How Israel-Hamas Conflict Could Impact Indian Economy: An Overview
How Israel-Hamas Conflict Could Impact Indian Economy: An Overview

The ongoing conflict in the Middle East between Israel and the Palestinian group Hamas has raised significant concerns about its potential impact on the Indian economy. This geopolitical strife, which erupted earlier this month, has introduced fresh global challenges, including a notable increase in international crude oil prices, which have surged by over 5 percent. Concurrently, US bond yields have surpassed the 5 percent mark, reaching their highest levels in 16 years.

India, a net importer of crude oil, is particularly sensitive to these developments. While the nation currently enjoys macroeconomic stability, it faces a significant risk—supply disruptions in crude oil prices due to the escalating war, which could trigger a spike in oil prices. If Iran, a major supporter of Hamas, were to become involved in the conflict, it could further escalate international crude oil prices and exert selling pressure in the market.

To gain a deeper understanding of the potential domestic repercussions, it is essential to examine how the Israel-Hamas conflict may impact the global economy.

Impact on the Global Economy
The conflict's implications for the global economy are already becoming evident. Key oil producers such as Saudi Arabia and Russia have announced substantial oil supply cuts, totaling 1.3 million barrels per day, continuing until the year's end. This has resulted in a global oil market deficit.

With oil prices now hovering above the $90 per barrel threshold, concerns are growing about the potential expansion of the conflict to affect other Middle Eastern oil-producing nations. This is especially worrisome given the current global economic scenario, characterized by "higher for longer" interest rates.

The stability of oil supply remains relatively secure unless the conflict spreads to involve other countries in the region and evolves into a proxy conflict between the United States and Iran. Shantanu Bhargava, Managing Director and Head of Discretionary Investment Services at Waterfield Advisors, explains, "Brent had crossed the $90 mark but then retreated. Now, we can use the $90 number to be the threshold beyond which there is trouble for the world economy."

Rising oil prices not only impact the cost of production for various industries but also lead to higher energy costs for businesses and households. This, in turn, drives global inflation upwards. Elevated energy prices and new inflationary trends could hamper the efforts of central banks to manage and reduce inflation.

Consequently, central banks worldwide may continue to raise interest rates, potentially slowing down global economic growth.

High Import Bill and Wider Current Account Deficit
For India, which relies on imports to fulfill approximately 85 percent of its energy needs, the implications are profound. If international crude oil prices continue to rise throughout the year, India could face a more substantial import bill. This, in turn, could result in a trade deficit, placing additional pressure on the country's current account balance. The higher costs of importing oil can have far-reaching consequences for India's economic stability and its trade position.

As the Israel-Hamas conflict unfolds and its economic ripple effects become more apparent, it's clear that the Indian economy, as well as the global economy, will continue to face significant challenges. Vigilance and prudent economic management will be essential to navigate these uncertain times.

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