Hyderabad: The escalation of tensions between the United States and Iran owing to the killing
of General Soleimani is a matter of great concern for India due to a host of reasons. The developments come in the wake of an unprecedented slowdown in the economy. The tensions in the Middle East have the potential to worsen the already fragile situation. India's hectic diplomatic move to isolate Pakistan may also be adversely impacted as Islamabad emerges as a key player in the enveloping scenario in the West Asian region. Pakistan has greater diplomatic leverage than India. The choking of choice to befriend with either the United States or Iran shall pose a strategic challenge for India's foreign policy establishment.
India imports nearly 80 per cent of its crude oil requirements. The West Asian region accounts for over two-thirds of India's oil imports. Prior to the American sanctions on Iran, Tehran accounted for nearly 10 per cent of India's crude oil requirements. As India brought down the oil imports from Iran to zero in the wake of American refusal to give us an exemption in regard to trade with Iran, Iraq became a vital supplier. The US assault on Iran's most important military leader on Iraqi soil triggered a major crisis in this region endangering oil supplies. The US attack has already led to the spurt in global oil prices. The disruption in the oil supplies market in the strategically key region shall undermine India's energy security.
The Indian stock markets fell by as much as 800 points as the news of American attack broke. The capital markets are normally vulnerable to any adverse developments domestically or globally. Thus, the growing tensions between the US and Iran shall kick off a vicious cycle of adverse impacts for India, which are cascading in character.
India's stock markets are heavily dependent on foreign Portfolio Investment for its healthy movement. But, in an hour of deepening crisis, the foreign investment tends to return to safe havens leaving the emerging markets to expose to a high risk of vulnerability. That is precisely what is happening after serious tensions broke out with Iran vowing to take revenge and Trump declaring a readiness to strike back in case of any Iranian misadventure. The global economy is already passing through a phase of sullen economic growth. The global economic outlook further slips into chaos as the world enters yet another phase of political and military uncertainties as none can predict how long and how far the US-Iran hostilities go. In fact, the world heeded a sigh of relief when the United States, Russia, Turkey and even Iran had cooperated in some way or other in decimating ISIS. In fact, the Iranian General also played a key role in this crucial anti-ISIS operation. But, with Iran and Iraq yet again plunging into a crisis of grave proportion, the danger of ISIS coming back in the same or different form still lingers. Such an eventuality will impact the global economy and thereby accentuating the reverse flow of foreign investment from India.
These global developments seriously undermine India's exports, especially to the trouble-torn region. The Indo-Iranian trade has already fallen by about 80 per cent in the first ten months of the financial year 2019-20 mainly due to the impact of American sanctions on nations trading with Iran. India exports cereals like basmati rice, tea, coffee, spices etc. India has the advantage of conducting trade with Iran in rupees. The latest spell of hostilities shall extend the sanction on Iran beyond unspecified time seriously hurting India's trade
The combined effect of higher import payments due to a hike in oil prices, falling exports, the outflow of foreign investment, etc., would be weakening rupee. This shall again adversely impact the Current Account Deficit, which at present is at a relatively comfortable position due to the long spell of low global oil prices.
Indian economy is passing through the acute downturn. The latest data released by the Central Statistical Office (CSO) reveal that the GDP growth rate in the current fiscal is expected to be around 5 per cent, the lowest in the last 11 years. As per the report, the industrial sector fell drastically with slowdown reported to be much steeper in the manufacturing sector. The fiscal deficit may surpass the budgetary target of 3.3 per cent to harbour around 3.5 per cent of GDP. In an era of globalization, the Indian economy cannot be completely insulated from global trends. The tightening of global oil prices shall cause inflation. The combination of falling growth and growing inflation can prove to be lethal for the Indian economy.
The gold prices saw an all-time high level. The projection for 2020 is that the gold prices may tread a path of higher trajectory. The new tensions can cause further anxiety in the global gold market that is always susceptible to world developments. The higher gold prices can widen the Current Account Deficit unless the situation leads to lower demand for the yellow metal.
About 8 million Indians are living in this region, popularly called as West Asia and North Africa (WANA) or the Middle East and North Africa (MENA). Any escalation in the situation can result in heavy reverse migration posing a serious challenge to the domestic economy. The Indian economy is already witnessing not only joblessness but even job losses. The reverse migration from gulf will further increase the livelihood challenges. Besides, the gulf Indians account for the lion's share of foreign remittances by expatriate Indians, which proved to be highly useful in times of precarious foreign exchange situation. However, India at present holds comfortable foreign exchange reserves. But, it cannot be taken for granted for a longer time as there are enough anxieties here too.
Any further escalation in the situation in the gulf may see the polarization of world powers. Saudi Arabia, the United Arab Emirates (UAE) are US allies in the region, and they are engaged in a confrontation with Iran. On the other hand, Iran has the backing of Russia and China. Even the US-led NATO partner, Turkey is moving towards Russia in the recent past. Turkey, Malaysia and Iran are already building up a coalition to counter Saudi dominance in the Organisation Of Islamic Countries (OIC). As such a possibility of polarisation across the region seems imminent. India will have to choose between either of the two camps. But, New Delhi has strategic and economic relations on both sides of the fence. Thus, increased hostilities between the US and Iran will create diplomatic and foreign policy challenges.
India could successfully isolate Pakistan in the recent past as the world increasingly realizes the role of Islamabad in aiding and abetting terrorism across the globe. The attempts of Pakistan to isolate India on Kashmir etc. Failed to yield any worthwhile dividends. The Trump administration has been acting tough on Islamic terrorism. But, the recent outbreak of hostilities may increase the strategic importance of Islamabad for Washington. The US is desperate to pull its troops out of Afghanistan. The Trump administration is negotiating with a section of the Taliban. The US needs Pakistan to accomplish this foreign policy objective. Now, the US further needs Pakistan to isolate Iran in the Islamic world. The US has already revived trading of the Pakistani military. Thus, the recent developments may undermine India's efforts to put its hostile
neighbour in the dock.