As the Hamas-Israel conflict enters its second week, the world watches with apprehension, pondering its potential economic ramifications. While it might be too early to predict the full extent of the impact on the global economy, India finds itself in a precarious position, primarily due to its heavy reliance on oil imports. Approximately 86 percent of India’s oil needs are fulfilled through imports, and the recent surge in oil prices could significantly affect its economy. Over the past year, India has increasingly turned to Russian oil imports, which have helped stabilize the nation’s inflation rates. From April to July 2023, India’s oil imports from Russia saw a staggering 126.94 percent increase, underscoring Russia’s growing influence on India’s oil landscape. However, the majority of India’s oil still comes from West Asian suppliers like Iraq, Saudi Arabia, the United Arab Emirates, the US, and Kuwait, which collectively cost India more than USD 20.7 billion during the same period. It is uncertain whether Russia can maintain its export prices if global oil prices continue to rise. India’s persistent inflation woes have taken a toll on the common man’s finances, leading to reduced savings rates. Recent data from the central bank revealed that net household financial savings have dropped to 5.1 percent of the country’s GDP, the lowest since 1976-77. If rising oil prices, trade deficits, reduced remittances from West Asia, declining foreign direct investment, and a weakening rupee persist, India’s economic growth, which was projected at 6.3 percent for FY24 by the International Monetary Fund (IMF), could be further jeopardized.
The IMF’s latest World Economic Outlook report, released shortly after the Hamas-Israel conflict began, did not account for the situation in West Asia and its potential consequences on the world economy, including India’s. This conflict has the potential to escalate into a regional war, involving sympathizers of Palestine and Hamas from the Arab world and Israel’s strong allies such as the US, the UK, and European Union members. A prolonged conflict could result in higher oil prices, increased inflation, and heightened economic uncertainty, adding new risks to the fragile global economy, already impacted by the Covid-19 pandemic and the Russia-Ukraine war. The IMF’s Chief Economist, Pierre-Olivier Gourinchas, has warned that a broader West Asian conflict could trigger an energy-supply shock, causing oil prices to rise, inflation to surge, and economic growth to decline. The IMF research indicates that a 10 percent increase in oil prices can reduce global economic growth by 0.15 percentage points. While oil prices have surged since the conflict’s outbreak, Gourinchas believes these increases may be temporary.
The effectiveness of the IMF’s economic growth forecast for India in 2023-24 will depend significantly on how the Hamas-Israel conflict unfolds. Israel’s efforts to combat Hamas, with support from its allies and sympathizers in the Arab world, could further escalate the situation. The potential for a united Arab front in support of Hamas may intensify the conflict and affect energy production in West Asia, driving up global oil prices. India, despite not being a direct party to the conflict, is vulnerable due to its dependence on oil imports, and its economic health hinges on the outcome of this crisis. The global economy remains on edge, and the consequences of a protracted conflict in West Asia are still uncertain. India, along with the rest of the world, must closely monitor the situation, adapt to changing circumstances, and prepare for potential economic challenges in the months ahead.
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