fortnight, although even these predictions are highly tentative given the unfolding nature of the conflict.
The main issue, the analysis shows, is the price of oil. India imports about 80 percent of its crude oil requirement, and so high and rising oil prices have a direct impact on the finances of not just the government but also of households, since high oil prices increase input costs across industries.
“Now we can use the $90 number (for oil prices) to be the threshold beyond which there is trouble for the world economy,” Madan Sabnavis, chief economist at the Bank of Baroda said in a note Monday morning. “India can get affected if the price remains high due to further supply disruptions.”
Iraq and Saudi Arabia are the second and third biggest suppliers of crude oil to India. Russia is the largest. While having the top three suppliers of oil to India either actively engaged in a war, or physically close to one, does increase uncertainty about the security of India’s oil supplies, any negative outcomes are still purely hypothetical.
The Bank of Baroda analysis says that, in the event that Iran joins the conflict, the trade disruptions could deepen further.
“Iran joining the fray can affect the sea routes and push up transport and insurance costs,” Sabnavis said. “Higher crude (oil) will distort our balance of trade and CAD (current account deficit) thus putting pressure on the rupee.”
Sabnavis added that Israel imports around $5.5-6 billion of refined petroleum products from India, and so a disruption of this trade would put further pressure on the exchange rate and could lead to a further depreciation of the rupee to a range of Rs 83-84 to a dollar from the current range of Rs 82-83 over the past month.
Who will pay — oil companies, government, or public?
Any time there is out-of-the-ordinary depreciation pressure on the rupee, the Reserve Bank of India steps in by selling a portion of the dollars it holds to prevent the rupee from falling further. Foreign exchange reserves serve as a buffer for the government’s international finances, and so a smaller reserve means a smaller buffer.
The other impact of a longer-than-expected Israel-Hamas war could be felt by the oil marketing companies (OMCs), government, and the public. The government has in theory put in place a dynamic pricing policy for petrol and diesel, under which the prices of the two fuels are to be changed on a daily basis in relation to the changes in the price of oil.
So, usually, when crude oil prices rise, so do fuel prices, and when oil prices fall, so do those of fuel.
However, OMCs have kept petrol and diesel prices unchanged since May last year. During this time, oil prices first surged to an average of $116 a barrel in June 2022, before gradually falling to $76 in June 2023. Keeping fuel prices unchanged meant that the OMCs first incurred huge losses when their inputs (oil) were more expensive than their output (petrol and diesel), and then made profits when this situation reversed.
With oil prices rising once again (they averaged $93 a barrel in September and are so far averaging $90 in October), and possibly rising even further due to the new war, the OMCs could choose to either increase fuel prices for the public or keep them unchanged.
Raising fuel prices would mean the public will feel the pinch at a time when retail inflation has been above the RBI’s target of 4 percent since September 2019.
Not raising fuel prices would mean the OMCs would absorb the losses — a likely scenario given the 2024 general elections are just months away — and would then have to be compensated by the government. This compensation will of course be done using taxpayers’ money, which means that one way or the other, it is the public that will pay if oil prices rise.
(Edited by Poulomi Banerjee)
Also Read: What Israel-Palestine conflict is all about and why both want West Bank & Gaza Strip