Why India Is Resilient Directly To Hamas-Israel Conflict, Russia-Ukraine War, But Faces Spillover Impacts – Analysis

The peculiarity of Hamas-Israel war is that unlike other wars or conflict, India is not directly impacted by the war. It is the spillover impact, which causes concern for India.

Israel is not a major trading partner or a major foreign investor in India. Nor is Palestine. Israel accounts for less than 2 percent of India’s total trade. Trade between India and Palestine is not conducted directly. It is through Israel. Therefore, comprehensive trade statistics with Palestine are not available. However, according to an estimation by the Ministry of External Affairs, India-Palestine bilateral trade was US$ 67.7 million in 2020.

Nevertheless, the war will take a turn for the worse if Arab world joins the war. Arab nations are important economic allies to India. It is oil that brings India closer to the Arab world. Given this, an oil crisis could emerge as an important impact and deterrent to the economy. Currently, the Arab world supplies more than 55 percent of India’s total import of crude oil. India is an oil import dependency nation. More than 90 percent of crude oil requirements are met by imports. Import dependency is inelastic due to the paucity of oil minerals domestically.

Another important fallout of the spillover impact of the war on India is the religious schism among Muslims, viz, Sunni and Shia. This could play an important role in stoking an oil crisis, if Arab world joins the war. A larger share of crude oil that is imported from Arab world is from Sunni dominated nations. For instance, Saudi Arabia, Kuwait and UAE are the major suppliers of crude oil and they are Sunni dominated Muslim populations.

Since Palestine is a Sunni dominated population (nearly 98 percent) , logically the possibility of the Arab world joining a war could cause a threat to oil crisis in India.

Oil accounts for biggest share of imports into India. Nearly one-fifth of India’s total imports is accounted by crude oil imports. Concurrently, this has a ripple impact on BOP (Balance of Payment). As and when oil prices hikes, the trade deficit widens. An escalating trade deficit is headwind to current account balance. Whenever the trade deficit widens, the current account imbalance swells. This leaves mounting pressure on foreign exchange reserves.

Nevertheless, there is solace amidst the threat to Indian economy due to the Hamas-Israel war. Even though concerns are looming large over global oil crisis due to war, Russia-Ukraine war may emerge as a major insulation to India’s oil crisis.

Since the outbreak of the Russia-Ukraine war, oil imports into India from Russia surged. It increased by 72 percent in 2023. It accounted for 16 percent of total crude oil import by India, from merely 2 percent in the previous year. The benefit reaped from Russian crude oil import was a major saving in foreign exchange reserves due to the discounted price offered to India.

During the first 9 months of 2022-23, Russia crude oil was priced at the cheapest rate. The average import price of oil from Russia was $87.7 per barrel, as compared to US$101.5 per barrel from Saudi Arabia, US$95.4 per barrel from Kuwait and US$92.6 per barrel from Iraq. This attributed to a savings of foreign exchange of US$3.6 billion in 2022-23. It also favourably impacted pricing of oil refinery products, which had a cascading impact on inflation. During the major part of the war year, petrol and diesel prices were rarely hiked in India .

Concerns mounted with Iran in the forefront to join the war. But, India stopped importing oil from Iran after USA sanctions four years ago.

Threats loom large with Egypt joining the war. If Egypt joins the war, concerns are raised over the blockage the of Suez Canal. With war razing Egypt, fears have mounted over the transhipment of India’s merchandise trade. The Suez Canal is vital for India to trade with USA, EU and Latin America. It is about 7,000 km shorter than the Cape route to link Asia and the west. Annually, about US$200 billion worth merchandise trade or 20 percent of India’s total trade, is routed through Suez Canal. This means any blockage of Suez Canal due to Egypt joining the war could cause a major dent to India’s supply chain and exports.

Concerns are also raised over the fate of thousands of Indians working in the Middle East, if the war breaks. Nearly 66 percent of NRIs abroad are in Gulf countries. Most of these are employed in construction related infrastructure, petroleum and petrochemical industries.

To this end, the major issue awaiting the spillover impact on India is whether the Arab world joins the war. So far, the salvo of threat, thrown by Arab world, to join the war is in the air. More than 20 days have passed and so far no Arab nation has officially declared war against Israel Even Iran, which has been in the forefront of the conflict, has at least showed a reluctantance to officially declare war.