By Nilanjan Banik
Joseph Campbell, author of “The Hero with a Thousand Faces” and scholar on comparative religions, once recounted a Japanese story. A samurai hunted down his master’s killer and was about to decapitate him when the assassin spat in the samurai’s face. The enraged samurai immediately returned his sword to the sheath and walked away. The reason is that he was taught by his master never to act in a fit of blind anger, as retributions should be delivered from an objective, righteous distance. Too close to and too soon after any ghastly atrocity, blood feuds like what is unfolding in Israel and Gaza may make us believe that we are heading for a ‘polycrisis’.
‘Polycrisis’ is a term used by the World Economic Forum’s Global Risks Report 2023 to explain, “present and future risks can also interact with each other to form a ‘polycrisis’ – a cluster of related global risks with compounding effects, such that the overall impact exceeds the sum of each part”. The Russia-Ukraine war, the post-COVID debt crisis, global warming, and now the war in the Middle East are all but different elements that make a polycrisis.
What will be the impact of a polycrisis on the Indian stock market and Indian economy in general? While the Ukraine and Russia war had arguably had a limited impact on the US stock market riding on AI stocks and India being a swing country (Saudi Arabia being the other one) gained from the surge in its mid and small-cap stocks, the fallout of the Israel and Hamas conflict, if it is not contained swiftly, may have more catastrophic collateral damages to the global economy.
There is a fear of a growing risk that other countries will be drawn into this conflict. In particular, if Iran, Egypt, and Syria were to join this religious war – with the presumption that this war is affecting the sentiment of the Arab and Muslim world – the price of crude may spin out of control. The price of crude oil jumped 6% ever since the start of this crisis. The oil price has inched toward $90 a barrel, and there is a likelihood it crossing the symbolic danger mark of $100 a barrel.
If the oil price crosses the $ 100-a-barrel barrier, interest rates will stay up higher for longer, not just in the US but in India as well. That, of course, comes with a caveat – if there is no financial accident in the US like any more bank going belly up. Furthermore, the dollar index inching up doesn’t bode well for India. If the fickle FII/FPI money rushes out, the much-valorized domestic retail money may hold up the market only for some time.
It is to be noted, that for India, crude has the largest share with 30% of the import bill. With a requirement exceeding more than 5 million barrels per day, a rise in crude price beyond the psychological $100 mark will impact the exchange rate and the real economy. Every $10 increase in crude oil price widens India’s current account deficit by 0.5%.
How much more price of oil will rise will depend upon whether the war spills over to other countries. Although there is an exchange of fire between Lebanon and Israel, it is unlikely that Iran may join the fight directly on religious grounds. It is known that Iran is backing Hezbollah leaders in Lebanon. However, Iran has already gained much from this ongoing crisis. For sure, as the military offense in Gaza continues it is going to scuttle the normalization of the relationship between Israel and Saudi Arabia. And that by itself is a big win for Shia-dominated Iran, who otherwise may feel left out if Sunni-dominated Saudi Arabia joins hands with the Zionists. Iran also fears a normalization of US-mediated ties between Israel and the Saudis will enable the latter to develop a civilian nuclear energy program.
In this fast-changing scenario, the Arab world (except for Iran) so far has not supported the Hamas attack on Israel. They did condemn the Al-Maamadani hospital bombing in Gaza but are yet to take an active step as yet.
Elsewhere, Iran is still supporting the Christian-dominated Armenians in their war against Azerbaijan which is a Muslim-dominated country. In fact, Armenia functions as a transit point for Iranians establishing a connection with Syria and Lebanon. The Assad regime in Syria is backed by Russia, which is again fighting a battle with Ukraine. Russia, Iran, and China, all of them stand to gain more by giving outside support than actively participating in the war.
The only plausibility is Egypt and Turkiye. Egypt drawn into a war is a cause of concern as it plays a pivotal role in the global supply chain because of its control of the Suez Canal. The economy is further going to take a hit, with more than one million Palestinians waiting to enter Egypt. Egypt is the world’s largest importer of wheat bulk of which used to come from Russia and Ukraine. The Russia-Ukraine war has pushed up the price of wheat, and Egypt is reeling under inflation touching 38% in September. With a weak economy and a high debt, Egypt could not afford to fight a war.
For Turkiye, which is still recovering from the impact of the deadly February earthquake, the more pressing need is to contain the Kurdish extremism. Moreover, the Sunni-dominated Arab world will certainly not welcome the aggressive stance of the once-dominant Ottoman Empire.
With President Biden’s visit and the likely easing of the movement of aid and people across the Gaza-Egypt border, the flare-up can be contained. Also, the US and Venezuela agreed on a deal that will ease US sanctions on Venezuelan oil. With a slowing down demand in China and more oil hitting the world market, the price of oil may not cross the danger limit. The market is signalling this as well. Thanks to strong corporate earnings, both the US and the Indian stock markets are so far steadfast. The headline index Nifty fell only 0.7% on the day the market opened after the Hamas attack on 10th October, but ever since then the stock market has been resilient. The oil price has still not crossed the September high number. September wholesale price index (WPI) number shows it continued to fall for six straight months in a row in India. The Indian economy is still holding strong, and let us hope that the emergence of a polycrisis derail this. (IPA Service)
(Nilanjan Banik teaches at Mahindra University, Hyderabad).