This conflict is also going to impact India’s trade dynamics with Israel.
New Delhi: Before the October 7th Hamas attacks, Prime Minister Netanyahu's government was battling a crisis in Israel, as he was cornered for bulldozing political opposition as he wanted reforms to give powers to the legislature to override the Supreme Court. This led to widespread public outrage never seen before in Israel’s history, against these controversial reforms. But it was more than just a single issue that had the country divided. Bibi Netanyahu, was already facing heat of the Israeli public, activists, politicians, and the opposition over graft allegations and the roughshod manner in which a proposed judicial overhaul was being pushed ahead, aimed at enabling the Knesset (Parliament) to override Supreme Court rulings and grant excessive control to the government for judicial appointments.
And then, as a much needed distraction, when Hamas struck at Israel – shocking the world at the ease with which it broke past the highly fortified Gaza border – it gave the Israeli government of Netanyahu a much-needed diversion from its internal crisis. As the debate continues on who allowed the attackers to enter unchecked, Mr Netanyahu grabbed the opportunity to declare ‘war’ on Gaza, and to form a unified political front to tackle the crisis. A subsequent inquiry like the one that followed the Yom Kippur war of 1973 eventually will hold people responsible for this botch up. For now, the massive Israeli attack on Gaza has the world divided on what will be the consequences of the Israel-Hamas conflict and its larger implications, apart from the tragic human toll, and how it will impact on Israel’s economy, politics and further divide the Israeli polity, and the region, in the long run. There are also concerns about how a prolonged fight could weigh on the region’s economy.
Impact on Israel’s politics
Israelis have given the verdict on their Prime Minister: they want Benjamin Netanyahu out of power as soon as the “October debacle” is over. Either way, this conflict will impact on his political future, and hence Netanyahu will not let up on destroying Gaza. Several surveys, as reported by Haaretz and other media outlets, report mounting fury against the PM and his National Unity government. All the surveys have been conducted in the last fortnight after Israel launched ferocious attacks on Gaza following Hamas’ brutal attacks on Israeli cities. But winning street battles and in built up areas, won’t be easy, if at all for even the best of armies.
The surveys say that there is a nationwide perception that the failure of the Netanyahu government to remain alert, caused the tragedy of October 7 that saw the highest ever single day casualties of Israelis, said Haaretz. In fact, a recent survey carried out among the people showed that if an election was to be held, Benny Gantz would get the most votes, with 48 per cent of public support, and Netanyahu would get 29 per cent.
“At present… it can be assumed (in a very rough estimate) that the costs of the current war will amount to at least 1.5 percent of GDP, which means an increase in the budget deficit of at least 1.5 percent of GDP in the coming year,” Bank Hapoalim chief strategist Modi Shafrir was quoted as saying to Times of Israel.
The major impact would be felt in private consumption and tourism figures. And the short-term effects of the war can already be seen in Israel. Israel’s tourism business has come to a near standstill. Cruise ships are avoiding Israel’s shores and major airlines have stopped flying to and from Israel. Besides tourism, Israel’s ever-growing tech industry is also likely to be affected by the war. High-tech industries have for a few decades been the fastest growing sector in Israel and crucial for economic growth, accounting for 14% of jobs, which is almost a fifth of the country's gross domestic product.
Impact of the conflict on India
This conflict is also going to impact India’s trade dynamics with Israel. In 2022, India exported goods worth $8 billion and imported goods worth $2.3 billion. India’s imports are strategic in nature as it is dominated by goods used for defence purposes, but now an Israel at war can’t be expected to continue with exports of similar magnitude. Most likely, the conflict will divert Israel's funds towards most critical requirements and that is expected to reduce imports of non-essential items, hampering India’s export prospects to the Jewish State.
An analysis by the economic research division of the Bank of Baroda released earlier this month shows that problems could start for India if the war persists for longer than about a fortnight, although even these predictions are highly tentative given the unfolding nature of the conflict. The main issue, the analysis shows, is the price of oil. India imports about 80 percent of its crude oil requirement, and so high and rising oil prices- due to the prevailing uncertainty- have a direct impact on the finances of not just the government but also of households, since high oil prices increase input costs across industries.
“Now we can use the $90 BBL (as a base for oil prices) to be the threshold beyond which there is trouble for the world economy,” Madan Sabnavis, chief economist at the Bank of Baroda said in a note. “India can get affected if the price remains high due to further supply disruptions.”
Iraq and Saudi Arabia are the second and third biggest suppliers of crude oil to India. Russia is the largest. While having the top three suppliers of oil to India either actively engaged in a war, or physically close to one, does increase uncertainty about the security of India’s oil supplies. Any negative outcomes are still purely hypothetical.
The Bank of Baroda analysis says that, in the event that Iran joins the conflict, the trade disruptions could deepen further. “Iran joining the fray can affect the sea routes and push up transport and insurance costs,” Sabnavis said. “Higher crude (oil) will distort our balance of trade and CAD (current account deficit) thus putting pressure on the rupee.”
Sabnavis added that Israel imports around $5.5-6 billion of refined petroleum products from India, and so a disruption of this trade would put further pressure on the exchange rate and could lead to a further depreciation of the rupee to a range of Rs 83-84 to a dollar from the current range of Rs 82-83 over the past month. With oil prices rising once again (they averaged $93 a barrel in September and are so far averaging $90 in October), and possibly rising even further due to the new war, the Oil Marketing Companies (OMCs) could choose to either increase fuel prices for the public or keep them unchanged.
Raising fuel prices would mean the public will feel the pinch at a time when retail inflation has been above the RBI’s target of 4 percent since September 2019. Not raising fuel prices would mean the OMCs would absorb the losses, a likely scenario given the 2024 general elections are just months away and would then have to be compensated by the government. This compensation will of course be done using taxpayers’ money, which means that one way or the other, it is the public that will pay if oil prices rise.
Impact on Oil prices
As the International Monetary Fund’s Gita Gopinath said, “If the war becomes a regional conflict and sees the involvement of more countries, it could impact oil prices, causing an increase in inflation and an adverse effect on world GDP.”
The future of the Israel-Hamas conflict is uncertain. And if it escalates into a wider regional war as there is an increasing likelihood of neighbours like Iran and Lebanon (Hezbollah) joining the fight. Arab nations too have begun to criticise Israel’s heavy-handed campaign in Gaza. The consequences of this war on consumers in India and also the Indians working in West Asia could also be troublesome. If the war between Russia and Ukraine had impacted global supply of key agricultural commodities like wheat and even fertilizers, the Israel-Palestine crisis could affect global crude oil supply, which may hit Indian households’ budgets as well.
It’s highly unlikely that the ensuing conflict between Israel and Hamas will be a short and swift one. Even the Israeli PM has shifted from his ‘gung-ho’ stance to a more practical one, wherein he says the military operations in Gaza will take quite long. One reason for that is the determined resistance that Hamas is willing to put up. Also, it’s not easy to defeat a group of people that are willing to die.
Finally, as the US sends military aid to Israel seems to contradict its assertion to slow or ease the ferocity of Israel’s military assault. Moreover, Israel has enough in its arsenal to destroy whatever is left of Gaza. One reason why the war in Ukraine has dragged on is because of US supplies of arms to Ukraine. Also wars are good business for the US arms industry. So, if this campaign goes on any longer, then the external ‘actors’ in that region could, at Iran’s behest, spark a bigger conflagration in West Asia and this would be a foreign policy disaster for the Biden administration, which was confidently looking ahead towards a possible Saudi-Israeli rapprochement, and perhaps tout it as a big victory for US foreign policy. But it now looks like a pipe dream for him, as the next year’s election looms large.