Can India handle the fallout from two wars?

India has so far manoeuvred itself out of tough spots around two brutal, divisive wars. Since Russia’s invasion of Ukraine in February last year, New Delhi has walked a tightrope, not antagonising Ukraine’s western allies and yet managing to procure discounted crude oil from Russia. When it comes to Israel’s massive bombardment on the Gaza strip since October 7, New Delhi has backed Tel Aviv against its war on terrorism but voted in favour of a United Nations resolution that condemned Israeli settlements in occupied Palestinian territory.

A deft handling of these two situations has helped India stay neutral and even gain some dividends, but the harsh reality is that these two wars have aggravated global economic uncertainty. Their fallout on the Indian economy is inevitable even though some economists whom ET spoke to argue that tailor-made policy measures can limit the damage.

Backed by strong domestic fundamentals, India’s macroeconomic outlook is robust. The International Monetary Fund (IMF), in its recent World Economic Outlook report (October 2023), has said that India will remain the fastest growing major economy in 2023 and 2024.

Still, for GoI policymakers, these two wars are too big to be brushed aside. “Global uncertainties have been compounded by recent developments in the Persian Gulf. Depending on how the situation develops, crude oil prices may push higher,” said the finance ministry’s September economic review, released late last month. The report further said that at the current level, US stock markets have greater downside risk than upside, and if that materialises, it will have spillover effects on other markets as well.

“Fraught geopolitical conditions can cause a general increase in global risk aversion. If these risks worsen and are sustained, they can affect economic activity in other countries, including India,” it added.


Indian exporters echo similar views, arguing that ripple effects of the wars resulting in an economic meltdown across continents are more alarming than any direct knock that they might face while trading in the warring nations. Colin Shah, MD of Kama Jewelry and former head of the Gem & Jewellery Export Promotion Council (GJEPC), says the direct impact of the Israel-Hamas conflict on India’s diamond exports to Israel will be limited. “What worries us more is the indirect impact of the two wars on the global economy. India’s diamond exports this year are already down by about 20%. The challenges are likely to continue next year,” he says.

India’s export of cut and polished diamonds to Israel last year was worth about $1.2 billion. Overall, Israel’s share in India’s global exports last year was 1.8%, up from 1.1% in 2021-22. The key export item is diesel ($5.5 billion in FY2023), followed by cut and polished diamonds. In the case of Russia, India’s total exports have been hovering around $3 billion in the last few years whereas its imports went from $5.5 billion in 2020-21 to $46.2 billion, a 740% increase in just two years, driven mainly by India’s aggressive buying of crude oil being offered at a cheaper rate.

Any geopolitical turbulence in an oil-rich region does not augur well for New Delhi as India is the world’s third largest consumer of crude oil (after the US and China). India’s dependence on crude oil imports has risen to 87%. This single commodity accounts for about a third of the country’s overall imports by value, a reason why even a minor rise in crude oil prices impacts India’s economic indicators, including the Sensex.

“In micro terms, Russia-Ukraine war has resulted in select benefits for India—for example robust wheat exports (till it was banned in May last year) and then in crude oil imports from Russia at a discounted price,” says Ajay Dua, former Union industry secretary. “But at a macro level, we have been hit very badly. Our exports this year will be down,” he says, adding that the impact of the Israel-Hamas conflict will be limited.

However, the proposed India-Middle East-Europe Economic Corridor, which was announced on the sidelines of the G20 summit in Delhi in September, might have to be put on the back burner now. “Arab countries involved in the economic corridor face a perception problem. At this stage, countries such as Saudi Arabia and the United Arab Emirates (UAE) won’t like to do something that will help Israel,” says Dua. The proposed corridor, with India, the US, Saudi Arabia, the UAE and the European Union as the main stakeholders, is designed to connect India to the Gulf region and then link the Gulf to Europe via Israel’s Haifa port.



According to Ranen Banerjee, partner and leader –Economic Advisory Services, PwC India , the very fact that commodity prices have been soft and crude oil prices have moderated after the initial spike implies that the market is expecting the Israel-Hamas conflict to not escalate and disrupt oil supplies. The price of Brent crude fell from $88.1 a barrel on October 6, a day before the Hamas’ attack on Israeli citizens, to $82.7 on November 13, according to data compiled by ETIG. When the RussiaUkraine war broke out last year, the crude oil price was higher, at $99 a barrel. “The demandside weakness emerging from economic headwinds across Europe and China is keeping oil prices in check,” says Banerjee, adding that the inflation impact owing to global oil price fluctuations has been contained in India, as the pump prices of fuel have not changed for months.

In fact, India saved about $2.7 billion by importing discounted Russian oil between January and September 2023, according to Reuters’ calculations based on government data. This year, Russia has eclipsed Iraq as India’s top oil supplier. Last fiscal year, India imported Russian oil worth $31 billion, up from $2.4 billion the previous year, registering a 1,200% increase.

Pradeep Mehta, secretary-general of CUTS International, a public policy research, advocacy and networking NGO, says that no single event, either Russia-Ukraine or Israel-Hamas war, can determine India’s economic trajectory, provided New Delhi’s responses to f luctuations are well thought-out. “Since the outbreak of the Russia-Ukraine conflict in early 2022, India has done well to maintain a fine balance between ensuring our economic security and meeting our diplomatic goals. Ultimately, economic prospects are shaped by timely responses to external uncertainties, supported by strong economic fundamentals domestically,” he says. He adds that the wisdom of certain policy responses with spillover effects, such as the export ban on certain commodities such as wheat, will remain debatable.

The big question now is how long will these wars continue. According to Jayant Dasgupta, former ambassador of India to World Trade Organization, Russia-Ukraine war will continue for a long time, provided Ukraine does not suffer any war fatigue, as the US is ready to finance it. “Americans are fighting a proxy war. Only Russians and Ukrainians are getting killed. And the US trade in armament is bound to flourish if the war continues,” he says.

Another question is whether these wars will spiral into wider regional confrontations. Deloitte India economist Rumki Majumdar says the current geopolitical crises will remain confined. “However, geopolitical uncertainties are here to stay,” she adds, “The world will find an equilibrium within the disequilibrium and businesses will have to factor in uncertainties in supply chains, oil prices, trade and investment decisions.”

If both wars continue till the end of the fiscal year, if not longer, there could be some pressure on the Indian rupee, the country’s foreign direct investments as well as on the sensitive issue of inflation. “Strong economic growth and vulnerabilities in food and fuel prices will keep overall inflation high. But at the same time, tighter monetary conditions will keep inflation from going up too high,” says Deloitte’s Majumdar. “We expect inflation to ease to 5% by the end of the fiscal year.”

William Murphy

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