Israel-Hamas War: How does war affect the Economy of India?

The global economy hasn’t even started healing from the Russia-Ukraine war that began last year, and now the Israel-Hamas conflict presents a new challenge. 

The International Monetary Fund (IMF) predicts that global growth will slow down, dropping from 3.5% in 2022 to 3% in 2023 and further to 2.9% in 2024, which is lower than the historical average of 3.8%. 

The Israel-Hamas war, following the Russia-Ukraine conflict, adds to the uncertainty and anxiety worldwide, affecting people’s willingness to take risks. It’s a challenging time for the global economy.

How can Israel-Hamas war impact the Indian economy?

The Israel-Hamas war can impact the Indian economy in several ways. Here are a few major factors that can affect the Indian economy if the Israel-Hamas war is prolonged for longer.

I. Crude oil prices

While India managed high oil prices after the Russian-Ukraine war by seeking out cheaper Russian crude, this time the Israel-Hamas war could affect West Asia, home to major oil producers like Iran and Saudi Arabia.

If the conflict widens, oil prices may initially increase by 56%-75%, reaching between $140 and $157 a barrel, as per the World Bank. 

India imports around 1.6 billion barrels of oil annually. So, for every dollar increase per barrel, it costs us ~$1.6 billion. If oil prices rise by $25, India would have to spend an additional $38 billion on oil imports, which is about 1% of the GDP, according to an Indian economist.

II. Depreciating Rupee

A weaker rupee can lead our exports to become more expensive, which might lead to higher inflation here and affect consumer spending during the festival season. 

This higher inflation makes it unlikely for the RBI to lower interest rates, which would have made consumer loans cheaper. 

The weak rupee is mainly due to:

(i) Growing trade deficit due to rising oil prices.

(ii) Declining imports of goods and services.

High crude oil prices harm India by affecting its currency stability, worsening the financial deficit of govt., impacting sectors like aviation, paints, tyres, chemicals, and more. 

Since India pays for oil imports in dollars, a higher oil bill increases the demand for dollars, making the rupee weaker against the dollar.

III. Trade

India, a net importer of crude oil, relies on imports for about 85% of its energy needs and might have to pay more for oil if global prices keep going up. 

This can create a trade deficit because India will spend more on oil imports, which can strain its current account balance.

If the Israel-Hamas conflict involves countries like Iran, a major oil producer, it has the potential to disturb global trade and the economy.

IV. Inflation

If global oil prices go up, it can make fuel more expensive and cause inflationary pressures. 

The RBI believes that ongoing price increases can reduce overall demand and spending as people and businesses will have less disposable income to spend on things other than energy.

Sudden shifts in oil prices can also affect how prices and wages are set in the economy by changing what companies and people expect about inflation. As a result, economic activities can slow down due to the effects of such an unexpected change.

V. Falling Stock Markets

If you’ve been following the stock markets, you might have noticed that they fell for more than a week in October. This happened during the initial days of the Israel-Hamas attack, causing panic among investors and causing them to withdraw their money, especially from emerging markets. 

However, the markets recovered when there was hope that the conflict would stay limited to Gaza. Now, Indian markets are experiencing volatility again. 

One of the main reasons for India’s strong economy is that while the real estate market is declining in other countries, in India it went through a 10-year slump and is now beginning to improve.

India performed relatively well after the COVID pandemic, with a growth rate of 7.8% in the previous fiscal year. 

However, the biggest question now is how the country will sustain this growth, especially given the current geopolitical developments. Many agencies estimate India’s growth in the current fiscal year to be close to 6%, but with ongoing wars and uncertainty, it’s not guaranteed. 

While India successfully handled the COVID pandemic, human conflicts like war present a different kind of challenge.

Written By Shivani Singh

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