The expansion of the war to Lebanon and the Persian Gulf due to the involvement of Hezbollah, Ansar Allah (the Yemeni militant group commonly known as Houthis), militias in Iraq and the Iranian Revolutionary Guard Corps (IRGC) has threatened to escalate the conflict beyond Israel and Palestine. But how might the ongoing war and possible escalation affect India’s economic and diplomatic engagements with the region?
India and the Middle East
India has been working towards enhancing and accelerating its economic growth and development to realise its potential and raise its population’s standard of living. Accordingly, significant diplomatic energy has been invested in enhancing economic relations with different regions of the world, especially in the neighbourhood and the extended neighbourhood. The focus has been on improving trade, commerce and investments, bringing global business to India, and paving the way for Indian companies to make their presence in different parts of the world. Consequently, there has been a significant spurt in India’s external trade and commerce over the years.
The Middle East has been one of India’s most important regions for external economic engagement. Several domestic, regional, and international factors have contributed to the region’s emerging position as India’s top economic partner. Bilateral trade, energy imports, significant two-way flow of investments, connectivity projects, outflow of Indian labour and workforce, inflow of remittances and increase in defence trade are among the important factors contributing to the economic engagements between India and the Middle Eastern countries.
Within the region, the Gulf Cooperation Council (GCC) states, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE, are among India’s most important economic partners.
Besides, there are notable trade and commercial relations with Iran, Iraq, Israel, Türkiye, Egypt, Syria and Jordan. Further, India has been working to enhance economic ties with the countries in North Africa, especially Algeria and Morocco, and had good economic relations with Libya before the civil war devastated the North African nation.
Enhancing connectivity
The quest for connectivity and the potential for expanding partnerships in niche and emerging areas has further strengthened India’s economic and commercial relations with the regional countries. The International North-South Transportation Corridor (INSTC) passing through Iran connecting India to Central Asia, Russia, and Eastern Europe meant that New Delhi has long invested in the Chabahar Port development and expansion project.
Since December 2018, India Ports Global Private Limited (IPGPL), a joint venture company formed by Jawaharlal Nehru Port Trust (JNPT) and Kandla Port Trust (KPT), has been operating the container/multipurpose terminals facility at the Chabahar Port.
In September 2023, during the G20 Summit in New Delhi, India, along with Saudi Arabia, the United States, UAE, Germany, France, Italy and the European Union, signed an MoU to develop the India-Middle East-Europe Economic Corridor (IMEC) to “stimulate economic development through enhanced connectivity and economic integration between Asia, the Arabian Gulf, and Europe.” Besides, India has joined hands with Israel, the US, and the UAE to form the I2U2. India, France, and the UAE have formed a trilateral agreement to enhance trade and strategic regional cooperation.
India has also signed a comprehensive economic partnership agreement (CEPA) with the UAE that came into effect in May 2022 and has revived the talks on the India-GCC free trade agreement (FTA) to explore the possibility of further enhancing trade relations with the regional bloc.
Implications of the Middle East crisis
With such vast economic ties and immense future potential, the Middle East is among the most important regions for India’s external economic relations. However, the war in Gaza, its expansion into Lebanon, the threats to the sea route in the Red Sea due to Houthi targeting of international shipping and most critically, the escalation in tensions between Iran and Israel can pose a serious threat to the bilateral economic engagements.
While the wars in the Gaza Strip and Lebanon had only had a limited impact on India’s economic relations with the Middle East, it has certainly put a break on the financial and commercial projects that flowed from the Abraham Accords.
The enthusiasm for the India-Abraham Accords economic cooperation discussed through I2U2 with a focus on food security and clean energy and the operationalisation of the IMEC that were based on the possibility of improved Arab-Israeli relations have already been dampened by the continuation of the Israeli military operation in the Gaza Strip and the rising Palestinian death toll.
The continuing Israeli assault on the Gaza Strip and its rising human cost has meant that Saudi Arabia, which was in the past exploring the possibility of formalising relations with Israel, has taken a firm stand on eschewing any talks of formal relations without discussing a potential pathway for resolution of the Palestinian problem. As a result, progress on the development and operationalisation of IMEC will likely remain slow until the ongoing conflict ends.
The possibility of expansion of the war to the Gulf region due to the involvement of Houthis in Yemen and the tension between Iran and Israel means that India’s economic interests can be severely harmed if the Middle East conflict does not wind down. The potential for disruption in the Red Sea means disruption and cost escalation of international trade with Europe, and with the IMEC, the potential alternative to the Red Sea route, yet to fully materialise, the war can have serious implications for India’s international trade.
Moreover, the confrontation between Israel and Iran could disrupt energy flow and increase oil and gas prices, which would devastate the economy due to the potential for cost escalation of essential commodities and a rise in inflation. Fiscal management to keep the oil and gas affordable, especially for the domestic sector, would mean serious disruption in budgetary planning.
What lies ahead?
The situation in the Middle East continues to be explosive, with the war in the Gaza Strip refusing to end and expanding into Lebanon and threatening to escalate into a full-fledged war between Israel and Iran. Thus far, the scenario has remained bleak. Still, the impact on India has been limited as New Delhi has been able to balance its relations with Israel, the Arab Gulf states and Iran without significantly altering its position on the issue of terrorism or support for a Palestinian state.
Moreover, the economic cost has been limited as the IMEC and I2U2 are in the early stages, and India has, over the years, notably diversified the sources of its hydrocarbon imports. Nonetheless, the potential for escalation remains a serious threat to India’s economic engagement with Middle Eastern countries, including expatriates, remittances, investment and connectivity projects.
The election of Donald Trump as the next president of the US can be a potential game-changer in the ongoing conflict, going by the statement of the president-elect on ending the conflicts in Ukraine and Gaza. Although this may be viewed as a good sign, going by the previous tenure of the Trump administration (2017–2021), the likelihood of increased pressure on Iran and escalation between the US and Iran cannot be ruled out. India would need to be prepared for any eventuality and keep its international partners engaged to take contingency measures to safeguard its economic and strategic interests.
Post Read Questions
Why is West Asia one of the most crucial regions for India’s external economic relations?
How might the ongoing war in Gaza affect India’s economic relations with West Asia?
What are the implications of Yemen’s Houthi attacks on international shipping in the Red Sea for global and Indian trade?
How can India maintain and expand its economic ties with West Asia amidst rising regional instability?
(The author is an Associate Professor of Middle East studies at Jawaharlal Nehru University, New Delhi. Views are personal. @MuddassirQuamar. In the second part of the article, the author will analyse the effect of the Middle East crisis on bilateral trade and Indian expatriates in the region.)
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Read other articles from the series on Conflicts in West Asia:
Conflicts in West Asia: Israel-Iran war of abrasion
Conflicts in West Asia: A brief history of the Israel-Palestine conflict
Conflicts in West Asia: Iraq in disarray
Conflicts in West Asia: Israel-Hamas war and the Yemen quagmire
Conflicts in West Asia: Kurds and their struggle with statelessness
The Middle East has been one of India’s most important regions for external economic engagement. (Reuters) 
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