Will Israel-Hamas war affect India’s economy? – DW – 11/06/2023

ongoing Israel-Hamas war causing anxiety India Regarding the potential impact of the conflict on oil prices.

India is the world’s third largest oil-consumer and importer Increasing oil supplies from RussiaAfter the invasion of Ukraine in 2022, a large portion of India’s imports still come from the Middle East.

Between April and September 2023, 44% of India’s oil imports came from the Middle East, according to industry figures shared by Reuters.

In October, the World Bank’s latest India Development Update (IDU) projected India’s growth rate at a robust 6.3% in the 2023-24 financial year, down from 7.2% earlier amid „global intensification”.

Commodity prices seem stable so far

Experts in India are concerned that the current conflict could bring new global momentum to the Indian economy, and that higher oil prices will bring up import costs and increase commodity and food prices.

Although recent World Bank The report on commodity prices found that while the broader economic impact of the Israel-Hamas war would be „limited if the conflict does not escalate,” the outlook for commodity prices would „quickly darken if the conflict escalates.”

„Overall oil prices have risen by around 6% since the start of the conflict,” it said.

Last month, the International Energy Agency (IEA) also warned that markets „will be on tenterhooks as the crisis unfolds”.

„Middle East conflicts are fraught with uncertainty and events are escalating rapidly. Against a backdrop of tightly balanced oil markets expected by the IEA for some time, the international community will be laser-focused on risks to the region’s oil flows,” the report said.

The World Bank report added that as conflicts in the Middle East escalate, policymakers in developing countries „must take steps to manage potential increases in headline inflation,” including measures to ensure food security.

„Given the high food insecurity risk, governments should avoid trade restrictions such as export bans on food and fertilizers, as such measures often intensify price volatility and increase food insecurity,” the report pointed out.

India’s Risk of Oil Price-Driven Inflation

For the coming financial year (2024), the country’s central bank, the Reserve Bank of India (RBI), has pegged crude oil prices at $85 (€79) per barrel. exchange rate 82.5 against the US dollar.

„A 10% increase in oil prices could raise inflation by around 30 basis points and impact growth by up to 15 basis points,” RBI estimates.

Economist Arun Kumar told DW that India’s oil supply would be at risk if the Israel-Hamas war spreads.

„Tensions around the world will worsen, and there will be supply disruptions, not just crude oil,” he said.

„If this happens, the Indian economy will also be adversely affected. Exports may fall further, while prices may rise and the value of the Indian rupee may be weakened by a weakening balance sheet position and a decline in foreign exchange reserves,” Kumar said.

While India’s core inflation remained contained at 4.6% in September, volatile oil prices are likely to weigh on inflation and growth estimates.

Lekha Chakraborty, a professor at the National Institute of Public Finance and Policy, said higher oil prices would increase inflation and affect India’s current account deficit (CAD), where the value of imported goods and services exceeds the value of exports.

For now, state-run oil marketing companies are expected to absorb higher costs, even as they face hypothetical losses in selling fuel.

India plans to source more oil from countries like Guyana, Canada, Gabon, Brazil and Colombia.

It has also massively increased oil purchases from embargoed Russia.

In October, Russian crude accounted for nearly 35% of India’s oil imports, followed by Iraq at 21% and Saudi Arabia at 18%.

„Certainly the long-term implications remain to be seen. Any potential disruptions or fluctuations in supply will obviously affect the energy sector in India. But the bigger risk factor could be political risk, and the government will have to strike a delicate balance,” Sanjay Jain, a senior fellow in economics at the University of Oxford, told DW. .

Edited by: Wesley Rahn