From the capital city of New Delhi comes rising concern over the escalating military exchanges between Iran and Israel, signaling an uptick in geo-political tensions that extend far beyond the Middle Eastern and West Asian territories to cast their shadow on global economic stability.
Suman Chowdhury, the Chief Economist and Head of Research at Acuité Ratings & Research, expressed apprehension regarding the increasing number of drone and missile attacks conducted by Iran on Israeli territory. He emphasized that these developments have significantly heightened the geopolitical risk, injecting uncertainty into the global economic landscape. While the crude oil prices currently hover around USD 90 per barrel, Chowdhury warns that if the hostilities intensify, oil prices could surge past USD 100, unsettling economies that are heavily reliant on oil imports.
Indian economy, which has been carving its growth trajectory post-pandemic, could face substantial challenges if the Iran-Israel conflict continues to intensify. Chowdhury identifies five areas where the Indian economy stands vulnerable to these external geopolitical maneuvers:
1. The first and foremost impact is the potential stalling of rate cut decisions by global financial regulators such as the Federal Reserve and the Reserve Bank of India. As geopolitical risks snowball, central banks may opt to maintain higher interest rates for an extended period to navigate through the terrain of economic uncertainty.
2. Secondly, the Oil Public Sector Undertakings (PSUs) in India are likely to encounter higher under-recoveries until the increased crude prices are transferred to the consumers through petrol, diesel, and LPG prices. This scenario could lead to the oil subsidy bill overreaching the earmarked projections in the interim budget for the fiscal year 2025. Chowdhury suggests that, should the price rise persist, we might expect to witness a trickle-down effect in costs post-elections.
3. A subsequent effect can be observed in the rising costs of oil derivatives, which play a critical role in the manufacturing process for industries such as petrochemicals, specialty chemicals, and paint. This cost surge will touch the operating margins in these sectors, impacting the bottom line.
4. Additionally, a surge in shipping costs is imminent, propelled by the need for heightened security and rerouted shipments, which is likely to inflate the import costs of goods, thereby putting upward pressure on wholesale inflation.
5. Lastly, Indian merchandise exports to the strategic West Asian markets could take an immediate hit amidst the conflict upheaval—breaking the momentum of trade in the short term.
On a cautionary note, Chowdhury mentioned that the pre-forecasted 6.7% GDP growth and 5.0% retail inflation for FY25 might be susceptible to downward revisions if there is further escalation in the Iran-Israel conflict. This stands as a testament to India’s intertwined economic fate with global political currents.
Given this backdrop, the Indian economy may have to brace itself for potential aftershocks of the conflict, while policymakers might need to plan for contingency measures to mitigate such risks. As with any geopolitical crisis, the situation is fluid, and the extent of the impact will largely depend on the duration and severity of the conflict.
As the world watches on, the economic implications of these regional conflicts underscore the need for robust risk management and agile adaptation strategies in the macroeconomic planning of nations. For India, a large importer of crude oil, vigilance and preparedness are warranted to navigate the possible economic tremors that arise from the reverberations of the Iran-Israel confrontation.
