Hello, this is Ganesh Rao, writing from London. This week, I look into how the Israel-Iran conflict was a reminder of India’s vulnerabilities — and the opportunities emerging from the crisis.
The Indian Army’s Brahmos missile system takes part Rehearsal in full swing ahead of the Republic Day Parade 2025, at Kartavya Path on January 20, 2025 in New Delhi, India.
Raj K Raj | Hindustan Times | Getty Images
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The big story
India’s economy was staring down a ravine over the past week.
Geopolitical tensions in the Middle East could have battered the country. Instead, India found in the Israel-Iran war a catalyst to beef up its defense sector.
The two Middle East countries agreed to a ceasefire on Wednesday, following a U.S. bombing campaign that U.S. President Donald Trump said obliterated Iranian nuclear ambitions. Oil prices gave up their short-lived gains, removing India from the precipice. But the episode highlighted many of India’s vulnerabilities.
India no longer buys Iranian oil, but 40% of its total crude imports still transit the narrow waterway of the Strait of Hormuz, one of the world’s most crucial oil chokepoints. Any disruption would have meant a severe economic fallout for the country.
For every $10 per-barrel increase in crude prices, India’s consumer price inflation could rise by up to 35 basis points while economic growth could decline by 30 basis points, according to an analysis by SBI Research.
Madan Sabnavis, chief economist at the Bank of Baroda, a majority government-owned bank in India, echoed that estimate, warning that, while a 10% price hike was manageable, a sustained price above $100 per barrel “can have a major impact.”
The conflict also puts New Delhi in a tight spot between its investments in Iran — notably the Chabahar port, which is operated by Indian companies — and its deep and growing defense relationship with Israel.
India is the single largest buyer of Israeli arms, accounting for 34% of its defense exports, according to a March 2024 report by the Stockholm International Peace Research Institute. Israel accounts for 13% of India’s imports.
India’s recent “Operation Sindoor” against Pakistan, launched after an April militant attack in Jammu and Kashmir, reveals the depth of this dependency on arms imports, according to analysts at investment bank Jefferies. The operation utilized a mix of old Russian gear and new Israeli-made equipment, including Heron surveillance drones, Spyder and Barak-8 surface-to-air missile systems.
Soon after Russia invaded Ukraine, India found that Moscow, historically a top arms supplier, had become unreliable. Russian defense manufacturing capacity was directed toward Moscow’s own needs for the war in Ukraine, causing significant delays for India’s military modernization program.
Worse still, analysts point out that Russian equipment, such as the T-90S tanks that are a staple of the Indian Army, appeared to have “underperformed” in Ukraine.
Pivoting to domestic defense
India would certainly not have wanted to suffer yet another delay in weapons procurement, were the Iran-Israel conflict to drag on.
This has created an urgent need for India to pivot. The transition, however, is more likely to take years, if not decades, as 90% of India’s armored vehicles and 70% of its combat aircraft were of Russian origin as of 2023, according to research from Bernstein.
“I think undoubtedly the situation will have increased the desire and conviction that all the countries have to increase their defence spending, which was initiated because of the Russian invasion of Ukraine,” said Anna Mulholland, head of emerging market equities research at Pictet Asset Management. The firm’s emerging market fund has India as the second largest allocation.
“The Middle East turmoil, while not new, will surely have increased people’s resolve and commitment to those increased defence budgets that have been spoken about,” she added.
Opportunity out of crisis
Out of this crisis, India has made an opportunity to grow its domestic defense industry.
Analysts at JPMorgan identified the recent geopolitical conflicts as a “pivotal moment for widespread recognition of BEL’s capabilities,” referring to the state-owned Bharat Electronics. The stock is up around 38% so far this year.
“A steady stream of orders, elevated geopolitical risks both in India and globally, and strong medium-term growth prospects … with healthy [return on equity] should continue to lead to outperformance, in our view,” said JPMorgan’s Atul Tiwari, an executive director at the bank, in a note to clients on June 23.
The most tangible sign of this pivot is “Project Kusha” — India’s homegrown alternative to the Russian S-400 air defense system, in which BEL is a key development partner. “This program is expected to contribute significantly to the company’s long-term order book once contracts are finalized,” JPMorgan’s Tiwari added.
India is unlikely to be the lone customer for those companies. New Delhi is also targeting defense manufacturing as an export industry. It aims to double exports to nearly $6 billion a year by 2030, according to Jefferies.
— CNBC’s Michael Bloom contributed reporting.
Top TV picks on CNBC
Dhiraj Nim from ANZ notes that while the recent rise in global oil prices pose downside risks for the rupee, the “shaky” ceasefire between Iran and Israel has helped stabilize investor sentiment and improved near-term outlook for the currency.
Frederic Neumann, chief Asia economist at HSBC and Tim Seymour, CIO at Seymour Asset Management, see EM as undervalued, with Korea, India, Vietnam standing out.
Need to know
India will produce a $100 billion tech company. That’s according to the CEO of Proseus, one of the biggest tech investors in the world. Proseus has invested in the buzziest tech firms in India, such as payments service PayU and e-commerce company Meesho.
Mixed picture for India’s economy. The Reserve Bank of India noted that factory and services activity in May remained healthy, but urban demand slowed sharply.
Capital injection for Air India. During India’s financial year 24-25, Tata Sons and Singapore Airlines pumped in 9,588 crore Indian rupees ($1.1 million) in the airline. Air India is dealing with a tragic air crash on June 12.
– Yeo Boon Ping
What happened in the markets?
The Nifty 50 hit its 2025 high at 25,549 points. Investors rushed into equities after easing tensions in the Middle East. The index added over 2% since last week and gained more than 7% in the year to date.
The benchmark 10-year Indian government bond yield moved lower by 3 basis points compared to last week and now trades at 6.27%.
What’s happening next week?
June 30: India industrial output in May
July 1: Industrial gases manufacturer Ellenbarrie Industrial Gases IPO, construction agency Globe Civil Projects IPO, India manufacturing PMI in June
July 2: Loans provider HDB Financial Services IPO
July 3: India services PMI in June