War Turmoil – India pays the heavy price of a needless war

Impact starts to pinch hard

The ongoing war in the Middle East is already imposing a heavy toll on India. India had just started its shift in oil procurement from Russia to the Middle East, in line with the Indo-US trade agreement framework. Scores of Indian ships are caught up in the high seas. In fact, due to the security risks in the region, Qatar has stopped production of LNG, which is hitting Indian industrial consumption as well as CGD services. The $7 billion ceramics industry, based out of Morbi in Gujarat, is staring at a shutdown as it can no longer procure propane to fire its kilns. Indian GCC merchandise exports to the tune of $15 billion are likely to be impacted if this blockade prolongs.

Bigger diplomacy questions to be answered

While the immediate economic implications are going to be huge, there are bigger diplomatic questions that need to be answered. When India signed the Indo-US trade deal and cut down on oil from Russia, the US and Israel were fully aware of the plans to attack Iran. The big diplomatic question, then, is why did the US allow India to be drawn into a deal in these circumstances. It has also hit India’s diplomatic relations with Iran. They have allowed passage to Chinese oil tankers, but Indian oil is still stuck. It also remains to be seen if the Chabahar deal continues now or whether there would be a rethink of the entire deal. Diplomacy may have taken a hit in the entire Middle East.

Real cost will be known in next few weeks

The panic reactions to the war in the Middle East are already visible in the macros. The rupee has weakened to ₹92/$ and FPIs have sold Indian equities worth $2.3 billion in the first week of March. Brent Crude has touched $90/bbl and the longer it hovers around these levels, the bigger the impact on the trade deficit and the CAD. Then, of course, there is the big hassle of domestic inflation which will see transmission of higher prices of oil, gas and other commodities. Once all these are added up and the loss of trade to India is factored in, the real cost to India will be clearer. Even without the calculations, it is evident that India is going to pay a huge price for this needless war.

India has to first ensure energy security

Considering that India virtually depends on the Middle East for its gas supplies and bulk of the crude supplies, the first priority for India would be to secure its oil & gas supplies. While oil still has alternative sources, there are not too many alternatives for gas. Already, Indian exporters are up in arms against the spike in shipping surcharge due to the war. In most cases, the surcharge is making their consignments unviable. Freight and insurance could add a much bigger cost to Indian trade. In a situation where global growth has been under pressure, the need of the hour was more stability and predictability. That is exactly the opposite of what India and the world is getting from the US.