How a full-scale Israel-Iran war will hurt the Indian economy

The ongoing conflict between Israel and Iran has escalated in recent months, with the two countries engaging in direct attacks and retaliatory strikes. The once “shadow war” has transformed into a more overt confrontation, raising concerns about the possibility of a full-scale regional crisis.Both sides have issued warnings and threats, with Iran threatening further missile strikes and Israel preparing a major counter-attack targeting Iran’s strategic sites. Here’s a look at how the conflict is affecting the Indian economy.Indian investors feel the pinchLeaving a ₹16 lakh crore hole in the pockets of Dalal Street investors, the Sensex has crashed more than 4,100 points in just five trading sessions as the double blow of the Iran-Israel war and China’s stimulus package has unleashed a bear attack on the Indian stock market.After plunging 1,769 points on October 3, the Sensex fell by 809 points on October 4, while the Nifty tested resilience at the key support level of 25,000, falling nearly 1%. In the last 5 trading sessions since September 27, the Sensex has fallen 4,148 points as the combined market capitalisation of BSE-listed stocks has fallen by ₹15.9 lakh crore to ₹461.26 lakh crore.The Sensex and Nifty recorded their worst week since June 2022 as they ended the week with a loss of 4.3% and 4.5%, respectively.Institutional investors had already warned of peak valuations in what appeared to be an overheated bull market. The Chinese stimulus measures accelerated the outflow of FII money from India to China, where stocks were trading at much cheaper valuations.And after Iran launched almost 200 ballistic missiles towards Israel on October 1 in response to the Israeli air strike in the southern suburbs of Beirut last week, foreign investors became doubly cautious in emerging markets. medium nocaptionhttp://youtu.be/5laXGWLNn94?si=3gGkXIYEIC9PSdO3Crude oil prices on the riseOil prices rose for a fourth day on October 4 as traders assessed supply risks in West Asia.Brent crude climbed above $78 a barrel, on course for the longest run of daily gains since August, while West Texas Intermediate was above $71. Israel has threatened reprisals against Iran, though US President Joe Biden has said the country should hold off from attacking its nuclear facilities.A major strike by Israel on Iran’s export capacity could take 1.5mn barrels of daily supply off the market, according to Citigroup. If Israel struck minor infrastructure, such as downstream assets, 300,000 to 450,000 barrels of output could be lost, analysts said in a note.A full-scale war will not bode well for India’s energy security. Despite India’s rising oil imports from Russia, it still depends significantly on oil and gas imports from West Asia.The share of Russian oil in India’s August imports declined to about 36% after rising for five straight months. In July, Russian oil accounted for about 44% of India’s oil imports. The share of West Asian oil in India’s August crude imports rose to 44.6% from 40.3% in July.India imports nearly half of its liquefied natural gas (LNG) from Qatar. In February, India signed a $78bn deal with Qatar to extend LNG imports by another 20 years. medium nocaptionhttp://youtu.be/HsusqYltC8E?si=0pLi1jUT_xusUm2pDisruptions to energy flowsMost of India’s energy imports will be jeopardised if a full war breaks out between Iran and Israel when Iran’s allies Hezbollah and Houthis too would be expected to escalate their attacks. Important oil shipping routes such as the Red Sea and the Strait of Hormuz can be disrupted by a full-scale war.India imports oil from Russia through the Red Sea and in case of a wider conflict, the shipments will have to take the longer route via the Cape of Good Hope to avoid attacks.More worrisome for India would be the blocking of the Strait of Hormuz through which it gets its LNG from Qatar and oil from Iraq and Saudi Arabia.Hormuz is the world’s most important oil transit choke point, as per the US Energy Information Administration (EIA). Choke points are narrow channels along widely used global sea routes that are critical to global energy security. The inability of oil to transit a major chokepoint, even temporarily, can create substantial supply delays and raise shipping costs, increasing world energy prices.India already depends for a significant part of its energy imports through Hormuz. Two-thirds of the oil and half the LNG India imports come through Hormuz. medium nocaptionhttp://youtu.be/46b_Q6HP8Lk?si=nkveY-ZzvZRF7CbrImpact on Indian economyA disruption in India’s oil and gas imports can throw the economy into disarray, spiking inflation and forcing the Reserve Bank of India (RBI) to keep interest rates high.India’s economy is heavily dependent on imported energy on which depend, in turn, several industries. A direct impact of higher oil and gas prices or squeezed supply will be higher inflation, which has been going down recently. This will keep the RBI from cutting interest rates, which is widely expected by the year-end.Since the government subsidises fuel to a large extent, an oil price shock might force it to recalculate its other spending, importantly on building infrastructure and also impact its fiscal deficit glide path.According to a Morgan Stanley report, a $10 per barrel increase could impact consumer prices by 0.21.4 percentage points across Asian economies. India is in the middle, with the Consumer Price Index rising up to 0.5 percentage points for each $10 per barrel increase in oil prices.India’s net oil import bill could widen to $101-104bn in the current fiscal from $96.1bn in 2023-24, and any escalation in the Iran-Israel conflict could impart an upward pressure on the value of imports, credit rating agency Icra said.As per Icra’s calculations, a $10 per barrel uptick in crude oil price will push up net oil imports by $12-13bn this year, thereby enlarging the current account deficit (CAD) by 0.3% of GDP. India buys most of its oil in dollars and higher prices can lead to the rupee’s depreciation, which will increase the overall cost of imports and further widen the CAD. medium nocaptionhttp://youtu.be/oeX6uMx6PwA?si=7RMbB56Ib0JhZrWGWider sea trade disruptionAs the conflict escalates, India Inc is preparing for trade disruptions along the vital Red Sea route. Experts warn of higher cargo freight rates due to Hezbollah’s ties with Yemen’s Houthi rebels, who frequently attack ships in the area.A direct Israel-Iran conflict could severely impact Indian exports. The crisis, which began last October, has already contributed to a 37.56% drop in India’s petroleum exports. The Red Sea route is crucial for India, handling 68% of trade by value and 95% by volume.With inputs from ET.