The Influence of the Israel-Hamas War on India and the Global Economy
Oct 16, 2023
In the wake of escalating conflict in Israel, it’s an alarming concern for various Indian companies that have operations in Israel are otherwise exposed to the war-hit country. This evolving situation heightens existing geopolitical tensions intensified by the Russia-Ukraine war, causing significant market uncertainty.
In 1992, India's trade relationship with Israel was valued at $200 million. Jumping to 2023, and this economic partnership has skyrocketed to an impressive $10.1 billion, positioning Israel as one of India's key trade allies in Asia and the 7th largest worldwide. Around 300 Israeli companies have chosen to invest in India, highlighting the strength of their economic connections.
India's proximity to Israel is evident, ranking as the third-largest trade partner in Asia and the 10th largest globally. This robust bilateral trade spans various sectors, including pharmaceuticals, agriculture, water, IT, and telecom, as reported by the Ministry of External Affairs.
India exports products like precious stones, chemical goods, and textiles to Israel, while Israel exports pearls, diamonds, chemical products, machinery, electrical equipment, petroleum oils, defence equipment, machinery, and transport equipment worth $2.3 billion to India. India primarily exports petroleum products to Israel, accounting for 1.8% of its total merchandise exports. India's gem and jewellery exports to Israel exceeded $1.2 billion in the previous fiscal year and this conflict could adversely impact the trade of gems and jewellery between the two countries.
In the fiscal year 2022-23, Indian merchandise exports to Israel reached $7.89 billion, with Israeli exports to India totalling $2.13 billion, resulting in a total trade volume exceeding $10 billion. India also has substantial investments in Israel, with cumulative overseas direct investment reaching $383 million by May 2023. Major Indian corporations like TCS, State Bank of India, Jain Irrigation, Sun Pharma, Infosys, Tech Mahindra, Adani, and Wipro have made acquisitions and investments in Israel, and consequently, the war has impacted the shares of 14 Indian companies in Israel’s stock market.
In 2022-23, Indian pharmaceutical exports to Israel surged to $92 million, a $60 million increase from the previous year. The ongoing conflict may drive up demand for essential pharmaceuticals in both Israel and the Palestinian territories, strengthening pharmaceutical ties between India and the region.
However, this flourishing trade faces substantial risk if operations at Israel's major ports - Haifa, Ashdod, and Eilat are disrupted. These ports handle vital goods that India heavily relies on, and the extent of this impact depends on the conflict's duration and severity. The ongoing Israel-Hamas conflict introduces uncertainty to the Middle East's geopolitical stability, affecting not only the global economy but also India's strong trade ties and dependence on crude oil. It's not just a regional concern; it has the potential to significantly impact various countries worldwide, including India.
Elevated crude oil prices and increased inflation
The ongoing conflict has quickly driven up oil prices, and this is a major concern for India, the third-largest global importer of crude oil. Such price hikes can lead to increased costs across the board, triggering inflation and hindering economic growth. Oil prices gushed by over 4% following unexpected Hamas attacks on Israel, the most extensive and violent in decades, raising concerns about heightened Middle East tensions, where nearly a third of global oil supply originates.
These geopolitical tensions in the Middle East could further elevate oil prices, potentially causing a prolonged reduction in oil supply and adversely impacting India's economy. This surge could also exacerbate challenges in various sectors already grappling with rising energy costs. It could also fuel inflation, which, while on a declining trend, remains well above the Reserve Bank of India's upper limit of 6 per cent.
With the breakout of the war, Brent crude rose 3.44% to $87.49 a barrel, while US West Texas Intermediate crude increased 3.85% to $85.98 a barrel. While the recent events in Israel don't immediately threaten the oil supply, there is a risk that the conflict could escalate into a more destructive proxy war, potentially involving the US and Iran, demanding close attention amid the current 'higher for longer' interest rate scenario. Any retaliatory action against Tehran, amid reports of its involvement in the attacks, could jeopardize vessel passage through the Strait of Hormuz, a vital route previously threatened with closure by Iran.
Rising crude oil prices are reigniting concerns about global inflation. Major economies like the United States, India, and China, which heavily import oil, could face increased import-driven inflation if oil prices stay high. This surge in energy costs for industries and households can drive overall inflation. High energy prices and new inflationary trends might thwart central banks' efforts to control inflation, potentially leading to prolonged elevated interest rates. This worries investors, as the possibility of rate hikes peaking and central banks considering rate cuts appears dim, affecting the global economic growth outlook.
Impact of surging crude oil price on India:
The rise in crude oil prices significantly impacts the Indian economy in several ways. Firstly, India, being a major crude oil importer, faces an increased cost of oil imports, potentially leading to a trade deficit. This puts pressure on the country's current account balance as more funds are directed towards oil imports.
Secondly, elevated oil prices result in higher fuel costs, triggering inflation. The increased transportation and production expenses lead to elevated prices for goods and services across the economy, affecting both consumers and businesses. This can hinder efforts to control inflation, which has been a priority.
Additionally, the Indian government often subsidizes fuel prices to shield consumers from the full impact of rising oil prices. Sustained high oil prices might necessitate increased subsidies or the absorption of some price increases, potentially leading to a higher fiscal deficit.
