The recent Israel-Hamas conflict, marked by intense hostilities, raises questions about its potential repercussions on the Indian economy. While, as of now, it seems to have minimal impact on Indian businesses, experts warn that a prolonged conflict or its expansion to neighboring Middle Eastern nations could change the equation.
The Escalation of the Conflict
On October 7, Hamas launched a staggering 5,000 rockets, causing widespread devastation in Israel. In retaliation, Israel declared a state of war, leading to casualties on both sides. As of October 13, the toll stands at over 1,300 Israelis and 1,500 Palestinians killed, with thousands more injured.
India’s Economic Ties with Israel
Israel plays a significant role in India’s international trade, primarily involving the exchange of rough diamonds, cut and polished diamonds, electronics, and telecom components. Conversely, India exports gems and jewelry, alongside cut and polished diamonds to Israel. Additionally, Israel is a major supplier of military equipment to India, with a lucrative military trade relationship worth approximately $2.1 billion.
In 2017, a report by the Observer Research Foundation highlighted India’s emergence as Israel’s largest arms customer, with sales exceeding $715 million.
Initial Impact on India
Indian economists and export organizations acknowledge that, at this early stage of the conflict, its immediate consequences on India’s trade remain relatively limited. However, should the conflict persist and spread within the region, it could begin to affect the Indian economy.
Ajay Sahai, Director General of the Federation of Indian Export Organisations, points to several concerns regarding the impact of the Israel-Palestine conflict on India. These include rising crude oil prices, capital flight to safe havens like the United States due to declining stock markets, and increased insurance premiums and shipping costs.
Analyzing the Future
D.K. Pant, Chief Economist at India Ratings & Research, suggests that any significant impact on trade will depend on the evolving nature of the conflict. If instability persists, it may lead to immediate consequences on oil prices, given the conflict’s location in a major oil-producing region. India relies on imports for 70-80% of its crude oil consumption, which can lead to economic implications.
Furthermore, the conflict can influence India’s current account and currency value, potentially resulting in inflation and a weakened currency.
Geopolitical Implications
Dr. Ranjeet Mehta, Executive Director of the PHD Chamber of Commerce & Industry (PHDCCI), emphasizes the interconnectedness of today’s global economies. He notes that India’s energy supply, economy, and investments could be directly impacted if countries like Saudi Arabia and Iran become involved in the Israel-Palestine conflict.
While it currently appears that other Arab countries may not join the war, recent events, such as Hezbollah’s actions in Lebanon, highlight the volatility of the situation. The northern border of Israel with Lebanon and Syria remains a potential flashpoint, which could escalate the conflict to a full-fledged religious war in the Middle East.
India-Israel Trade Relations
India is among Israel’s top ten trade partners, with substantial trade relations in various sectors such as pharmaceuticals, agriculture, IT, telecom, and homeland security. This collaboration gained momentum after Indian Prime Minister Narendra Modi’s state visit to Israel in 2017.
Given Israel’s importance as a trading partner, it is imperative for India to closely monitor the situation. If the conflict intensifies and draws in foreign players, it could disrupt the global economy, including India’s, with ramifications reaching far beyond the Israel-Palestine region.
