Iran-Israel flare-up: What does it mean for India?

What just happened in West Asia?

In a departure from its long-term policy, Iran attacked Israel directly late on Saturday taking tensions in the region to a new high. The attack was in response to the bombing of Iran’s Consulate in Damascus on 1 April, ostensibly by Israel, that killed senior Iranian military commanders. Under pressure from hardliners, Iran launched cruise and ballistic missiles apart from over-300 drones at the Jewish state. Most of them were intercepted and the few that got through caused minimal damage. Earlier in the day, Iran’s Revolutionary Guards seized a container vessel purportedly owned by an Israeli billionaire.

Is an all-out war now a possibility?

That depends pretty much entirely on how Israel responds to this direct attack by Iran. After the attack, Iran said that “the matter can be deemed concluded" indicating that its response to the Consulate bombing is complete. Israel may not view it to be so. Its Prime Minister Benjamin Netanyahu warned that “whoever harms us, we will harm them". A strong Israeli reaction risks pushing the two countries into an all-out war, possibly dragging the US into it. To be sure, US and UK forces are already involved in this latest escalation. They have shot down Iranian drones over Jordan, Syria and Iraq.

How is the world reacting to the conflagration?

Leaders from across the world have condemned the Iranian attack and called for immediate cessation of hostilities. US President Joe Biden also re-affirmed his country’s “ironclad" commitment to Israel’s security. World leaders called for restraint to lower tensions in a volatile region which risks descending into chaos. The implication of that will be significant.

How badly will the world be impacted?

The immediate impact will be higher oil prices. Crude oil, already trading near six-month highs, may cross $100 per barrel if tension worsens. The benchmark Brent Crude is trading at $90 levels now. An all-out war will cause supply chain disruptions as Iran will execute its threat to shut down Suez Canal. All this will push inflation up just when developed countries are looking to reduce interest rates. Global economic growth could fall below the 3.1% that the International Monetary Fund has projected for 2024.

And how will India be affected?

The crisis comes just when India seems poised for rapid economic growth. Inflation is coming under control and industrial production is gathering pace. Add to this strengthening consumption and reviving private investment. A war could derail all this. Though imports from Russia have increased, Arab states account for two-thirds of India’s oil needs. Higher oil prices will push up inflation and delay any interest rates cuts critical to boost GDP growth. Merchandise exports, already sluggish, will drop further.