The possible impacts on India if Iran-Israel conflict escalates into a full-fledged war: Read details
Amid the ongoing military confrontations and the likelihood of an all-out war between Israel and Iran, the global markets, including the Indian market, are expected to experience major trade disruptions. Early signs of the conflict’s impact on the Indian market became visible after Sensex closed 573 points lower on Friday (13th June). Considering that India has trade relations with both the countries, the impact of their conflict will be seen in India.
Surge in oil prices and resultant hike in the cost of exports
Following the first two rounds of Israel’s attack on Friday, the international oil market witnessed a spike of nine percent. Prices of Brent crude oil also rose by over $6 to cross a five-month high of $78 per barrel. Though, India does not import large quantities of crude oil from Iran, but the supply chain being affected, exports might become expensive. A rise in crude oil prices threatens to weaken the Indian rupee resulting in inflation.
According to a report of Emkay Global, Iran produces around 3.3 million barrels per day (mbpd) of crude oil, which accounts for around 3% of global production. It exports around 1.5 mbpd to different countries, with China being its biggest importer (80%) followed by Turkey.
Iran lies on the northern side of the Strait of Hormuz/Persian Gulf, which is a key passage through which 20–25 per cent of global oil supply transits, as well as a critical corridor for Liquefied Natural Gas (LNG) shipments from the UAE and Qatar, which is among the top LNG suppliers to India. Iran, in the past, warned to block this route. If it chooses to do so as a result of its ongoing conflict with Israel, the global oil supply is bound to take a hit. With a higher-than-expected production hike for July, the oil markets are reportedly expected to survive any possible cuts in Iranian oil supply for some time. However, if the conflict drags for too long, it can cause disruptions in the oil market
Air space diversions
After Israel began its airstrikes on Iran on Thursday (12th June), the Iranian airspace witnessed mass diversions of passenger jets flying between Europe and Asia. As Iranian as well as Israeli airspaces were occupied by projectiles being fired from both sides, the international commercial aviation felt its ripple effects. The flights had to take longer routes resulting in delays and increased fuel costs. With Pakistan’s airspace already being closed for India, a shut down of the Iranian irspace will force Indian flights to take longer routes. As per reports, an Air India Mumbai-London flight returned after three hours in the air.
Freight rates might go up
The conflict between the West Asian countries will also negatively impact trade via sea route. Shipments, including export shipments from India, started resuming the Red Sea route in May this year, after the route faced security concerns throughout the last year due to recurring attacks by Houthis in Yemen. However, with direct confrontations started between Israel and Iran, the vessel might have to take the longer Cape of Good Hope route. This detour will result in increased freight charges as the voyage time increases by 10-14 days. Longer sea routes also lead to reduced availability of vessels further contributing to the rise in freight rates.
Other adverse effects of the conflict
India’s imports from the Middle East include, LPG, LNG, petrochemicals, and fertilisers. The diversion in the sea route could lead to enhanced prices and well shipping risks. Any disruptions in the LPG or fertiliser supply would disturb the supply chain in rural Indian households and agriculture sector. An increased cost of fertiliser would further affect the price of food.
Manufacturing sector including aviation, chemicals, paints, tyres, cement, and logistics make use of petroleum-based components and fuels. If the prices of the raw materials like jet fuel, gasoil, or naphtha increase, the profit margins will be reduced.
India’s trade relations with Israel and Iran
During the current financial year, India exported goods worth $2.1 billion to Israel and imported goods worth $1.6 billion. India’s exports to Iran stood at $1.2 billion while it imported goods worth $441.9 million from Iran. India’s cumulative trade with both Israel and Iran amounts to about $5 billion.
The items exported by India to Israel include, polished diamonds, jewellery, consumer electronics and engineering goods. Israel, on the other hand, exports large quantities of military weapons to India. The country is India’s 32nd largest trading partner and a major defence supplier. According to a report of Stockholm International Peace Research Institute, India has imported military hardware worth about $3 billion from Israel, including radars, surveillance and combat drones and missiles, in the past 10 years. India also imports pearls, precious stones, electrical, electronics equipment, fertilizers, chemical products from Israel.
Apart from crude oil, India imports dry fruits, chemicals and glass utensils from Iran and exports several items including Basmati rice, tea, coffee and sugar.
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