Israel-Iran War: Know here how a full-blown war in the Middle East will affect the economy globally, including India

Israel-Iran War: India’s commerce and economy might be severely impacted by a full-scale Middle East conflict if Iran continues to fire missiles at Israel. This is because the Red Sea shipping route is crucial to world trade, and its closure would drive up the cost of goods and freight.

Given that the majority of India‘s gas and oil are imported, the conflict may also result in increased crude oil prices, which would have an adverse effect on both inflation and economic development.

What’s Going On in the Middle East At The Moment?

In fighting in Lebanon, around eight Israeli troops lost their lives. Iran claimed to have launched 180 missiles in revenge for the deaths of key leaders of its affiliated militias, Hamas and Hezbollah, against Israel on Tuesday night. However, the majority of the missiles were intercepted or missed their objectives. Israel is considering how to react.

According to US authorities, Iran also attacked several other Israeli aviation facilities, striking the Negev Desert’s Nevatim facility and suffering very minimal damage.

Benjamin Netanyahu, the prime minister of Israel, promised retaliation. In a speech on Tuesday night, he said, “The Iranian regime does not understand our determination to defend ourselves and our determination to retaliate against our enemies.” “The axis of evil is receding, and Israel is on the march.”

When Iran fired a barrage of over 300 drones, cruise missiles, and ballistic missiles against Israel in April, the US, Israel, and other allies together launched a massive operation to intercept them. A senior Iranian commander was killed in a missile strike on an Iranian diplomatic facility in Damascus, Syria, and that attack was revenge.

How India’s Energy Dependence Is on the Middle East

India still buys gas and oil from the Middle East despite a rise in its purchases of oil from Russia. According to the statistics, the percentage of Russian oil that India imported in August fell to about 36% after increasing for five months in a row. In July, almost 44% of India’s oil imports came from Russia. India’s crude imports increased from 40.3% in July to 44.6% in August due to the increased percentage of Middle Eastern oil. The region’s share decreased to around 44% from roughly 46% in April through August of last year. India’s primary Middle Eastern oil suppliers include Kuwait, Saudi Arabia, the United Arab Emirates, and Iraq.

Half of India’s LNG imports come from Qatar. In order to prolong LNG imports by a further 20 years, it inked a $78 billion agreement with Qatar in February.

Effect on the Energy Flows to India

India obtains oil from Russia via the Red Sea; therefore, in the event of a full-scale conflict, the cargo would have to be rerouted via the Cape of Good Hope to avoid being attacked. Another difficulty might be the closure of the Strait of Hormuz, which is how India imports oil and LNG from Saudi Arabia and Qatar.

The Arabian Sea, the Gulf of Oman, and the Persian Gulf are connected by Hormuz, which is situated between Oman and Iran. Because so much oil passes through the Strait of Hormuz, it is the most significant oil chokepoint in the world.

Making up 67% of all flows of crude oil and condensate across the Strait of Hormuz into Asia in 2022 and the first half of 2023, China, India, Japan, and South Korea were the leading destinations for crude oil traveling through the Strait. Hormuz is the entry point for half of India’s LNG imports and two-thirds of its oil.

As Europe accounted for 21% of India’s total petroleum product exports in fiscal 2023, a Crisil report from February actually cautioned that shipping markets would negatively affect exports even more. According to an Indian Express report, increased shipping costs were likely to lower overall petroleum product export spreads, which would negatively affect standalone refiners’ profitability.

India’s biggest commercial partner is the European Union (EU), with bilateral trade expected to reach US$136 billion in 2022–2023. India’s second-biggest export market, with over $61 billion in exports, is this market. With US$78.5 billion in exports in 2022-2023, the US is India’s top export destination despite being its second-largest trade partner.

The bright spot for India in the battle is that regional powers like Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar have stayed out of the Iran-Israel or proxy fight.

India’s commerce with these Gulf Cooperation Council (GCC) nations climbed by 17.8% cent between January and July 2024 compared to the same period the previous year, according to Global Commerce Research Initiative (GTRI) research. During this time, India’s exports to Iran increased by 15.2% as well.

Effect on the Price of Oil

The price of gas and oil will directly affect inflation, which has been declining lately. Because of this, it is unlikely that the Reserve Bank of India (RBI) would lower interest rates by year’s end, as is often anticipated.

A $10 per barrel rise may affect consumer prices by 0.2 to 1.4 percentage points in Asian markets, according to a Morgan Stanley analysis. With the Consumer Price Index (CPI) increasing by up to 0.5 percentage points for every $10 rise in oil prices per barrel, India is in the middle.

A substantial drop in the price of crude oil globally in August 2024 caused a major reduction in India’s oil imports of 32.4% year over year, according to a Crisil analysis. This decline is the third consecutive month that oil imports have decreased, mostly due to a reduction in crude prices. In August 2024, Brent crude averaged $80.9 per barrel, down from $86.2 per barrel in August 2023.

According to ICRA, cited by The Economic Times, India’s net oil import bill might increase to $101–104 billion in the current fiscal year from $96.1 billion in 2023–24. Additionally, any worsening of the Iran-Israel conflict could put upward pressure on the value of imports. According to ICRA’s estimations, an increase of $10/barrel in the average price of crude oil for this fiscal year results in a $12–13 billion increase in net oil imports for the year, which increases the current account deficit (CAD) by 0.3% of GDP. Most of India’s oil purchases are made in US dollars.

How about the plans for the India-Middle East-Europe Economic Corridor?

The India-Middle East-Europe Corridor (IMEC), which was unveiled at the G20 summit in New Delhi last year, may not advance as planned due to the conflict between Iran and Israel.

The Gulf area is connected to Europe via the Northern Corridor and India to the Gulf region via the Eastern Corridor under the IMEC plan. Together with road transportation routes, it will have a network of ship-rail and railroad transit lines.