A tightrope between Israel and Arab ties

A prolonged Israel-Hamas conflict may, at some point, pose a threat to Indian financial assets

Indian passports issued before 1992 carried two exclusions: The document was not valid for South Africa or Israel. If you wished to travel to the latter, the visa was issued by the Israeli Consulate in the erstwhile Bombay as a separate document without a passport stamp. That changed when the two nations established full diplomatic relations.

However, there was a strong, if clandestine, relationship. During the Indo-Pak War of 1965, Israel supplied mortar shells and other munitions. In 1971, Israel again supplied munitions. By the Kargil War of 1999, the defence relationship was well-established and no longer clandestine. Israel supplied sophisticated laser-guided munitions for the Mirage 2000 as well as reportedly provided intelligence inputs.

Israel is now the third-largest supplier of defence equipment to India, behind Russia and France — it was the second-largest supplier until the Rafale deal. Over 8 per cent of India’s defence imports are from Israel. In other trade spheres, the relationship is also strong — India is Israel’s second-largest trading partner in Asia (excluding defence).

India exported around $5.5 billion worth of petroleum products to Israel last year, and imported raw diamonds, electronic components, etc. There are many Indo-Israeli Research & Design (R&D) projects, including cutting-edge defence applications in avionics, drone development, electronic equipment, snooping (Pegasus is an Israeli product, for example), GPS–related R&D, aerospace, renewable energy, information technology (IT) and other high-tech areas.

While India exports petroleum products (it has surplus refining capacity), it is famously dependent on energy imports. Over 85 per cent of India’s crude and over 50 per cent of its natural gas are imported. A large proportion of that is supplied by Muslim-majority Arab nations, apart from Russia.

Moreover, roughly 9 million non-resident Indians (NRIs) are residents of the Gulf nations. That’s approximately two-thirds of all NRIs, and many more work in Saudi Arabia, Kuwait, and other nations. West Asian NRIs contribute close to 30 per cent of inward remittances. There are many Indian businesses incorporated in the Gulf Cooperation Council (GCC). It’s a deep historic relationship. Indians with Israeli visas have trouble getting into some Arab countries, but they can enter and work in others.

It would be an understatement to say Israel doesn’t get on with the Arab world, or Iran, or Russia for that matter. The conflict with Hamas started with a horrifying massacre targeting Israeli civilians. It has escalated with equally horrifying massacres of Palestinians as Israel has retaliated. All of this has been highly visible across media and social media platforms, with the usual fake news thrown in. This has led to a further hardening of attitudes.

Thus far, Arab nations have not come up with a concrete response to the ongoing conflict. However, while most Arab governments aren’t directly driven by public opinion, they may find it difficult to ignore the emotional impact on their citizens if the conflict continues, and God forbid, if it escalates.

In 1973, in the aftermath of the Yom Kippur War, the Organization of the Petroleum Exporting Countries (Opec) flexed its muscles and punished the energy-dependent First World by simply hiking oil prices. India ended up being collateral damage. The price of petrol at Indian pumps was raised from Rs 0.65/ litre to Rs 1.7/ litre in a day (there’s been plenty of energy inflation in the subsequent 50 years). If the Gaza assault continues, Opec’s Arab members may again leverage their energy and significant financial clout to punish Israel and its friends.

India needs to walk a diplomatic tightrope. It cannot give up the oil. Nor can it give up on the trade and defence ties with Israel. Nor can it risk loss of residency and livelihoods for all the NRIs who live and work in the Arab nations. It is, therefore, hard to take any official stand. India will have to equivocate, as indeed it has done successfully so far. 

In one sense, India has already suffered collateral damage because of higher, more volatile energy prices. There is no conceivable resolution to this conflict in any reasonable timeframe. Israel versus Hamas adds a set of “known unknown” geopolitical risks that may directly affect India’s economic interests. That might, at some stage, become an issue that impacts Indian financial assets.