Even as the conflict between Israel and Iran is going on with the former vowing to retaliate after the later recently launched drones and missiles to it, Indian analysts are concerned with the possible escalation. They said there is a perceptible increase in the geopolitical risk quotient, imparting higher uncertainty to the global economic outlook.
Suman Chowdhury, chief economist and head (research) at Acuité Ratings & Research, said, “With the drone and missile attacks on Israel by Iran, there is a perceptible increase in the geopolitical risk quotient, imparting higher uncertainty to the global economic outlook. Although crude oil prices are yet to rise sharply beyond $90 per barrel, there is a significant likelihood that it will breach the $100 level if the conflict intensifies further over West Asia.”
He said that the Iran-Israel conflict’s potential impacts on the Indian Economy are:
1. Higher geopolitical risks and the consequent uncertainty on the disinflation path will delay the decision of the US Federal Reserve and the Reserve Bank of India to cut rates, implying interest rates will remain higher for longer.
2. Higher under-recoveries for the oil PSUs till the crude price increases are passed on to petrol, diesel, and LPG prices. The oil subsidy bill is likely to be above the interim budget for FY25. If the price rise is sustained, there is also a likelihood of pass-through after the elections.
3. Prices for oil derivatives are likely to rise, impacting the operating margins for sectors like petrochemicals, speciality chemicals, and paints.
4. Shipping costs may rise further, pushing up costs of imported goods and thereby, wholesale inflation.
5. Merchandise exports to West Asia can slow down in the short term due to the escalation in conflict.
“While we have a forecast of 6.7 per cent and 5.0 per cent for GDP growth and retail inflation in FY25, these can become vulnerable to revisions if the Iran-Israel conflict escalates further,” Chowdhury said.
Iran launched hundreds of missiles and drones at Israel over the weekend in response to an apparent Israeli strike on Iran’s embassy compound in Syria on April 1 that killed 12 people, including two Iranian generals. Israel, with help from the United States, the United Kingdom, neighbouring Jordan and other nations, successfully intercepted nearly all the missiles and drones.
Israel Finance Minister Bezalel Smotrich on April 18 said retaliatory strikes should “rock Tehran so everyone there will realise they should not mess with us.”
However, according to Associated Press, Iran’s president has warned that the tiniest invasion by Israel would bring a massive and harsh response.
Tensions in the region have increased since the start of the latest Israel-Hamas war on October 7, when Hamas and Islamic Jihad, two militant groups backed by Iran, carried out a cross-border attack that killed 1,200 people in Israel and kidnapped 250 others. Israel responded with an offensive in Gaza that has caused widespread devastation and killed more than 33,800 people, according to local health officials.
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