It may be a bit early to predict economic consequences of the ongoing Hamas-Israel armed conflict on the world economy, but India is bound to be impacted if the war continues for long and oil prices keep soaring through the coming winter months. The war is now running through the second week. About 86 percent of India’s oil requirement is met through imports. Imports of cheaper Russian oil since the middle of last year helped the country contain inflation to an extent. From April to July 2023, the growth of India’s oil imports from Russia was even more significant at 126.94 percent, underscoring Russia’s reinforced position in India’s oil landscape. The cost of oil imports from Russia in the first four months in the current fiscal was estimated at $15.74 billion. However, the combined supplies from Iraq, Saudi Arabia, the United Arab Emirates, the US and Kuwait during the same period cost India in excess of $20.7 billion. Thus, India continues to depend significantly on West Asia for oil supplies. And, Russia is unlikely to maintain its present export price if the global oil prices shoot up significantly.
The continuing inflation in India has put a hole in the common man’s pocket. Saving rates are depressingly down. Data released by the central bank towards the end of last month showed net household financial savings dropped to 5.1 percent of the country’s GDP, the lowest since 1976-77. It was 7.2 percent of the GDP in 2021-22. The Reserve Bank of India is probably influenced by the government to contain the bank rate to help businessmen and investors. However, it may run out of options if the rising oil prices, higher trade deficits, lower remittances from West Asia, thinner foreign direct investment and falling exchange value of rupee adversely impact India’s economic growth, which the International Monetary Fund (IMF) lately predicted at 6.3 percent (from earlier projected 6.1 percent) for FY24. The global lender expects retail inflation of India to rise to 5.5 percent in FY24 before easing to 4.6 percent in FY25. The IMF’s October 2023 World Economic Outlook report was released barely 72 hours after Hamas attacked Israel. Naturally, the IMF report was not expected to take stock of the West Asia situation and its impact on the world economy, Including India’s.
The Hamas-Israel armed conflict has the potential of turning into a regional war involving sympathisers of Palestine and Hamas from the Arab world and Israel’s strong diplomatic and strategic friends such as the US, the UK and European Union members. A long drawn Hamas-Israel conflict raises the risk of rising oil prices, higher inflation and more economic uncertainty. It poses a whole new series of risks to an already fragile global economy partly caused by the Covid pandemic and Russia-Ukraine war.
After presenting the World Economic Outlook, the IMF hastened to add that a broader conflict in West Asia would threaten global economy via inflation and much will depend on whether fighting draws in other countries. The IMF’s top economist, Pierre-Olivier Gourinchas, said the conflict risks creating an energy-supply shock, which could raise oil prices, feed inflation and reduce growth. The IMF research shows a 10 percent increase in oil prices reduces global economic growth by 0.15 percentage point. Oil prices have jumped since the fighting started although Gourinchas said the increases may not last. The IMF chief economist said it was too early to say how the escalation in the long-running conflict would affect the global economy: “Depending how the situation might unfold, there are many very different scenarios that we have not even yet started to explore, so we can’t make any assessment at this point yet.” In fact, the IMF has warned monetary authorities not to ease interest rates too soon.
Thus, the effectiveness of the IMF’s economic growth forecast on India for 2023-24 will depend much on the way the Hamas-Israel armed conflict develops. Never before has Israel lost so many lives to terror attacks. Israel’s three-time prime minister Benjamin Netanyahu has set up a national emergency government, involving opposition party leaders, and a war cabinet to “wipe off Hamas.” But, it would be easier said than done. Hamas has long been fighting for the cause of a proper state for Palestinians ever since Fatah gave up the armed struggle. Iran, Afghanistan, Saudi Arabia, Iraq, Egypt, Yemen, Qatar, Lebanon and Syria are sympathetic to the Hamas cause. They all are in favour of a Palestine state. Incidentally, BRICS members are also in support of an independent homeland for Palestinians. However, it is difficult to guess to what extent they will firmly stand by Hamas, known to be a terrorist outfit, in its sudden war against Israel.
The supporters of a Palestine state would rather trust the reformed Palestine Liberation Organisation and Mahmoud Abbas, current president of Palestinian Authority, than Hamas terrorists. Surprisingly, Abbas, now at Jordan’s capital Amman, remained rather conspicuous by his silence until the US Secretary of State, Antony Blinken, visited him last week. The Hamas attack has certainly weakened Abbas’ political authority. Blinken also met several Arab leaders apparently to seek their assurance of non-participation in the Hamas-Israel fight. Arab sentiments are, however, running high. A pan-Arab support for Hamas, which looks unlikely for the present, could intensify the fight and expand its base. Though neither the West Bank nor Gaza produce any oil, global oil prices have spiked since Hamas attacked Israel amid speculation about how the conflict could affect energy production in West Asia.
Ironically, tiny Israel, almost one-fourth the size of India’s West Bengal state, is the world’s 27th biggest economy. It is one of India’s few major sources of trade surplus. The trade between the two countries in merchandise and services during 2022-23 was estimated at $12 billion. India’s merchandise exports and imports from Israel during 2022-23 were $8.4 billion and $2.3 billion, respectively, leading to a merchandise trade surplus of $6.1 billion. India is believed to be a major spyware importer from Israel. The massive surprise rocket attack on Israel by Hamas on October 7 now raises the question of the efficacy of Israel’s much vaunted spy tools and intelligence equipment. An expansion of the Hamas-Israel war, involving some of the Arab nations and Iran, could badly impact India’s economy in the coming months. (IPA Service)