How a widening Middle East conflict would affect India

[00:00:00] Hello and welcome to All Indians Matter.

[00:00:29] I am Ashraf Engineer.

[00:00:30] Last weekend, Iran attacked Israel with drones and missiles, heightening fears of the conflict

[00:00:35] in the Middle East turning into a regional war, one that could even go nuclear.

[00:00:40] Not surprisingly, India viewed this with great concern and called for immediate de-escalation.

[00:00:44] In a statement, the external affairs ministry said, and I quote,

[00:00:47] We are seriously concerned at the escalation of hostilities between Israel and Iran,

[00:00:51] which threatens peace and security in the region.

[00:00:53] We call for immediate de-escalation, exercise of restraint, stepping back from violence

[00:00:58] and return to the path of diplomacy.

[00:01:01] It is vital that security and stability are maintained in the region.

[00:01:04] Stop quote.

[00:01:05] Already, the Middle East is a tinderbox and a full-grown regional war would not

[00:01:09] leave India unscathed.

[00:01:11] It has vital economic and strategic interests in the region.

[00:01:14] How would a widening conflict there impact India?

[00:01:29] For decades, India has pulled off a balancing act when it comes to ties with Israel and

[00:01:34] Iran.

[00:01:35] India has strategic ties with both countries and in the case of war, a neutral or ambivalent

[00:01:39] stance would be difficult to pull off.

[00:01:41] Before I continue, I should say that this episode was recorded a couple of days before

[00:01:45] its release when the Iran-Israel conflict had not turned into a full-blown war.

[00:01:50] I hope that it has stayed that way and that there is never a war.

[00:01:53] Let's return to India's interests.

[00:01:55] Roughly 18,000 Indians live in Israel and 5,000 to 10,000 in Iran.

[00:02:00] Across the Gulf and West Asia, there are 90 lakh Indians and a regional conflict would

[00:02:05] be a serious risk to them.

[00:02:06] There is also a considerable economic stake in the region, especially Iran and Israel.

[00:02:11] Adani Ports is the joint owner and developer of the Haifa Port in Israel, one of the

[00:02:15] busiest in West Asia.

[00:02:17] A war would mean a plummet in port traffic.

[00:02:20] Sun Pharma owns a large stake in Taro Pharma, a generics player headquartered

[00:02:24] in Haifa, Israel.

[00:02:25] Reliance Industries is looking to buy out Tower Semiconductors of Israel, a key player in

[00:02:30] the semiconductor industry.

[00:02:31] In fact, many Indian companies are looking to invest in the semiconductor supply chain

[00:02:35] there.

[00:02:36] As far as Iran is concerned, India exports rice, tea, chemicals, pharmaceuticals and

[00:02:41] raw sugar in massive quantities to it.

[00:02:43] On its part, Iran has been a key source of oil for India.

[00:02:46] In fact, till 2019, when US sanctions were imposed on it for its nuclear program and

[00:02:51] for allegedly funding terror, Iran was among the largest suppliers of oil to India.

[00:02:56] The exports to India slowed but as demand rises, they could revive.

[00:03:00] The crucial strategic concern is the Chabahar Port in Iran's Baluchistan province, which

[00:03:04] is being jointly developed by the two countries.

[00:03:07] India needs the port to cut costs of trading with Iran and the Middle East and open

[00:03:11] a trade route via a road to Afghanistan, Armenia, Greece, Turkey and Russia.

[00:03:15] Chabahar is a gateway to Central Asia, one India needs since Pakistan does not allow

[00:03:20] land transit to Indian goods.

[00:03:23] But let's return to oil for a bit.

[00:03:25] West Asia is vital for India's energy security.

[00:03:27] The region accounts for 80% of our oil supplies and a conflict would disrupt the supply chain.

[00:03:33] So far, India has tried to hedge the risk by buying Russian oil at discounted prices

[00:03:37] but a conflict in the Middle East would raise oil prices significantly.

