Diplomatic and Economic sense amidst war

Even as it is a difficult task to assess the impact of the ongoing Israel-Hamas war on the Indian economy, one thing is crystal clear that India is likely to gain out of it. Yes, it may come at a cost in forms like costlier crude oil and sliding INR against the Greenback

First, we will have a look at its impact on the global economy. As per the forecast made by International Monetary Fund (IMF), it is likely to cross the mark of 2.9 per cent as against the target of 3 per cent.

In contrast, India continues to enjoy relative macroeconomic stability at this moment, but is vulnerable to one key risk - supply disruption in crude oil prices because of escalation in the war, resulting in a spike in crude oil prices.

High crude oil prices hurt India impacting currency stability (making imports expensive), possibly worsening the government’s fiscal deficit (the government is likely to absorb higher prices by cutting excise duty), widening the CAD further impacting currency adversely and affecting the profit margins of sectors such as aviation, paints, tyres and chemicals.

“All these implications could have a negative impact on economic growth in the short term, as high inflation and low profitability in various sectors would hit disposable incomes and discretionary spending,” says Shantanu Bhargava, Managing Director, Head of Discretionary Investment Services, Waterfield Advisors.

The conflict is not affecting India's trade with Israel immediately. Should the battle escalate, supply-side issues may arise. India's 1.8 per cent merchandise exports to Israel are mostly petroleum products. Israel imports $5.5–6 billion in refined hydrocarbons from India. India's exports to Israel were $8.4 billion in FY23. India imports equipment, pearls, diamonds, and other precious and semi- precious stones from Israel. India imported $2.3 billion from Israel in 2023 of goods.

In FY23 alone, India's merchandise exports and imports with Israel were valued at $8.4 billion and $2.3 billion, respectively, culminating in a $6.1 billion trade surplus. Key exports include diesel ($5.5 billion) and refined diamonds ($1.2 billion), while primary imports encompass rough diamonds ($519 million) and polished diamonds ($220 million), among other products.

Of course, there lies potential risk on the global markets, including the Indian market. To elaborate it, markets fear the spreading of the ongoing conflict beyond the current geography. We must remember that the Middle-East region accounts for one-third of the global seaborne trade.

"India has witnessed substantial exports of gem and jewellery to Israel, amounting to $1279.76 million during the 2022-23 fiscal year"

The market’s logic is quite similar to the Russia-Ukraine war. Crude and war-stocks apart, safe heaven asset classes like US Treasuries, gold, only tend to be impacted. Crude is up nearly 7 per cent and gold by 5.5 per cent since 5th October, this year.

Going by the political experts, there appears to be an elevated probability of around 70 per cent or above, of the conflict drawing militant groups from other nearby countries. This simply means that the trade disruption as feared by the markets would take place. As a result, crude and commodity prices that move through the sea- route are likely to be the first to be impacted. It is noteworthy that 30 per cent of India’s imports are crude-linked and input costs of companies are linked to commodity price pressures. Above all, there is an apprehension of broad market volatility.

The US put 2,000 troops on heightened alert and extended the deployment of an aircraft carrier in the Middle East as the administration makes a show of deterrence ahead of Israel’s expected ground assault on Hamas. Oil settled near $86 after a choppy session as traders assessed the intensified diplomatic efforts by the US to contain the crisis in Gaza.

"The Gem & Jewellery Export Promotion Council (GJEPC) has already voiced concerns about the escalating Israel-Hamas conflict, highlighting that India's gem and jewellery exports to Israel exceeded $1.2 billion in the previous fiscal year"

Look on the brighter tide

Now, let’s have a look on the brighter tide of the episode. Indian economy, which has recently joined the top five economy club of the world by surpassing the UK, is all set to join the top three economy club of the world in near future. The reason is simple. There has not been any such major disturbances in India and the entire world, particularly post Covid, is looking at India now for trade pacts.

Of late, JP Morgan has made a bold forecast, saying that India is all set to become third largest economy by 2027 by crossing the GDP of $7 trillion. In fact, James Sullivan, the Managing Director, Head of Asia Pacific Equity Research at JP Morgan sees Indian economy doubling to $7 trillion by 2030 with contribution from manufacturing rising to nearly 25 per cent from 17 per cent and exports doubling, to over a trillion US dollars.

Indian economy has rather hiked its growth forecast from 6.1 to 6.3 per cent for the current year in the recent past. Apart from it, this market is the fastest growing in the world for the second consecutive year. It is an interesting fact at a time when the neighbouring country, China’s growth has been forecast to reach five per cent during these time periods.

Now comes the action taken by the Federal Reserve which has indicated that it will pause its cycle of rate hike as inflation levels are gradually coming nearer to target levels. India has been monitoring the global situation in West Asia with concern, to assess any potential fallout on the domestic economy.

It becomes evident from the concern as expressed recently by the RBI governor, Dr. Shaktikanta Das, when he highlighted slowdown in external environment and warned of headwinds from geopolitical tensions that could upset the economic outlook.

Whatever be the case, a prolonged conflict in western Asia could have adverse impact on the domestic economy. Merchandise exports sector may be a case in point, which has not been growing as fast as others. During the first five months of the current fiscal, total merchandise exports reached $172.95 billion when compared to $196.33 billion in the year-ago period. It has happened because of the slack in demand from Europe and the US, which are passing through recessionary phase at the moment. Even services sector is moving southwards.

Second major concern is in the form of oil imports. For starts, India imports 85 per cent of its fuel requirements. The oil prices globally have been volatile since Ukraine crisis last year. It is a different thing that the oil price has moderated in between. However, in case the ongoing Israel-Hamas crisis prolongs, which is likely to be a possibility, then again it will start soaring which will have its adverse impact on the otherwise growing economy of the country.

The external headwinds, caused by the geo-political tension, apart, the domestic indicators are pointing towards a bright outlook in terms of growth for the current fiscal. Initially, when the news of the current disturbance in the West Asia started pouring in during early October, the domestic market started correcting itself. However, within a short while, the market was able to recover thanks to positive quarterly results by the corporates. In fact, the second quarter for the corporates is also expected to bring better financial results for the corporates. Demand is also picking up in other sectors like passenger cars and FMCG among others.

India is responsible for cutting and polishing 90 per cent of rough diamonds globally, and employing around two million people, has been facing an unprecedented crisis due to plummeting demand, prompting trade bodies to ask members to halt imports of rough stones for two months.

In the current financial year so far, exports have seen a decline of 30.27 per cent year-on-year, marking the steepest drop in at least half a decade. Notably, demand from pivotal markets like China and the US has nosedived.“India has witnessed substantial exports of gem and jewellery to Israel, amounting to $1279.76 million during the 2022-23 fiscal year. It is significant to note that Israel, being a very important trading center, also exports rough diamonds to the tune of $1782.80 million,” said Vipul Shah, chairman, GJEPC.