Ashraf Engineer
April 20, 2024
EPISODE TRANSCRIPT
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
Last weekend, Iran attacked Israel with drones and missiles – heightening fears of the conflict in the Middle East turning into a regional war, one that could even go nuclear. Not surprisingly, India viewed this with great concern and called for immediate de-escalation. In a statement, the external affairs ministry said: “We are seriously concerned at the escalation of hostilities between Israel and Iran which threatens peace and security in the region. We call for immediate de-escalation, exercise of restraint, stepping back from violence and return to the path of diplomacy. It is vital that security and stability are maintained in the region.” Already, the Middle East is a tinderbox and a full-blown regional war would not leave India unscathed. It has vital economic and strategic interests in the region. How would a widening conflict there impact India?
SIGNATURE TUNE
For decades, India has pulled off a balancing act when it comes to ties with Israel and Iran. India has strategic ties with both countries and, in the case of war, a neutral or ambivalent stance would be difficult to pull off.
Before I continue, I should say that this episode was recorded a couple of days before its release when the Iran-Israel conflict had not turned into a full-blown war. I hope that it has stayed that way and that there is never a war.
Let’s return to India’s interests.
Roughly 18,000 Indians live in Israel and 5,000 to 10,000 in Iran. Across the Gulf and West Asia, there are 90 lakh Indians and a regional conflict would be a serious risk to them.
There is also a considerable economic stake in the region, especially Iran and Israel. Adani Ports is the joint owner and developer of the Haifa port in Israel, one of the busiest in West Asia. A war would mean a plummet in port traffic. Sun Pharma owns a large stake in Taro Pharma, a generics player headquartered in Haifa, Israel. Reliance Industries is looking to buy out Tower Semiconductors of Israel, a key player in the semiconductor industry. In fact, many Indian companies are looking to invest in the semiconductor supply chain there.
As far as Iran is concerned, India exports rice, tea, chemicals, pharmaceuticals and raw sugar in massive quantities to it. On its part, Iran has been a key source of oil for India. In fact, till 2019 when US sanctions were imposed on it for its nuclear programme and for allegedly funding terror, Iran was among the largest suppliers of oil to India. The exports to India slowed but, as demand rises, they could revive.
The crucial strategic concern is the Chabahar port in Iran’s Baluchistan province, which is being jointly developed by the two countries. India needs the port to cut costs of trading with Iran and the Middle East and open a trade route via road to Afghanistan, Armenia, Greece, Turkey and Russia. Chabahar is a gateway to Central Asia, one India needs since Pakistan does not allow land transit to Indian goods.
But let’s return to oil for a bit. West Asia is vital for India’s energy security. The region accounts for 80% of our oil supplies and a conflict would disrupt the supply chain. So far, India has tried to hedge the risk by buying Russian oil at discounted prices. However, a conflict in the Middle East would raise oil prices significantly.
If there is war, it would have a fallout on the Red Sea region. Houthi rebels in Yemen, who are disrupting shipping by attacking merchant vessels, would intensify the offensive. More ships originating from the US and Europe would have to take the much longer Horn of Africa route to India. This would lead to delays in deliveries and significantly higher freight and insurance costs. Iran, meanwhile, might impose added conditions or fees on ships passing through the Straits of Hormuz. All of this would mean crude prices would stay high for a long time.
Make no mistake, it’s not just oil marketing companies like Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum that would be hit. Industries that use oil would be affected too. Think plastics, tyres, paints, toiletries and detergents. Higher crude prices would mean higher input costs, which would be passed on to consumers such as you and me.
Airlines too would be hit as the price of aviation turbine fuel rises. They would have to re-route flights to avoid Iranian and Israeli airspace, raising costs further. In fact, this is already happening.
Even the capital goods industry – which creates fixed and physical assets such as buildings and machinery – could see a slowdown in their orders in the Middle East. The projects already under way could see delays in execution. Among those Indian companies with a large presence in engineering, procurement and construction, as well as hydrocarbons, is L&T.
So, a host of industries would be hit and that isn’t good news for the Indian economy.
What about India’s fledgling defence industry?
In FY24, India’s defence exports stood at Rs 21,100 crore – 32% higher than the previous year. But take the decade between FY05 and FY14. In that period, the cumulative figure was a mere Rs 4,312 crore. So, the growth is significant. Many countries are looking to us for defence supplies and, as they gear up for a period of strife, India could be a key supplier. So, that could be an industry that benefits.
Now, let’s look at the stock market.
An escalation could increase volatility. If the price of crude rises, inflation would spike upwards and push markets down. This, in turn, would reduce the possibility of interest rate cuts that industries need in order to keep financing costs in check. This would affect valuations. Of course, higher costs would mean slimmer profit margins and thus a fall in stock prices.
India has little influence on the decisions of the countries involved, so its policy decisions will have to be reactive. This is a tricky diplomatic challenge.
The problem is that a war between Iran and Israel would unlikely remain confined to the two countries. Other Arab states would not watch on. Public pressure would force them into the war, too, thus widening the theatre across the Arabian peninsula.
India has built bridges with Israel over the past decade to tap its expertise in defence and technology. At the same time, it is an important strategic partner to the Middle East. A war could force India to take sides – not the best spot to be in. Neutrality is an option but it doesn’t have too many benefits. Take the case of Russia’s invasion of Ukraine. India tried the middle path while China didn’t. As a result, China is wielding greater influence on Russia.
For now, it’s wait and watch. Let’s hope there is no full-blown war because no matter which regional players participate or stay away, India will suffer collateral damage.
Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at editor@allindiansmatter.in. Catch you again soon.