[00:03:40] If there is war, it would have a fallout on the Red Sea region.

[00:03:44] Houthi rebels in Yemen who are disrupting shipping by attacking merchant vessels

[00:03:47] would intensify the offensive.

[00:03:49] So ships originating from the US and Europe would have to take a much longer

[00:03:53] Horn of Africa route to India.

[00:03:55] This would lead to delays in deliveries and significantly higher freight and insurance costs.

[00:04:00] Iran meanwhile might impose added conditions or fees on ships passing through the straits

[00:04:04] of Hormuz.

[00:04:05] All this would mean crude prices would stay high for a long time.

[00:04:09] Make no mistake, it's not just oil marketing companies like Indian Oil Corporation, Hindustan

[00:04:14] Petroleum and Bharat Petroleum that would be hit.

[00:04:17] Industries that use oil would be affected too.

[00:04:19] Think plastics, tyres, paints, toiletries and detergents.

[00:04:23] Higher crude prices would mean higher input costs which would be passed on to consumers

[00:04:27] such as you and me.

[00:04:29] Airlines too would be hit as the price of aviation turbine fuel rises.

[00:04:33] They would have to reroute flights to avoid Iranian and Israeli airspace raising

[00:04:36] costs further.

[00:04:37] In fact this is already happening.

[00:04:39] Even the capital goods industry which creates fixed and physical assets such as buildings

[00:04:44] and machinery could see a slowdown in their orders in the Middle East.

[00:04:47] The projects already underway could see delays in execution.

[00:04:50] Among those Indian companies with a large presence in engineering, procurement and

[00:04:54] construction as well as hydrocarbons is L&T.

[00:04:57] So a host of industries would be hit and that isn't good news for the Indian

[00:05:00] economy.

[00:05:01] What about India's fledgling defence industry?

[00:05:04] In FY24, India's defence exports stood at Rs 21,100 crore, 32% higher than the

[00:05:11] previous year.

[00:05:12] But take the decade between FY05 and FY14.

[00:05:16] In that period, the cumulative figure was a mere Rs 4,312 crore.

[00:05:20] So the growth is significant.

[00:05:22] Many countries are looking to us for defence supplies and as they gear up for a period

[00:05:26] of strife, India could be a key supplier.

[00:05:28] So that could be an industry that benefits.

[00:05:31] Now let's look at the stock market.

[00:05:33] An escalation would increase volatility.

[00:05:35] If the price of crude rises, inflation would spike upwards and push markets down.

[00:05:39] This in turn would reduce the possibility of interest rate cuts that industries need

[00:05:43] in order to keep financing costs in check.

[00:05:46] This would affect valuations.

[00:05:47] Of course, higher costs would mean slimmer profit margins and thus a fall in stock

[00:05:51] prices.

[00:05:52] India has little influence on the decisions of the countries involved so its policy

[00:05:56] decisions will have to be reactive.

[00:05:58] This is a tricky diplomatic challenge.

[00:06:00] The problem is that a war between Iran and Israel would unlikely remain confined

[00:06:04] to the two countries.

[00:06:05] Other Arab states would not watch on.

[00:06:07] Strategic pressure would force them into the war too, thus widening the theatre across

[00:06:11] the Arabian Peninsula.

[00:06:13] India has built bridges with Israel over the past decade to tap its expertise in defence

[00:06:17] and technology.

[00:06:18] At the same time it is an important strategic partner to the Middle East.

[00:06:21] A war could force India to take sides, not the best spot to be in.

[00:06:25] Neutrality is an option but it doesn't have too many benefits.

[00:06:28] Take the case of Russia's invasion of Ukraine.

[00:06:30] India tried the middle path while China didn't.

[00:06:33] As a result, China is wielding greater influence on Russia.

[00:06:36] For now, it's wait and watch.

[00:06:38] Let's hope there is no full blown war because no matter which regional players participate

[00:06:42] or stay away, India will suffer collateral damage.