Owing to the protracted Israel-Palestine imbroglio, India finds itself grappling with a host of economic vicissitudes, most notably the inexorable escalation in oil prices, a surge in inflationary pressures, and pronounced volatility in the stock market. These perturbations, exacerbated by an overarching atmosphere of global uncertainty, are beginning to cast long shadows over the contours of India’s financial edifice.
India’s energy security remains precariously poised, heavily dependent as it is on the volatile currents of Middle Eastern oil. As of August 2024, a formidable 44.6% of India’s crude oil imports emanate from this region, rendering any disruptions in pivotal maritime corridors such as the Strait of Hormuz or the Red Sea potentially catastrophic. These choke points, which are narrow channels along widely used global sea routes that are critical to global energy security are not merely geographical features but lifelines of global energy, facilitating the movement of over one-fifth of the world’s oil. A blockade or even the rerouting of tankers via the Cape of Good Hope would significantly elongate transit times and concomitantly escalate transportation costs. Such an upheaval portends a ballooning of India’s oil import bill, with projections for FY 2024-25 placing it between a daunting US $101 billion and US $104 billion, a marked increase from the US $96.1 billion of the preceding fiscal year.
The repercussions of these inflated crude oil prices reverberate directly through India’s inflationary landscape. This will result in substantial price rise across the board with a significant challenge for our economy and policy makers. With oil imports constituting about 90% of the total domestic demand, with major sourcing from Saudi Arabia, Iraq, the UAE, Russia, USA and Kuwait, the domestic economy is heavily reliant on oil import for its energy requirements. The Reserve Bank of India (RBI), which had previously entertained the possibility of trimming interest rates, now faces a bleak scenario wherein spiralling fuel costs are likely to perpetuate inflationary pressures. From transportation to manufacturing, the escalating costs of fuel ripple across the economy, culminating in heightened consumer prices across an array of goods and services.
The stock markets, as ever susceptible to global tremors, have not remained insulated from the escalating conflict. Not even a week ago, on October 3, 2024, the Sensex witnessed a precipitous fall of over 1,700 points, while the Nifty nosedived by 546 points, reflecting investors’ palpable anxiety over the oil-induced inflation spectre. The India VIX, colloquially dubbed the “fear index,” soared by nearly 10%, a stark manifestation of the market’s growing unease. Compounding this turmoil is the exodus of foreign capital from Indian equities, as investors pivot towards ostensibly safer havens such as bonds and gold. This exodus has disproportionately impacted sectors such as real estate, automobiles, energy, and finance, all of which have seen substantial declines across their respective indices.
The maritime arteries of India’s trade, particularly through the Red Sea, are now beset by soaring insurance premiums due to the conflict-induced risks. This aggravates shipping costs and jeopardises India’s ability to efficiently export goods to key markets in Europe and North America. With approximately US $120 billion in trade traversing these waters annually, the economic consequences of such disruptions are far from trivial.
To be sure, India’s foreign reserves, standing at over $700 billion – a first for the nation, provide some respite in cushioning immediate external shocks. However, should the Middle Eastern conflict persist, it threatens to sap investor confidence and, more alarmingly, derail India’s broader economic trajectory.
To sum up, the unfolding Israel-Palestine war has amplified the already considerable vulnerabilities in India’s economic framework. The spectre of surging oil prices, inflationary pressures, stock market volatility, and disrupted trade routes loom large, with the magnitude of their impact hinging largely on the conflict’s duration and the ever-evolving global milieus, with a concurrent fallout on the domestic economic velocity.