Anxiety Over Israel-Iran Escalation; Implications for Energy, Fertilizer Prices, Shipping, And US Presidential Elections, India Faces Export Declines
As the conflict between Israel-Iran continues to simmer, uncertainty hangs over the region and the world. Repeated attacks are likely to continue its show of strength the ongoing cycle of retaliation between Israel and Iran-backed forces is unlikely to ease in the short term, with each side seeking to assert dominance.
Israel-Iran Crises, A Global Concern as Escalation Looms
Policymakers and global corporations are keeping a wary eye on the escalating conflict in the Middle East, which has already led to significant geopolitical, economic, and humanitarian impacts.
The situation, which began with a major attack by Hamas on Israel on October 7, 2023, has grown into a broader conflict that threatens to spiral even further out of control, affecting energy prices, global shipping, and regional stability.
Rising Tensions and Escalation
The conflict between Israel and Hamas has seen a steady escalation since it started.
Israel’s air and ground operations in Gaza have resulted in more than 40,000 deaths, nearly two million displaced, and significant damage to property and infrastructure.
The humanitarian crisis is severe, with widespread food shortages and a healthcare system on the verge of collapse. International efforts led by countries like the US, Egypt, and Qatar to broker a ceasefire have so far failed.
Israel remains focused on degrading Hamas’ military and governance structures, while Hamas insists that any ceasefire must be permanent.
Amidst this, around 100 Israeli citizens remain hostages since the initial Hamas attack, with little clarity on how many are still alive.
Israel’s actions have sparked growing anger and criticism worldwide, with South Africa appealing to the International Court of Justice and the International Criminal Court considering arrest warrants for Israeli leaders.
Despite these developments, support for Israel remains strong, particularly in the US and some European countries, although opposition is mounting within the Democratic Party, among Arab and Muslim communities, and sections of the Jewish population.
Boiling Point
The conflict has expanded beyond Gaza, with significant escalation along the Israel-Lebanon border.
Hezbollah’s sustained rocket attacks have triggered Israeli air and ground responses, displacing 70,000 Israelis in the north. In retaliation, Israel has successfully eliminated several high-ranking Hezbollah leaders, a feat it failed to achieve during a similar conflict in 2006.
This has further fueled tensions, as Israel targeted Iranian supply routes and officials coordinating with Hezbollah in Syria and Lebanon.
Iran’s response has been swift and severe.
The killing of top Iranian Revolutionary Guard officers in Damascus led to a dramatic escalation in April when Iran launched drone, cruise, and ballistic missile attacks on Israel.
While much of the attack was thwarted by US, UK, and Israeli forces, Iran’s aggressive stance signaled its determination to respond to any perceived violations of its sovereignty, especially after Israel killed Hamas leader Ismail Haniyeh in Tehran in July.
Regional and Global Economic Consequences
The conflict is reverberating far beyond the Middle East. The strategic Strait of Hormuz and the Red Sea, vital waterways for global energy and trade, are under increasing threat.
The US, heavily involved in both the Russia-Ukraine conflict and growing tensions in the Indo-Pacific, is facing pressure to curb escalation in the Middle East.
President Biden, who campaigned on reducing America’s military engagements abroad, now finds himself in a complex balancing act. While there is strong domestic support for Israel, his administration must navigate delicate diplomatic relations, especially as rivals like Russia and China are closely watching for any signs of US weakness or overstretch.
Potential Impact on India With Escalating Middle East Tensions
The ongoing geopolitical tensions in the Middle East are casting gloom over India’s economy, with wide-ranging consequences that extend to the stock market, energy costs, and trade.
The crisis, particularly the conflict between Israel and Iran, has already caused ripples across global markets, pushing gold prices to record highs and spurring a sharp rise in crude oil prices.
Stock Market Reaction
India’s stock market witnessed a steep decline on October 3, as investors reacted to the escalating tensions. The Sensex plummeted by 1,832 points to 82,434, while the Nifty dropped 565 points to 25,231.90.
The Middle East conflict is seen as one of the key drivers behind this market turbulence, compounded by SEBI’s tightening of futures and options trading norms.
Market analyst Prashanth Tapse of Mehta Equities noted that the plunge was driven by broad-based selling pressure. Concerns about foreign investors pulling out of emerging markets like India, combined with rising exposure to Chinese markets following their recent stimulus measures, contributed to the downward spiral.
Investors are increasingly alarmed by the situation in West Asia, leading to a risk-averse stance.
Crude Oil Prices and Inflationary Pressures
One of the most significant concerns for India, as the world’s second-largest importer of crude oil, is the potential for rising oil prices.
The Middle East crisis, particularly the escalating conflict between Israel and Iran, threatens to push global oil prices higher, which could stoke inflationary pressures in India and increase its import bill.
Crude prices had recently dipped to a three-year low but have been climbing steadily, now hovering around $75 per barrel.
The Reserve Bank of India (RBI), which is set to hold its Monetary Policy Committee meeting from October 7 to 9, will likely focus on these developments as it continues to battle inflation.
A report from QuantEco Research highlighted the need to closely watch global crude prices, noting that any further escalation in the Middle East could see oil prices rise beyond the RBI’s fiscal projection of $85 per barrel.
While India has diversified its oil imports by purchasing significant amounts from Russia, it remains heavily reliant on Middle Eastern supplies.
India’s total imports in FY24 amounted to $675 billion, and its oil bill alone stands at $180 billion, making any surge in crude prices a major economic challenge. However, some experts, like Prathamesh Mallya from Angel One, suggest that a build-up in US crude inventories could provide some temporary relief.
Gold Prices Surge Amid Uncertainty
Gold, often seen as a safe haven during times of geopolitical and economic uncertainty, has also surged in response to the Middle East tensions.
The involvement of Iran in the conflict between Israel and Lebanon has raised fears of a wider regional war, pushing investors towards gold. As of October 3, gold prices in India had risen to Rs 76,250 per 10 grams, an increase of 2% over the past 10 days.
Market analysts are forecasting further increases in gold prices, with projections that it could reach Rs 78,500 to Rs 80,000 in the short term. The growing uncertainty in West Asia is likely to continue driving demand for gold, as investors seek stability amidst the turmoil.
Impact on Exports and Logistics
Indian exporters are also feeling the effects of the Middle East conflict, particularly due to rising logistics costs.
The disruptions in key shipping routes, such as the Suez Canal and the Red Sea, have forced vessels to take longer routes around the Horn of Africa, resulting in a 15-20% increase in shipping costs.
This is squeezing the profit margins of industries that rely on exporting low-end engineering products, textiles, garments, and other labor-intensive goods.
The commerce ministry and exporters are closely monitoring the situation, with concerns that rising logistics costs could further strain India’s trade.
According to a report from the Global Trade Research Initiative, industries that depend on high-volume, low-value exports are likely to face significant challenges in the coming months.
India’s trade with countries directly impacted by the conflict has already been affected – Exports to Israel have dropped by 63.5%, while Jordan has seen a 38.5% decline, and Lebanon’s exports have fallen by 6.8%.
As the conflict continues, these disruptions are expected to worsen, posing additional risks to India’s export-driven industries.
The Last Bit, As the Middle East crisis unfolds, India faces a range of economic challenges, from rising energy costs and inflation to disruptions in exports and logistics.
The situation remains fluid, and much will depend on how the geopolitical tensions evolve in the coming weeks still policymakers and businesses alike are bracing for further uncertainty, with the hope that a resolution can be reached before the economic fallout becomes even more severe.