Moreover, surging oil prices can exert pressure on the Indian rupee as India pays for oil imports in dollars. This can lead to increased demand for dollars, potentially weakening the rupee against the dollar, as observed in FY23.
Higher export prices
The Israel-Hamas conflict may impact Indian exporters sending goods to Israel, potentially resulting in higher insurance premiums and shipping costs, but it's unlikely to affect trade volumes unless the conflict escalates. The Global Trade Research Initiative (GTRI) suggests that Indian firms exporting to Israel might face increased risk premiums from India's ECGC, impacting merchandise exports. However, the extent of this impact largely depends on the duration and intensity of the conflict.
India's trade with Israel in 2022-2023 is estimated at $12 billion, with merchandise exports at $8.4 billion and imports at $2.3 billion, resulting in a merchandise trade surplus of $6.1 billion. Key exports to Israel include diesel and cut and polished diamonds, while imports comprise rough diamonds, electronics, telecom components, potassium chloride, and herbicides.
The two countries also engage in IT services, and R&D collaborations in agriculture, water technology, and renewable energy. They are popular tourist destinations for each other and cooperate in the medical sector. Negotiations for a free trade agreement are in progress, and several prominent Indian companies have a presence in Israel.
Israeli companies have invested $286 million in India, contributing to renewable energy, real estate, water technologies, and R&D centres. While the conflict may introduce challenges in the short term, the long-term partnership between India and Israel across various sectors remains robust.
International trade experts suggest that the conflict may reduce the profits of domestic exporters but will not impact trade volumes unless a full-scale war ensues. India exports a range of IT services to Israel, engages in strong R&D collaboration in agriculture, water technology, and renewable energy, and serves as a popular tourist destination for Israelis. Both nations are negotiating a free trade agreement, and Indian companies have a notable presence in Israel. Israeli firms have made significant foreign direct investments in India, particularly in renewable energy, real estate, and water technologies, and are establishing R&D centres and production units in the country.
The Israel-Hamas conflict has sent shockwaves through equity markets, prompting investors to seek refuge in safe-haven assets. Global markets exhibit a risk-off sentiment, with US stock futures declining, Asian markets trading lower, and gold prices surging by over 1%. This geopolitical turmoil has also led to a rise in the US dollar and Japanese yen. Analysts emphasize caution, suggesting that investors wait for unfolding developments before taking significant risks. Foreign institutional investors are continuously selling due to higher bond yields and escalating crude oil prices, adding to market concerns.
In the Indian stock market, analysts do not foresee an immediate major impact, but the situation remains unpredictable. The potential involvement of other actors, like Iran, is a significant concern, as it could lead to a sharp increase in crude oil prices. From a technical perspective, the Nifty 50 is in a critical demand zone within the 19,300-19,250 range, and until it stabilizes, it may remain in a sideways pattern. A breach below 19,250 could trigger a healthy correction. Short-term traders are advised to exercise caution, while long-term investors may find potential buying opportunities in a substantial correction.
While there is no instant cause for panic in the Indian stock market, its performance will be closely linked to global market dynamics. As the earnings season begins and state elections approach, the market will closely monitor corporate reports and management commentary to gauge the trajectory going forward.
Influence on different branches of the economy
The recent outbreak of war has had a profound impact on various segments of the economy. Stock indexes, despite Columbus Day being a federal holiday, have taken a hit with S&P Futures and Dow Futures down by over half a percent, and Nasdaq Futures down by more than seven-tenths of a percent.
Gold and silver prices are on the rise due to geopolitical tensions in the Middle East, particularly the Israel war outbreak. Investors are turning to precious metals like gold and silver as uncertainty in other assets, such as equities, mutual funds, and bonds, prompts a shift in investment, driving up their prices. Israel's situation is a significant trigger for these metals in the near term.
The Gem & Jewellery Export Promotion Council (GJEPC) has voiced concerns about the escalating Israel-Hamas conflict, highlighting that India's gem and jewellery exports to Israel exceeded $1.2 billion in the previous fiscal year.
In the realm of individual stocks, some companies with significant military contracts, like Lockheed Martin Corporation, RTX Corporation, and Northrop Grumman Corporation, have seen their shares surge by nearly 5% and 4%, respectively. Oil prices have climbed over 3% to reach $87.21 a barrel, with petroleum companies such as Occidental Petroleum Corporation experiencing similar gains. This surge is attributed to concerns over potential oil sanctions or supply constraints in the Middle East due to the conflict.
Cryptocurrencies, on the other hand, are experiencing a decline across the board, although Bitcoin and Ethereum are faring relatively better with losses of less than 2%. Meanwhile, some altcoins, including XRP, Solana, and Shiba Inu, have plummeted by more than 4%.
he airline industry has not been spared, as several airlines, including U.S. carriers like Delta, United, and American Airlines, have cancelled flights to Tel Aviv, leading to stock prices dropping by over 2% in premarket trading. This decline is likely linked to concerns about rising oil prices affecting the airlines' profitability.
Further escalation of the war could negatively impact the Indian economy and severely concern domestic stock market investors. Global markets are monitoring the conflict for potential spread, especially to Saudi Arabia, initially expecting a limited scope and impact on oil prices, but also anticipating higher volatility.