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Escalating tensions in West Asia threaten to destabilize India's economy, with far-reaching implications for macroeconomic indicators. Rating agency Icra has stated that the geopolitical uncertainty may disrupt India's Current Account Deficit (CAD), currency valuation, and Foreign Portfolio Investments (FPI) inflows. Rising inflation concerns also loom large as global oil prices face potential volatility.
"The impact on commodity prices is limited so far and may affect global sentiments if tensions escalate. An escalation of the conflict may delay shipments and increase the cost of trade through the Suez Canal," Icra noted in the report.
Israel contributes marginally in merchandise trade, the overall pie of FDI equity inflows, the FPI and remittances to India. Geopolitical tensions in Israel may lead to some commercial implications for Indian corporations with a presence in that country. "Moreover, India would be impacted through changes in global sentiment and commodity prices," Icra added.
Impact On Indian Macros
A sustained flare-up in geopolitical tensions in West Asia, and the consequent increase in crude oil prices would negatively impact Indian macros. While an increase in average crude oil prices is likely to push up the Current Account Deficit (CAD), an escalation of the conflict would also exert pressure on the USD/Indian rupee pair and may impact Foreign Portfolio Investors (FPI) inflows to India.
Additionally, this would pose upside risks to our WPI inflation, and to a smaller extent to our CPI inflation projections for FY2025. While the extent of the direct impact on the fiscal health would be limited, G-sec yields may remain sticky in spite of the modest G-sec supply in H2 FY2025 and the higher demand owing to bond index inclusion. A sustained surge in crude oil prices could also exert a drag on GDP growth during the fiscal, Icra added.
Talking about imports, the report noted that following Western sanctions on crude oil, Iran’s share in the total Indian merchandise imports declined to below 1 per cent in FY2024 from the average of 2 to 3 per cent seen in the decade before FY2019. Though India does not import any crude from Iran owing to the sanctions, the ongoing geopolitical tensions have led to an increase in Brent crude prices.
Further, there is a threat that Iran may close the Straits of Hormuz, which is the main route of transport for crude oil from West Asia (holding a major share in oil imports) to India. Significant imports from Iran include dye intermediates and asbestos; the same can be substituted by other countries and hence are not critical.
In exports, Iran was one of the major destinations of export of basmati rice and tea from India in FY2023, however, its share went down significantly in FY2024. The ongoing geopolitical tensions may further constrain such exports to Iran in FY2025. India’s share in Iran’s total imports and exports stands at 3 per cent. However, Indian trade is significant for Iran for some agri and textile products, the report mentioned.
FDI, FPI And Remittances
Iran’s share in Foreign Direct Investment (FDI) inflows into India is negligible, contributing less than 1 per cent to the total pie. Further, contributions to FPI and remittances are nil. Additionally, there are no migrants in Iran from India as per the World Bank’s KNOMAD database.
However, an escalation of the ongoing conflict may impact FDI, FPI and remittances from neighbouring West Asia countries like the United Arab Emirates (UAE), Saudi Arabia, Qatar, Oman, Bahrain and Kuwait, which have a significant share in all these categories for India. These neighbouring countries also house 50 per cent of India’s total stock of migrants, having travelled there for employment opportunities. ▪
According to the report, “Weak global sentiment may affect FDI and FPI inflows from the advanced economies as well.” Notably, Israel is the 44th largest country for FDI inflows into India, contributing 0.05 per cent to the total pie. Its share in the FPI is marginal as only one entity from Israel has invested as on September 2023. and accounts for 0.1 per cent of India’s migrant stock and remittances to India.
