The ongoing conflict in the Middle East, confined mainly to the Gaza region now, has caused only negligible disruption in India’s trade so far. Some sectors such as fertilizers and diamonds — both cut and polished — may see a slight, but manageable, impact, while for most others impact will be insignificant, finds a recent Crisil Ratings study.
India’s trade with Israel is relatively low, accounting for 1.9 per cent of total exports and 0.3 per cent of total imports last fiscal. The merchandise exports mainly comprise polished diamonds and petroleum products, including refined hydrocarbons, while imports largely comprise industrial equipment, fertilizers, rough diamonds, and precious stones.
Israel is a major global producer of muriate of potash (MoP) and among the top three countries that India imports from, accounting for 25 per cent of all MoP imports last fiscal. However, the share of MoP (as final product or as an ingredient in other fertilisers) remains low at 10 per cent of domestic fertiliser consumption. Additionally, India’s ability to source from other countries lowers the supply risk.
For domestic diamond polishers, Israel is primarily a trading hub. Exports to the country were 5 per cent
of total diamond exports from India last fiscal. Additionally, 2 per cent of all roughs imported are from Israel. Polishers also have alternative trading hubs, such as Belgium and the United Arab Emirates, with ultimate customers based in the US and Europe. Rahul Guha, Director, CRISIL Ratings draws attention to Israel’s import of USD1.25 billion worth of polished diamonds annually from India. With the country now declaring war on militant group Hamas, this number could be at risk. “To be sure, there is some bump-up in demand in the second half of every fiscal from festivities such as Thanksgiving, Christmas, and the Chinese New Year, but this is unlikely to provide a significant offset. Consequently, we see the Indian diamond industry shrinking by over a third on an annualised basis this fiscal,” says Guha.
Radhika Rao Senior Economist, DBS Group Research flags a wider risk of the Middle East’s role as an important trading partner for India, as the Gulf Cooperation Council (GCC) countries accounted for 19 per cent and others in West Asia (including Israel, Jordan, Lebanon, etc) made up 6 per cent of total imports last year. The corresponding export share stood at 11 per cent and 4 per cent, respectively, points out Rao. Amongst the regional countries, two-way trade is most active with Saudi Arabia and the United Arab Emirates, particularly on petroleum/ crude oil imports, with the market share shifting towards Russia in the past year and a half, courtesy of hefty price discounts. As of FY23, India’s crude oil import dependency stood at 87.4 per cent of total consumption.
The conflict has, driven up prices of gold and crude oil and their trajectories will bear watching, especially crude oil, given India’s high dependence on its import. Also, elevated crude oil prices have a cascading impact on a host of other sectors that consume the oil itself or linked raw materials. Since the Middle East conflict began in early October, gold prices have surged 13-15 per cent to over Rs 60,000 per 10 gm.
On the energy front, any spillover of the conflict to nearby oil-producing and exporting regions could result in supply-related constraints and spiralling prices of crude oil. Within a week of the conflict, crude oil prices rose 4 per cent to USD 90 per barrel but have stabilised a tad lower thereafter. A sharp rise in crude oil prices will impact linked sectors in India, such as aviation, automotives, paints, tyres, cement, chemicals, synthetic textiles, and flexible packaging. Besides, higher inflation may lead to interest rates continuing to rule firms in India till the conflict de-escalates.
For now, Rao sees a lower scope of spillover to the domestic retail pump prices in an election year, thereby limiting any material change to the inflation trajectory. This excludes a small (less than 0.05 per cent) spillover risk from other non-retail pump prices/ transportation segments. However, earlier reports of a potential fuel price cut, according to Rao, look challenging in light of the escalation in global rally in the energy commodity. “In the interim, the balance sheets of the domestic state-owned oil marketing companies are likely to be under pressure,” says Rao. While the overall impact on India remains low as of now, any spread of the conflict leading to disruption of operations at major ports can have some impact.