How Iran-Israel tensions may impact Indian economy, trade

As tensions escalate between Iran and Israel, India finds itself bracing for potential economic repercussions, with concerns looming over its trade and energy security.

The escalating conflict, marked by recent incidents including Iran's seizure of a container ship near the Strait of Hormuz and retaliatory drone attacks against Israel, has sparked fears of disruptions to global maritime trade routes. With 12% of global maritime trade passing through this volatile region, India, a significant player in international trade, stands vulnerable to the fallout.

Impact on trade

India's trade with both Iran and Israel, key actors in the conflict, faces uncertainties. Merchandise exports and imports from Israel in the fiscal year 2023 amounted to substantial figures, indicating a significant trade relationship that could be jeopardized by escalating tensions. Indian exporters, particularly in sectors like footwear, are already feeling the strain of disrupted supply chains, with container freight rates skyrocketing and shipments facing delays.

Moreover, the potential for further escalation of the conflict threatens to dampen global economic growth, impacting demand for Indian exports across various sectors. MSMEs, already grappling with a downturn in global business sentiments, stand particularly vulnerable to the fallout.

Energy security concerns

India's energy security is also at stake, with around 2 million barrels of crude oil reaching the country daily through the strategically vital Strait of Hormuz. Disruptions to oil transport in this region could lead to supply shortages and drive up domestic energy costs, further exacerbating inflationary pressures and constraining economic growth.

The broader geopolitical context of the conflict, with Iran's alliances with China and Russia and engagement with the US and NATO, adds further complexities. While India has maintained a stance of careful neutrality, experts warn of potential geoeconomic uncertainties in the medium to long term, which could impact India's trade relationships with Gulf countries and other neighbouring nations.

The government response

In response to the escalating conflict, India's Commerce Secretary has announced that the government is actively analyzing the situation and remains open to taking remedial measures if necessary. India's strategy of maintaining balanced relationships with both Iran and Israel, while engaging strategically with neutral parties like the United Arab Emirates, underscores its efforts to safeguard its economic interests amidst the evolving geopolitical landscape.