Israel-Hamas war: What could it mean for India’s economy?

Published : Nov 07, 2023 15:51 IST - 4 MINS READ

For the upcoming FY 2024-25, the RBI has pegged crude prices at $85 (€79) a barrel, and an exchange rate of 82.5 rupees against the US dollar.

For the upcoming FY 2024-25, the RBI has pegged crude prices at $85 (€79) a barrel, and an exchange rate of 82.5 rupees against the US dollar. | Photo Credit: VIVEK PRAKASH

The growing conflict in West Asia has raised geopolitical concerns about stable prices and oil supply.

The ongoing Israel-Hamas war is causing concern in India over the conflict’s potential impact on oil prices. India is the world’s third-largest oil-consumer and importer, and although India has been increasing its oil supply from Russia since the invasion of Ukraine in 2022, a major slice of Indian imports still comes from West Asia.

Between April and September 2023, 44 per cent of Indian oil imports were from West Asia, according to industry figures shared by Reuters.

In October, the World Bank’s latest India Development Update (IDU) said it forecast India’s growth rate in fiscal year 2023-24 to come in at a strong 6.3 per cent, which was down from the previous 7.2 per cent amid “intensifying global headwinds”.

Commodity prices seem stable, so far

Experts in India are concerned that the ongoing conflict could bring fresh global gusts for the Indian economy, with elevated oil prices bringing up import costs and increasing prices for commodities and foodstuffs.

Although a recent World Bank report on commodity prices found that the wider economic impact of the Israel-Hamas war would be “limited if the conflict doesn’t widen”, the outlook for commodity prices “would darken quickly if the conflict were to escalate”. “Overall oil prices have risen about 6 per cent since the start of the conflict,” it said.

Also Read | How the Israel-Hamas conflict might bring Russia unexpected gains in Ukraine war

In October, the International Energy Agency (IEA) also cautioned that markets “remain on tenterhooks as the crisis unfolds”. “The Middle East conflict is fraught with uncertainty, and events are fast developing. Against a backdrop of tightly balanced oil markets anticipated by the IEA for some time, the international community will remain laser-focused on risks to the region’s oil flows,” the report said.

The World Bank report added that, in the case of the West Asian conflict escalating, policymakers in developing countries would then need to “take steps to manage a potential increase in headline inflation”, which includes measures to ensure food security. The report also pointed out that “given the risk of greater food insecurity, governments should avoid trade restrictions such as export bans on food and fertilizers as such measures often intensify price volatility and heighten food insecurity”.

India’s risk of oil-price-driven inflation

For the upcoming financial year (2024-25), the Reserve Bank of India (RBI) has pegged crude prices at $85 (€79) a barrel, and an exchange rate of 82.5 rupees against the US dollar.

“A 10 per cent jump in oil prices can make inflation soar by about 30 basis points and impact growth by about 15 basis points,” the RBI estimates.

Economist Arun Kumar told DW that Indian oil supply could be in jeopardy if the Israel-Hamas war spreads. “Tensions will aggravate globally and there will be more supply bottlenecks and not just regarding crude,” he said.

“If this happens, the Indian economy will also be adversely impacted. Exports can decline further while prices could rise and the Indian Rupee could weaken with the worsening of the balance of payment situation and decline in foreign exchange reserves,” said Kumar.

Although India’s core inflation has remained under control at 4.6 per cent in September, volatile oil prices have the potential to affect inflation and growth estimates.

Also Read | Scared and exhausted, Gaza rescue workers soldier on despite Israel’s air strikes

Lekha Chakraborty, professor at the National Institute of Public Finance and Policy, said that highest oil prices would exacerbate inflation and affect India’s current account deficit (CAD), in which the value of imported goods and services exceeds the value of exports. For now, state-run oil marketing companies are expected to absorb the higher costs, even as they face notional losses in selling fuel.

India is also looking to source more oil from countries like Guyana, Canada, Gabon, Brazil, and Colombia. It has also heavily increased oil purchases from sanction-hampered Russia. In October, Russian crude accounted for nearly 35 per cent of India’s oil imports, followed by Iraq at 21 per cent and Saudi Arabia at 18 per cent.

“The longer-term implications remain to be seen, of course. Any potential disruptions or fluctuations in supply will obviously impact the energy sector in India. But the larger risk factor might be political risk, and the government will need to strike a delicate balance,” Sanjay Jain, senior fellow in economics at the University of Oxford, told DW.

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