By Dr. Manoranjan Sharma and Archana Choudhary
In a catastrophic chain of events triggered by the October 7, 2023, attack on Israel killing 1,139 people and many more wounded while 250 Israeli civilians were kidnapped, including 30 children and a subsequent missile attack on Israel on October 6, 2023, Israel launched airstrikes against Iran on October 26, 2024.
In this greatly unsettling and painful scenario, it’s improper to derive a wrong sense of satisfaction, in a manner of “I said so”. This is not the time to score brownie points. But in my views in the public domain (e.g., Iran-Israel Conflagration: No World War III but grim portents abound”, Financial Express, October 5, 2024 ) I averred- and as events later revealed to be prescient and accurate- that any attack on Israel must factor in the certainty, not just the possibility or even the likelihood, of a fierce Israeli backlash in the decision- making calculus.
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Actions have Consequences
Why did I say so? Simply because we are long past the Utopian world, a normative world, where Jesus Christ stressed, “If you forgive others their transgressions, your heavenly Father will forgive you” (Mt 6:14) is passe. Similarly, Mahatma Gandhi said, “If someone slaps you on one side of your face, turn the other one to him.”
In the third millennium, an abject surrender or even a conspicuous absence of counterattack is invariably seen as a sign of weakness, impotence and capitulation. The Srimad Bhagwad Geeta clearly substantiates the thesis that “actions” have “consequences”. This school of thought of attack and counterattack, onslaught and retaliation, thrust and parry has been an integral part of human history across regions, religions and time periods but this incontrovertible fact has acquired greater force and resonance in the present-day world. As Hindi’s most famous poet Ram Dhari Singh Dinkar wrote inimitably about a century ago in his classic work Rashmirathi about the Mahabharata War
“क्षमा शोभती उस भुजंग को
जिसके पास गरल हो
उसको क्या जो दंतहीन
विषरहित, विनीत, सरल हो।”
(Forgiveness is becoming of the serpent that has venom.
Not for the toothless, poison-less, kind, gentle snake.)
What makes it compelling is that Israel is fighting an “existential” war on multiple fronts for the survival of the Jewish nation and the ideas and ideals held dear by the Jewish State and the Jewish people. This comes on the top of the Holocaust and the genocide of European Jews during World War II between 1941 and 1945 in Nazi Germany.
The Challenge and the Response-Strategic Options and Choices
In the aftermath of the October 1, 2024, attack on Israel, I had unequivocally maintained that Israel will retaliate at a time, place and manner of its choosing. I had isolated and identified six options:
- Refrain from taking the escalatory ladder because of the successful repulsion of this attack.
- Launch a retaliatory strike.
- Worst case scenario, where “all hell breaks loose” by attacking Iran’s nuclear program
- Launch a cyber-attack on Iran.
- Eliminate top Iranian leadership
- Devastate Iran’s main ports, particularly the oil terminals which provide most of Iran’s foreign-currency income.
While all these are difficult policy choices fraught with global implications, I maintained that in view of regional dynamics and global spill-overs, an attack on Iranian military installations was most plausible as indeed borne out by the events of October 26, 2024.
Now that this scenario has largely played out on predictable lines, where do we go from here? To my mind, the Israeli attack on Iran was “precise” and “targeted”. But as conceded by Iran, it was also “limited”. Things could have been much worse as unmistakably spelt out in various options open to Israel explored and examined by me. Iran’s response to the unfolding scenario is unfathomable as I write – on the one hand, it claims that the damage was “limited”, on the other hand, it goes on to say that this action calls for a “proportionate” response. Should Iran respond aggressively, Israel would respond even more strongly, and the vicious cycle of war and devastation would go unabated. Reading between the lines suggest that Iran may say “finis” and cease and desist from further action. Hopefully saner counsels would prevail on both sides.
Otherwise, Iran may well play into the hands of Israel and provide Israel an opportunity to strike at the root of Iranian polity, economy and strategy.
These are real and worrisome scenarios of considerable contemporary significance. Such devastating assaults on critical Iranian infrastructure and facilities would set Iran back by several decades, lead to yet another attack on Israel, escalate the Middle Eastern scenario and thus cause extensive concern and consternation because of marked oil price volatility, transforming oil market dynamics, global economic uncertainties, shifting paradigms and evolving shape of the global order.
Inherent Fallacy of Decoupling India Hypothesis
We in India have long believed in the unifying concept of “vasudhaiva kutumbam”, i.e., the world is a family. But the central fact that no country can be an island in the stream has been repeatedly reinforced by tectonic events, i.e., global financial crisis of October 2008 and the Covid19 pandemic which devastated lives and livelihoods across the development spectrum.
Tel Aviv, the epicentre of the conflict may be 4000 kms. away from Delhi but Delhi would sense- loud and clear- the ramifications and repercussions of this gradually spinning out of control development.
Economic Impact on India
With the US standing clearly with Israel, its long-time strategic and military partner, things could deteriorate in the realms of global oil prices, trade and regional stability because there are multiple factors at play in the real world besides the raw physics of production.
At the global level, this flare-up has ignited fears that make the overall situation grim, the recovery ascent difficult and the Fed rate cutting cycle extended. This sabre-rattling has wide-ranging ramifications and repercussions across geographies, economies and sectors with volatility in bond and equity markets albeit temporarily. Bond prices will fall, cost of credit will rise for companies, crude price will rise, and stock markets will fall both because of reduced profitability of the corporate sector and heightened uncertainty.
India’s net oil import bill could widen to $101-104 billion in FY 25 from $96.1 billion in FY 24. A $10/barrel rise in the average crude oil price raises the yearly net oil imports by $12-13 billion, thereby widening the current account deficit (CAD) by 0.3% of GDP.
