The increase in tensions between Iran and Israel could prompt a rapid and possibly exaggerated response in the Indian market, amplifying existing pressures caused by diminished expectations of Federal Reserve interest rate cuts following the US’ March inflation figures. Besides the immediate impact of trade with both countries, India’s exporters face worrying rise in logistics costs as well as delays in shipments to markets in Europe. Certainly, India needs to carefully assess the emerging situation and be ready to respond to any eventualities.
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Iran’s recent attack on Israel has escalated tensions and raised concerns for India, which maintains friendly ties with both nations. India’s trade with Iran primarily involves the import of crude oil, while its trade with Israel encompasses various sectors, including agriculture, technology, and defense. Any escalation in the conflict could disrupt these trade channels, impacting India’s economy.
India holds the position of Israel’s second-largest trading partner in Asia and ranks seventh globally, as stated in the Ministry of External Affairs’ (MEA) brief on foreign relations. Additionally, heightened tensions in the region could lead to increased volatility in global markets. The situation warrants close monitoring as India navigates its diplomatic relationships and trade partnerships amidst this conflict. Before we understand the near term impact of this conflict, let us first briefly examine India’s trade profile with both nations.
India’s trade with Israel has surged over the past five years, almost doubling from US$ 5.6 billion in 2018-19 to US$ 10.7 billion in 2022-23 (excluding defence). This is a multifold increase from a value of around US$ 200 million in 1992, when the two countries established diplomatic relations.
In FY 2022-23, India’s exports to Israel were valued at US$ 8.45 billion, while imports stood at US$ 2.3 billion, resulting in a trade surplus of US$ 6.13 billion in India’s favor. During the first 10 months of FY 2023-24, bilateral trade reached US$ 5.75 billion. Israel accounted for 0.92% of India’s total trade (US$ 1,167 billion) in FY 2022-23, ranking as India’s 32nd largest trading partner.
India’s trade with Israel comprises a variety of goods. The trade basket includes, in particular diesel, diamonds, aviation turbine fuel, radar apparatus, Basmati rice, T-shirts, and wheat. In fact, diesel and diamonds alone accounted for 78% of total exports in 2022-23.
Conversely, India imports items such as space equipment, diamonds, potassium chloride, mechanical appliances, turbo jets with a thrust> 25KN, and printed circuits from Israel.
The value of India-Iran trade decreased over the last five years. In 2022-23, Iran was India’s 59th largest trading partner, with bilateral trade reaching US$ 2.33 billion. India’s trade with Iran has experienced a contraction in recent years, followed by an increase in FY 2022-23. It rose by 21.77% YoY to US$ 2.33 billion in 2022-23. However, in the preceding years (2019-20, 2020-21, and 2021-22), trade contracted between 9.10% and 72% year-on-year due to US sanctions on Tehran. From a value of US$ 17 billion in 2018-19, it plunged to US$ 4.77 billion in 2019-20, and further to US$ 2.11 billion in 2020-21. Of the US$ 2.33 billion trade in 2022-23, India’s exports to Iran accounted for US$ 1.66 billion, while imports from Tehran stood at US$ 0.67 billion, resulting in a trade surplus of about US$ 1 billion in India’s favour. In FY 2023-24, bilateral trade reached US$ 1.52 billion during the first 10 months (April-January). India primarily exports agricultural goods and livestock products, including meat, skimmed milk, buttermilk, ghee, onions, garlic, and canned vegetables to Iran. On the other hand, it prominently imports methyl alcohol, petroleum bitumen, liquified butanes, apples, liquified propane, dates, and almonds.
The increase in tensions between Iran and Israel could prompt a rapid and possibly exaggerated response in the Indian market, amplifying existing pressures caused by diminished expectations of Federal Reserve interest rate cuts following the US’ March inflation figures. S&P Global Market Intelligence’s base projection anticipates a decrease in India’s consumer price inflation from 5.7% in 2023 to 5.1% in 2024. “But if global oil prices rise considerably, the disinflation trajectory would be reversed, with average CPI inflation likely exceeding 6 per cent in 2024. This would also encourage the RBI to raise interest rates further, leading to tighter financial conditions for longer, with a likely negative impact on growth,” said Hanna Luchnikava-schorsch, Principal Economist, S&P Global Market. According to the think tank Global Trade Research Initiative (GTRI), ongoing tensions in the Middle East are unlikely to lead to a rise in petrol prices in India. However, there could be some impact due to tensions in the Red Sea, a crucial trade route connecting Europe and Asia, on which roughly 12% of global trade depends.
Ajay Srivastava, founder, the GTRI, also highlighted the potential impact on the Indian economy, noting that:
Exporters are also cautiously monitoring the situation, foreseeing a 10-15% surge in air freight to Europe, along with increased logistics and insurance expenses. They expect a downturn in demand for engineering exports to Europe due to Iran’s attack on Israel. The crisis in the Red Sea area has prompted a significant shift of cargo traffic to air transport, including goods like leather items, traditionally shipped by sea. Consequently, air cargo costs to Europe have spiked to around ₹140 per kg from ₹35, a mere three months ago.
In a TPCI survey on the anticipated increase in air freight to Europe post the Iran-Israel conflict, 49% of respondents predicted an increase of over 20%, 24% estimated a rise of 5-10%, and 22% expected a 10-15% increase. When asked which sector would be most affected by the conflict, 43% of respondents said engineering, 29% said automotive, and 20% said textile.
Moreover, a rise in tensions in the oil-rich Middle East could lead to an increase in India’s oil import expenditure. India is the world’s third-largest importer of oil and sources about 85% of its oil requirements from abroad.
Finance Minister Nirmala Sitharaman, in an interview with CNBC Awaaz news channel, said, “India is prepared to take adequate steps to mitigate any impact of the Iran-Israel conflict on its economy and will “remain alert. Can’t say that we are fully ready. As developments unfold, we are preparing to take adequate steps in India’s interests.”
When we asked Mr. Sudhakar Kasture, Director, Helpline Impex Ltd, about the impact of the situation on the India’s economy, he said, “The potential impact of Iran-Israel tensions on India raises several crucial questions. Firstly, if oil becomes a part of sanctions, will India be able to source it from Iran? Secondly, will investments under the PLI schemes be affected if the US and Europe impose sanctions? Thirdly, how would a potential return of Mr. Trump to power affect these dynamics? Additionally, Russia’s support for Iran and its role in India’s oil imports, along with the broader implications for trade and defense purchases, are significant factors to consider. China’s role, especially in the oil sector is also critical given India’s heavy reliance on oil imports.”
Conclusion The escalating tensions due to Iran-Israel conflict have raised concerns for India, which maintains friendly relations with both nations. India’s trade relationships with Iran and Israel could be disrupted, impacting its economy. Heightened tensions may also lead to increased volatility in global markets, further affecting India. As India navigates these challenges, it is essential to remain vigilant and take appropriate steps to mitigate any negative impact. Maintaining a careful approach and balanced relationships with both Israel and Iran will be crucial for India’s economic stability amidst the conflict.
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