Israel & Palestinian War - The Impact on Inflation
The ongoing war between Israel and the Palestinian terrorist group Hamas has shown a shadow of uncertainty over the Indian economy. Given, its dependency on crude oil and its strong trade ties with Israel. Domestic stock market investors are already scared by the ongoing conflict, with experts saying that any further escalation could negatively impact the broader Indian economy. One of the immediate impacts of this conflict is the surge in oil prices. This hits India hard because it's the world’s third-largest importer of crude oil. As the crude oil prices surge, the threat of high inflation grasps the global economy again. The United States, India, China, and other major economies are big importers of oil and can see high import inflation if the oil prices remain elevated.
When oil prices rise, the cost of production for various industries and energy costs for businesses and households also surge, driving inflation higher.
Major exports from India to Israel include precious stones and metals, chemical products, and textiles. On the other hand, major exports from Israel to India include pearls and precious stones, fertilizer products, machinery and electrical equipment, and petroleum oils. As Israel is a leader in medical innovation, Indian hospitals import medical equipment and technology from Israel, and Israeli companies invest in Indian healthcare startups. Both nations are also negotiating a free trade agreement.
So, any escalation in the conflict between Israel and Hamas could disrupt the trade between these two nations, affecting a broad spectrum of industries. As Israel is a significant trade partner for India, the Israel-Hamas conflict isn't just a regional issue that impacts the Middle East. But the further escalation could have a drastic impact on several countries around the globe, including India.
High energy prices and new inflationary trends could undermine the efforts of central banks to bring inflation under control. This can see interest rates at an elevated level for a prolonged period. Therefore, the rupee depreciation is a distinct possibility that will require RBI action. The currency range will shift upwards to the ₹83-84 bracket in such a case. The recent activities do not have any immediate impact. However, it can create supply-side problems if the conflict escalates.
India’s exports to Israel account for 1.8% of India’s total merchandise exports led by petroleum products. Israel buys around $5.5-6 billion of refined petroleum products from India. In FY23, India’s total exports to Israel stood at $8.4 billion. In FY23, India’s imports from Israel were at $2.3 billion. Indian exporters shipping goods to Israel may face higher insurance premiums and shipping costs due to the Israel-Hamas conflict, which may reduce the profits of domestic exporters but will not impact trade volumes unless war escalates.
Fortunately, so far there is no report of port disruption. India-Israel bilateral services trade is estimated to be around $ 1.3 billion. It may have no impact unless war escalates to involve bigger parts of Israel. The real impact would depend on the duration and intensity of the war. However, High inflation remains a major risk to macroeconomic stability and sustainable growth and the latest escalation between Israel and Hamas may unravel the hard work done so far by the apex bank towards keeping inflation in check.
Kautilya, IBS Mumbai.