Oil prices and equity markets could undergo a yo-yo move. A marked reduction in oil supply and consequently surging crude oil prices would raise domestic inflation and interest rates could remain persistently high and “sticky” for long. The disconcerting mix together with the tortuous path to recovery supports the safe-haven dollar and gold.
While surging oil prices in the aftermath of the Iran-Israel war have a cascading macro-economic impact across sectors that could trigger a sell-off, oil-based sectors like automobiles, transportation, aviation, paints, tyres, cement, and chemicals could take the greatest hit. The market could be disrupted by the war-related risk but hopefully, the supply-demand oil dynamics would continue to be largely unfettered. The Indian stocks with an Israeli connection could take a hit. The war could slacken India’s plan of building an India-Middle East-Europe Economic Corridor.
With crude oil output of almost 3 million barrels per day (mb/d) i.e., about 3 % of the global production, Iran is a major oil producer and exporter and more importantly, 20 % of the world’s crude oil supply passes through the Hormuz Strait (60 % of Indian crude supply is accounted for by the Hormuz Strait), there could be a ‘super-spike’ raising crude oil prices per barrel per day raising it from the present level of USD 78 (Brent Crude) to USD 80 and even USD 85, depending on the nature of the unfolding events. This is not as far-fetched as it may apparently seem. For, supply disruptions in Iraq and Venezuela triggered a bull run in oil in July 2008 with oil prices zooming to $145. If major supply disruptions occur in the global oil market, OPEC+ might reduce voluntary cuts and increase production.
India’s energy dependence on the Middle East is still huge. 45 % of India’s crude oil imports come from Gulf Cooperation Council (GCC) and 50 % of LNG comes from Qatar. India’s exports to GCC countries pegged at about $200 billion may also reduce.
The share of Russian oil in India’s August imports declined to about 36% after rising for five successive months. The share of Middle Eastern oil in India’s August crude imports rose to 44.6% from 40.3% in July.
The RBI had projected crude oil prices for India’s basket at $85 per barrel in FY25. The basket witnessed average crude oil prices above $85 a barrel in the first four months of the year. In the tumultuous days ahead, a $10 per barrel increase can raise consumer price index (CPI) by 0.5 percentage points. Accordingly, the RBI may refrain from cutting interest rates.
A Global Trade Research Initiative (GTRI) report revealed that India’s trade with the GCC countries rose by 17.8% cent between January and July 2024 compared to the corresponding period the previous year. India’s exports to Iran also grew by 15.2% during this period.
Logistics, particularly shipping, would feel the heat denting exports because Europe accounted for 21% of India’s overall petroleum product exports in FY 23, and higher shipping costs would constrain spreads of petroleum product exports, impacting the profitability of standalone refiners.
Disruptions in key shipping routes, particularly through the Suez Canal and the Red Sea, have forced vessels to take a longer route, leading to a 15-20 % hike in shipping costs. This has severely impacted the profitability of Indian companies, particularly those exporting low-end engineering products, textiles, garments and other labor-intensive goods.
The surge in prices sharply raises India’s import bill, worsening the trade deficit and exacerbating pressure on the rupee. A weaker rupee makes imports costlier, stoking inflationary pressures. But given India’s huge forex reserves of over $700 billion, the rupee is unlikely to depreciate steeply.
Foreign portfolio investment (FPI) inflows into Indian equities surpassed Rs 1 lakh crore so far this year,. But this trend could reverse as regional tensions escalate, potentially disrupting global trade and supply chains and raising crude oil prices.
In the case of the Indian economy, heightened oil security risks and concomitant surge in oil prices would widen the triple deficits of the trade deficit, current account, and fiscal deficit. Since apart from macroeconomic fundamentals and the growth prospects of the firm and the industry, the capital market is also sentiment-driven, this war would negatively impact the BSE and NIFTY levels. But contrary to popular perception, extensive pessimism is uncalled for because of the strength and resilience of the Indian economy.
The heightened global uncertainty has raised gold prices from Rs. 75,694 per 10 gm on October 4, 2024 to Rs. 81,850 on October 30,2024. Gold prices, however, are also a function of investor appetite, safe haven considerations and forces of demand and supply.
As deterrence collapsed, the crisis escalated, the stakes rise higher necessitating the intervention of major world powers for peace in the multi-party West Asia conflict. India’s strategically time-tested relationship with both Iran and Israel is fraught with difficulties on the policy and operational fronts. Israel has long been a trusted defense and security partner. Iran is a major crude oil supplier and has shared concerns about terrorism, the Afghanistan landscape, and the geo-strategically significant Chabahar port.
No “Great Expectations” (Charles Dickens), “Chhoti si Asha” (Chhoti si Asha-modest hope-is a popular Hindi number sung by AR Rahman and Minmini, Album Rosa)
The writing on the wall is clear, the message of history unmistakable: lurching from crisis to crisis cannot continue ad infinitum making for a calamitous future. In the ultimate analysis, regional powers should come together to form a comprehensive security framework that includes confidence-building measures, arms control agreements, and peaceful conflict resolution mechanisms. Given the trust deficit on both sides, a beginning can perhaps be made by the return of Israeli hostages and the time-tested principle of “trust but verify” on both the warring sides. Towards this end, the long simmering issues of historical grievances, territorial disputes, and religious extremism must be considered in a spirit of mutual accommodation and give and take on all sides.
About the author: Dr. Manoranjan Sharma, Chief Economist, Infomerics Ratings and Archana Choudhary, IRS, Principal Director General of Income Tax, Delhi.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.
