India Faces Severe Risk: Iran-Israel Conflict Threatens Energy Supplies and Currency Stability
India Exposed to Global Risk Due to Iran-Israel Conflict
The ongoing conflict between Iran and Israel has introduced a fresh risk factor for India, exposing vulnerabilities despite minimal direct trade ties. Analysts at Bernstein have identified this as a major concern, particularly given the significant dependencies of India’s energy imports on regional trade routes.
India’s Limited Trade Ties with Israel or Iran: A Vulnerability
Contrary to the extensive implications of its involvement in the conflict, India has reportedly maintained minimal direct trade ties with either Israel or Iran. According to Bernstein, India’s trade volume with these nations stands at around $4 billion and $1.6 billion respectively. It is significant that crude imports from Iran, valued at a substantial $12 billion in FY19, have ceased completely due to sanctions imposed on the country.
Strategic Vulnerabilities: The Strait of Hormuz
A major concern for India revolves around the strategic choke point of the Strait of Hormuz, where over 20% of global oil supply navigates through its waters. It has been estimated that nearly 70% of India’s crude oil imports and nearly 50% of its natural gas imports rely heavily on this route. Bernstein warns about possible disruptions here and their potential to cause severe supply shocks.
Iran’s Threats, Global Supply Implications, and Oil Prices
Iran’s recent threats to block the Strait of Hormuz have sent shockwaves globally, with oil prices surging 16% in ten days, rising from $60 per barrel to nearly $75 per barrel. Such spikes are not unprecedented; major disturbances like Russia-Ukraine war and US invasion of Iraq caused prolonged price hikes. Bernstein warns that prolonged conflict could propel crude above the $100-per-barrel mark.
India’s Limited Alternatives
India faces numerous challenges with little access to alternative oil routes. Saudi Arabia and UAE have pipeline capacities sufficient for their nations but insufficient for broader regional needs. As such, India must continue relying on the Strait of Hormuz, even though imports from Iraq, Qatar, Bahrain, and Kuwait—accounting for 28% of crude and around 42% of natural gas—are heavily reliant on this route as well.
Impact on India’s Current Account Deficit and Currency Stability
Further, higher crude prices would significantly strain India’s current account deficit (CAD) and pose risks to currency stability. The rupee has already weakened against the dollar, reaching nearly 86 Indian Rupees, and further depreciation toward 88 remains possible. Bernstein predicts that sustained $10 price increase in one quarter could add around 0.11% of GDP to CAD.
Challenging India’s Defense Procurement
Besides economic risks, the conflict may also present difficulties for India’s defense procurement programs. Given potential domestic disruptions affecting Israeli trade exports, India is likely forced into sourcing non-Israeli supplies, potentially straining public sector units (PSUs). Airspace restrictions further compound problems as carrier flights via Pakistani airspace cause increased costs.
Macroeconomic Fundamentals
Despite all these concerns, Bernstein acknowledges that India’s brief macroeconomic stability has been maintained through favorable inflation forecasts and recovering domestic demand. This stability, combined with a controlled inflation policy, maintains the forecasted year-end target of 26,500 for Nifty but also warns that prolonged geopolitics may strain this outlook by propelling imported inflation and further depreciating currency values.
Conclusion
The ongoing conflict between Iran and Israel poses significant risks to India’s economy despite its minimal direct trade ties with either party. With the key regional trade route impacted, and no immediate alternatives at hand for accessing global oil supply, risks of severe disruptions in supply are imminent. While current estimates suggest that India’s macroeconomic stability remains supported by favorable growth predictions, prolonged geopolitical uncertainty poses a real threat to future currency strength and balance of payments.
