Will Mideast Tensions Affect India Inc in the Near-Term?

New Delhi, June 20 (NationPress) The effects of tensions in the Middle East on Indian corporations are projected to be minimal in the immediate future. This is attributed to low capital expenditure intensity and the financial resilience of these firms, providing a safeguard against potential risks, as stated in a report by Crisil released on Friday.

Nevertheless, should the situation escalate further, the repercussions could intensify, particularly due to a rise in oil prices and disruptions in supply chains, which may lead to inflation, according to the report.

"Up to now, the ongoing instability in the Middle East has not notably impacted India Inc.’s global trade. However, a further deterioration could affect certain sectors, such as basmati rice, which would require close observation, along with fertilizers and diamonds—both cut and polished—potentially facing some repercussions," the report detailed.

The instability in the Middle East has influenced global crude oil markets, with Brent prices fluctuating between $73 and $76 per barrel (bbl) over the past week, a rise from the average of $65 per bbl during April-May 2025. Should crude oil prices remain elevated for an extended period, it could adversely affect the profitability of India Inc., the report emphasizes.

Furthermore, prolonged uncertainty may result in increased air and sea freight costs and higher insurance premiums for sectors reliant on exports and imports, the report suggests.

India’s direct trade with Israel and Iran is negligible, constituting less than 1% of total trade. The primary export to Iran is basmati rice, while trade with Israel encompasses a broader range, including fertilizers, diamonds, and electrical equipment.

In fiscal 2025, Iran and Israel represented about 14% of India’s basmati rice exports. However, since basmati rice is a staple, the ongoing tensions are unlikely to severely impact demand, as per the Crisil report.

Moreover, India’s capacity to export to various countries in the Middle East, the US, and Europe mitigates demand risks. Yet, a prolonged crisis might cause delays in payments from partners in these regions, extending the working capital cycle, the report indicates.

For domestic diamond polishers, Israel serves primarily as a trading hub, accounting for around 4% of total diamond exports in the last fiscal year.

Additionally, approximately 2% of all rough diamonds imported come from Israel. Polishers also have alternative trading hubs such as Belgium and the United Arab Emirates, with ultimate buyers based in the US and Europe, providing a buffer against any adverse effects on the sector, the report states.

The consequences of any substantial rise in crude oil prices from the current levels will differ across sectors directly or indirectly affected, and the impact on profitability will rely on the capacity to transfer cost increases.

Higher oil prices will favor upstream oil companies as it leads to increased revenue, while their costs remain fixed.

On the other hand, downstream oil refiners might experience squeezed operating margins due to rising input costs, having limited capacity to fully pass these costs onto retail fuel prices.

In specialty chemical companies, about 30% of operating costs are linked to crude. In this sector, the ability to pass on significant increases in input costs is limited, as it is just beginning to recover from profitability pressures caused by subdued demand, compounded by ongoing Chinese market influences and inventory corrections by suppliers over the past two fiscal years.

Similarly, the paint industry may face margin pressures since around 30% of production costs are linked to crude, and competitive intensity could restrict the ability to transfer elevated input prices to customers, affecting profitability.

For aviation firms, fuel accounts for roughly 35-40% of operational costs. Additionally, these operators will encounter increased fuel costs due to longer travel times resulting from airspace closures or diversions.

In the tyre sector, approximately half of operating costs are crude-linked. As for revenue, 60-65% is derived from the replacement market, with the remainder coming from original equipment manufacturers (OEMs). While tyre manufacturers can swiftly pass on input price hikes in the replacement market, this process typically experiences a lag for OEM sales, which could temporarily impact margins.

For flexible packaging and synthetic textile manufacturers, although over 70-80% of production costs are linked to crude, the impact of rising prices may be moderate due to an improved demand-supply balance and the firms' capacity to transfer costs to customers, albeit with some delays, the report concludes.