India really cannot handle tension in West Asia right now. That may seem obvious: after all, any escalation in hostilities between Iran and the United States, after the latter killed top Iranian military commander Qassem Soleimani, will have a huge impact across the region and beyond. It’s not for nothing that “World War 3” trended on Twitter ll day on Friday.

But the timing matters too. The Indian economy is in an extremely precarious position. Gross Domestic Product growth has plummeted and the government is struggling to make ends meet, without massively overshooting the fiscal deficit target. The policy making approach to this seems to be to insist that all is alright and hope that the cycle will naturally turn, with a few boosts here and there.

An external shock – in the form of high oil prices or a drop in remittances from the Indians who live in West Asia – could make things much worse.

Iran-US conflict

After coming to power in 2016, US President Donald Trump undid the Iran nuclear agreement that his predecessor, Barack Obama, painstakingly worked to put together. Instead, Trump pivoted to a policy aimed at punishing Tehran for what the US sees as irresponsible actions around the region, including expanding its influence over neighbouring Iraq, through sanctions and covert strikes.

Over the last few years, the situation has already been poised on a knife’s edge a couple of times, after Iran attacked oil tankers in the Persian Gulf and also shot down a US drone. In both cases there was fear of an outright retaliation by Washington that many believe would spark off a regional conflict. In June, Trump called off airstrikes on Iran at the very last minute.

The events of the last few days – a rocket attack in Iraq that killed an American contractor, a retaliatory strike by the US, an Iran-supported Iraqi militia storming the US embassy in Baghdad, and now the killing of Qassem Soleimani – are certain to lead to even more conflict.

Yet it is unclear what form this will take and whether Tehran will want to hit back right away. Meanwhle, in America, the Republican party is using the opportunity to drum up support for a war on Iran that some analysts have advocated for decades now.

Impact on India

There are two primary dangers for India, other than the extremely destabilising effects of any outright war in the region.

One, there are 8 million Indians living and working in West Asia, the vast majority of whom live in the Arabian Gulf. Conflict would put them all in danger, as it did at the start of the 1990s, when the US went to war with Iraq and New Delhi had to arrange an airlift of more than 110,000 Indian citizens.

But even if there isn’t all-out conflict, heightened tensions could hurt the economies of the region, and endanger the jobs of many Indians. Already the events of the last few years, including inter-regional conflict between Saudi Arabia and Qatar, employment nationalisation drives in a number of countries and Dubai’s struggles to recover from economic crisis, have hurt the diaspora.

Kerala has already begun coming to terms with the idea that many more will return. A sudden jolt would put pressure on the places Indians return to, and also endanger the $40 billion in remittances India receives from West Asia – more than 50% of all remittances to the country, a key source of foreign exchange.

Then there is the question of oil prices. Though international prices have gone up by 4% since the strike on Soleimani, analysts do not currently expect them to get much higher – presuming it is in no one’s interests for that to happen and that both the US and Iran will back down from outright conflict.

Yet if that presumption is wrong, India will face some difficult times. Although India does not now import much oil from Iran, it is still heavily reliant on the the Strait of Hormuz – the tiny span of water through which a quarter of the world’s oil and a third of its natural gas travels. Higher oil prices would automatically mean inflation in India, where analysts are already worried about rising food prices.

Even if India’s economy were on a more stable footing, conflict in the region would be dangerous. But the current tensions, coming as they do when the Indian economy seems poised on a precipice, should be even more alarming for policymakers.

Read also:

2020 should be the year Modi and Shah focus all efforts on the economy. Will they?