Escalation in the Israel-Hamas clash could have an adverse economic impact through higher import bills, inflationary pressures and current account deficit. It may also affect trade, oil prices and the value of the Indian Rupee with the proposed economic corridor with Europe running into uncertainty.
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After the Russia-Ukraine conflict of 2022, a global health catastrophe in the form of COVID-19 which caused a major setback for the world economy, the Israel-Hamas Conflict has posed a fresh challenge. This geopolitical conflict has disturbed the flow of goods which has complicated the supply chain of the two nations. It has its repercussions across the world including in India. India is closely connected to the Middle East for its various requirements and a situation of this scale is likely to have a damaging impact on the Indian economy. The Israel-Hamas Conflict has accentuated India’s dependence on other countries for its requirements and also challenged its economic fabric.
From the time the war began, there has been a rise in the price of international crude oil and US bond yields have reached 5%. This has an impact on the Indian economy as it is an importer of crude oil. Experts are of the view that supply disruption in crude oil as a consequence of the Israel-Hamas conflict may cause a further rise in crude oil price. There is also a debate that if Iran supports Hamas in the ongoing war, then this may lead to a rapid increase in crude oil price causing selling pressure in the market which may hamper the global economy.
India’s exports to Israel, primarily petroleum products are 1.8% of its total exports. This year India’s exports to Israel were quite impressive that was around $8.4 billion.
MAJOR IMPACTS OF ISRAEL-HAMAS CONFLICT ON THE INDIAN ECONOMY
1. INFLATION: An increase in oil price causes a simultaneous increase in everything, which harms the country that relies primarily on oil imports. This sparks inflation and retards the economic growth and development of the nation. Currently, inflation is above the 6% limit as per the Reserve Bank of India (RBI) and the rise in crude oil price may cause a significant rise in inflation which will have not so good impact on the Indian economy.
2. IMPACT ON TRADE: India has a trade relationship with Israel. Israel imports precious stones, metals, chemical products and so on from India while India imports petroleum oils, machinery, chemical fertilizers and transport equipment from Israel. So, the Israel-Hamas conflict can disturb trade relations between the two nations which may affect various other industries. In the financial period of 2022-23 Indian exports to Israel were around $7.89 billion and Israeli exports to India were $2.13 billion. Also, various multinational corporations have made huge investments in Israel which may be disrupted due to the Israel-Hamas conflict and the Indian economy will move downwards.
3. IMPACT ON INDIAN RUPEE: As of 16th October, the value of the Indian rupee devalued to 83.28 per dollar. According to the Reserve Bank of India, the rupee will be in the range of 83-83.5 per dollar in the coming weeks and will become 84 if there is an increase in oil price. Devaluation in the rupee will make the exports costlier and increase inflation which will put pressure on consumer spending. This will harm the Indian economy.
4. CURRENT ACCOUNT DEFICIT: An increase in crude oil price will worsen the government’s fiscal deficits which will widen the current account deficit. The current account deficit indicates the Balance of Payment of a country and in a situation like this it may cause a rapid increase in inflation which is not desirable for the Indian economy.
During COVID-19, the Indian economy had hit an all-time low and it cannot afford to face another setback. It has become self-sufficient in many sectors and it needs to produce those resources for which it is dependent on other countries so that it does not suffer in the future.