As expected, the conflict in the Middle East has directly led to a tumble in the stock markets in India, and crude oil prices have zoomed up nearly 10 per cent on the back of the news of the strife and its expanding nature.
But if you thought oil prices and the pursuant inflation were the only things for India to worry about, you have got a thing coming.
“For India, this is a live stress test of three pillars: energy security, currency stability and corporate margin durability,” said Narender Singh, small case manager & founder of GrowthInvesting.in
“The market is reacting to crude. It should be reacting to cash flows.”
For India, the long-term worries are compounding. While the oil squeeze itself would be bad for the economy despite the fact that the country had diversified its oil import basket in recent years to source from the likes of Russia and the US, the bigger worries extend into trade, aviation, insurance, agriculture and not the least, Indian corporates and their global ambitions.
The Gulf region, being a repository for Indian human resources — about a crore Indians, and these are the documented ones, live and work in just the seven Gulf Cooperation Council (GCC) countries. India, in recent years, has taken a keen interest in closer cooperation with many of these countries, not just strategically, but also in trade, business and people-to-people connections. This had included free trade agreements with two of them already, the United Arab Emirates (UAE) and Oman, with a larger treaty with the GCC under negotiation.
Not only do these countries’ aura of peace and stability lie in tatters overnight, but the coming aftermath to their economy will directly impact India, and its immense trade with them.
Take, for example, the UAE. From pepper and a vast trove of food products from Kerala to electronic products from Indian manufacturers, the UAE is India’s third biggest trading partner. Trade between the two countries crossed 100 billion dollars last year. And mind you, most of it had nothing to do with petroleum products.
Travel and tourism will also be a badly affected area. Dubai is the most travelled-to international city by Indians, and this could change in the interim at least. The India—UAE sector is one of the world’s busiest international routes, with over 20 lakh passengers a month — a FlyDubai CEO had said a few months ago that this was nothing, as demand existed for increasing this four times! With the Gulf airspace shut down for the third day and no solution in sight, hundreds of thousands of passengers have been stranded at airports on both sides.
The bigger worry will also be how this redraws the aviation sector. Air India has already been constrained by a ban on flying over Pakistani airspace since Operation Sindoor. Iranian and Arabian peninsula airspace out of bounds will not only directly impact the fortunes of India’s airlines and their fledgling international ambitions, but also India’s access to people and goods, further west. Meanwhile, the Strait of Hormuz blockade will make imports slower and dearer, and we are not talking of oil alone — shipping companies will face not just cost overruns, but longer time on re-routing as well as higher insurance.
“The first casualty will not be consumption demand; it will be corporate profitability,” said Narender Singh, “Aviation margins compress immediately; chemicals and paints will see input cost volatility. FMCG absorbs freight and packaging costs before passing them on — earnings downgrades, not index crashes, is the real risk.”
There is also the fear of the weak rupee, which had shown signs of slow recovery in the past few weeks, but is now going for a free fall. India is now at that stage of its economic growth that a stronger dollar does not just mean an increase in cost. It could also mean that foreign investment becomes cautious. As Singh quipped, “The policy room for the Reserve Bank of India narrows quickly if oil and currency move (up) together.”
India’s IT sector could also face a whammy. If the strife shows no signs of abating soon, it could slow tech spending and put on hold expansion plans in the region, which would not be good news to India’s IT services industry, which is already battling the uncertainty that AI has brought in.
On top of it, there is also the risk of major cyberattacks, as has been seen during similar geopolitical conflicts in recent times. Considering India’s deep business and social ties with the region, the fear of a domino effect is very real.