Iran–Israel War: The heightened tensions and possible war between Iran and Israel have ignited economic alarms around the world. For India, a nation with enormous dependence on oil imports and closely integrated into the world economy, the impact can be severe. One such major problem is inflation — the general increase in prices — that can hit anything from fuel to food.
Both Iran and Israel are powerful in the Middle East region, which largely dominates global crude oil production and exportation. Supply lines like the Strait of Hormuz might be cut off in the event of a war. India receives more than 80% of its crude oil imports, all of which pass through this area. Any disruption of supply chain may drive the cost of crude oil through the roof.
Oil’s contribution to inflation is substantial. If oil becomes costlier, it impacts the transport, manufacturing, and even agricultural cost. This cost then gets transmitted to consumers by way of increased services and goods prices. India has already experienced price sensitivity on account of a rise in global crude prices for the past several years, and an upswing again would fuel inflation.
Even the war of such long duration would lower the Indian Rupee. A reduced Rupee will imply that India will have to pay more in local currency to obtain the same quantity of imports. This also puts more pressure on inflation. Fertilizers, chemicals, and inputs for industry will also rise as imports.
India’s government and Reserve Bank of India (RBI) are monitoring closely. RBI could be making monetary policy adjustments if inflation is rising, sharply. The government could also seek other sources of oil or increase subsidies to help consumers, but that would be tightening the fiscal deficit.
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Though the Iran–Israel war might be far away from India, its economic burden might be deeply experienced here. Increased oil price, short supply, and exchange rate swings all contribute to inflation. Though short-term impact might be minimal, an extended war can indeed yield actual price increases in many sectors. India needs to remain watchful, diversify energy sources, and possess sufficient policy buffers so as to ward off the ripple effect of this likely crisis.
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