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Economic impact of ongoing conflict in Israel – Hamas war for the world economy in general and Indian economy in particular

Hamas gunmen launched an unprecedented assault on Israel from the Gaza Strip on 7 October, killing more than 1,400 people and taking at least 239 hostages. Since then, Israel has been carrying out retaliatory strikes on Gaza, in which more than 8,000 people have been killed and the numbers are increasing on a daily basis. Israel has also sent troops and tanks into the territory to undertake ground based strikes and has wowed to finish Hamas.

The conflict, apart from being a humanitarian and political crisis, also has wider economic ramifications for the world economy in general and the Indian economy in particular. This conflict could not have come at a worse time, when the world is already burdened with the Russia and Ukraine conflict. These conflicts have wider impacts on the movement of goods and services as countries tend to take sides and restrict the other country’s economy by levying economic sanctions, affecting global trade and commerce.

The on-going conflict in the Gaza strip, in the backdrop of Russia and Ukraine conflict, has hugely affected the flow of goods and services. Some of the significant impacts on the world’s economy in general and the Indian economy in particular includes:

1. Fluctuations in energy prices

The Middle East is a significant oil-producing region and any escalation of tensions leads to increased oil prices. This, in turn, affects global markets and potentially slows down economic growth, particularly for countries highly reliant on oil imports. The Brent crude had risen 33% from $84 per barrel in Feb 2022 to $112 per barrel in June 2022 after the Russia-Ukraine conflict erupted, the highest in a decade, and is presently trading at $90 per barrel. This is also about 60% higher than pre-covid levels of $57 per barrel in Feb 2020. Natural gas prices in Europe also rose sharply due to the Russia-Ukraine conflict, with some contracts trading at over €300 per megawatt-hour. While energy prices have come down somewhat since then, they remain elevated compared to pre-war levels. As of October 30, 2023, natural gas prices in Europe are around €150 per megawatt-hour. 

The ongoing conflict of Russia and Ukraine and the present one at Gaza also poses significant challenges for India’s energy security. As of August 2023, the Middle East accounted for 44% of India’s total crude oil imports while Russia has become India’s largest crude oil supplier, with a share of over 35%. It is important to note that the Middle East is still a major supplier of oil to India, and it is likely to remain so in the future. However, India’s growing reliance on Russian oil is a significant development, and it could have implications for India’s energy security and foreign policy.

2. Trade Disruptions

Protracted conflicts can disrupt trade routes, impacting not only the countries directly involved but also neighboring states and trading partners. This can affect the flow of goods and services, leading to economic uncertainty. Approximately 15% of world trade moves through the Mediterranean Sea. This includes both intra-Mediterranean trade between countries in the region, as well as trade between the Mediterranean and other parts of the world. Further the Mediterranean Sea is also a major hub for passenger shipping. In 2022, over 300 million cruise passengers visited Mediterranean ports. Thus the Mediterranean Sea is a vital trade route for many countries around the world. It plays a key role in the global economy and the movement of goods and people.

The conflict in the Middle East may influence India’s trade relations too. Both Israel and Palestine & the regional countries have good economic ties with India. E.g. India imports from Israel includes defence equipment, technology, and agricultural products. Meanwhile, imports from other middle-east countries includes crude oil. If tensions escalate, it might affect trade relations or create some diplomatic challenges, affecting India’s economic engagements with both regions. It needs to be noted Gaza is situated on the eastern coast of the Mediterranean Sea, bordered by Egypt on the southwest and Israel on the east and north.

3. Humanitarian Costs

The conflict’s humanitarian toll can burden neighboring countries and the international community with refugee influxes and increased humanitarian aid costs, which can strain global resources and impact international aid budgets. In 2010, approximately 1.6 million people lived in the Gaza Strip and almost 1.0 million of them were UN-registered refugees. This number has been steadily increasing over the last 10-12 years as Gaza has an annual population growth rate of 1.99% (2023 est.), the 39th-highest in the world. 

India has historically provided humanitarian aid to the region in the past through various forms of assistance, including financial aid, medical assistance, and development projects. During the Gaza conflicts in the past, India has contributed aid through UN agencies, non-governmental organizations, and directly to authorities to support relief efforts for civilians affected by the conflict.

4. Tourism and Regional Economic Development

Instability affects tourism in the region, impacting the economies of Israel, Palestine, and neighboring countries. The reduction in tourism revenue can have cascading effects on employment, businesses, and infrastructure development. The Mediterranean Sea plays a vital role in the global tourism industry. It is a major transportation corridor and a popular destination for tourists from all over the world. According to the World Tourism Organization (UNWTO), the Mediterranean region accounts for approximately 30% of global tourism arrivals and 25% of global tourism receipts. This makes it the world’s leading tourism destination.

According to the India Tourism Statistics 2022, West Asia, which includes the Middle East, accounted for 12.5% of all foreign tourist arrivals in India in 2022. This makes it the third largest source region for foreign tourists to India, after South Asia (24.2%) and North America (15.9%). Thus, any conflict in the region can have an adverse effect in tourist arrivals from the region.

5. Global Political Implications

Geopolitical tensions resulting from the conflict may strain international relations and influence global alliances, potentially impacting economic agreements and international cooperation. The United Nations General Assembly on Friday 27 October 2023 adopted a major resolution on the Gaza crisis, calling for an “immediate, durable and sustained humanitarian truce leading to a cessation of hostilities”, breaking the deadlock, where Member States on the Security Council had failed to reach agreement on four draft resolutions. 

India abstained from voting for the non-binding Jordanian resolution but voted in favor of a Canada-led amendment to the draft resolution on the Gaza crisis, which unfortunately didn’t achieve the required two- thirds majority for passage.

Conclusion

In summary, while the direct impact of the Israel-Palestine conflict on the Indian economy might not be that significant directly, the simultaneous occurrence of tensions in Ukraine and Russia could compound the economic effects by creating a broader atmosphere of uncertainty and volatility in global markets, affecting trade, investments, and strategic decision-making for India.

Views expressed are personal.

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