The consequences of wars are not uniform. If we take recent history, some wars had far-reaching economic consequences; others didn’t have any impact. The Yom Kippur War of 1973 created the first oil shock, which, in turn, triggered profound consequences in economies, energy systems, and industries like automobiles.
Many other wars, which were more localised, were soon forgotten. The impact of the Iran war can be properly assessed only after the war is fully over. Depending on the duration of the war and the extent of the energy shock, the consequences can vary.
Perhaps the biggest lesson from the Iran war is that it has profoundly altered the economics of modern warfare through the novel strategy of inexpensive drones vs hugely expensive interceptors. Here, we compile the lessons from the war from India's perspective.
1. Energy insecurity
Perhaps the biggest economic lesson from the Iran war is that it exposed the vulnerability of nations to shocks emanating from choke points like the Strait of Hormuz. The war has triggered a major energy crisis. The spike in the price of crude and restrictions on the availability of LPG and LNG have impacted energy importers significantly. The energy crisis has not impacted economies that are self-sufficient in energy. Energy exporters like the US and Russia, which have not been affected by the closure of the Strait of Hormuz, have gained from the energy crisis.
Energy importers like India have been impacted significantly. Since India imports about 85 per cent of its crude oil, 60 per cent of its LPG, and 50 percent of its LNG, and since a major part of these imports are coming through the Strait of Hormuz, India became hugely vulnerable to this crisis. Ballooning trade deficit, rising current account deficit, and depreciating currency have turned out to be strong macro headwinds for India.
READ | Iran war completes 2 months: Nifty targets cut amid oil, inflation risks
2. Importance of renewable sources of energy
From the Indian perspective, a major lesson from the war is that we have to always be vigilant and prepared for an external sector vulnerability arising from our energy import intensity. The sharp spike in crude and restrictions on the availability of LPG and LNG transformed the Indian economy from a Goldilocks scenario before the war to a vulnerable setting within a few weeks of the breakout of the war. Economies that had developed renewable sources of energy were much less impacted. The big lesson from this is that India has to develop renewable sources of energy on a war footing.
3. Fiscal discipline is crucial
Another lesson from the war is that India managed to absorb the initial shock through tax cuts on petrol and diesel. A major success of this NDA government is its success in fiscal consolidation, having brought down the fiscal deficit from 9.2 percent of the GDP in FY21 to 4.4 percent in FY26. Fiscal deficit will slightly expand this year due to the tax revenue forgone, but the fiscal consolidation gave us the fiscal space to partly absorb the oil shock. This macro lesson underscores the importance of fiscal discipline.
4. The importance of staying invested
An important lesson from the history of geopolitical conflicts, including wars, is that their impact on the stock market is short-lived. Wars trigger immediate fear and panic selling, but soon the panic subsides and normalcy returns to the market. Often, the panic selling provides opportunities for contrarian buying to investors who have the skill to “turn greedy when others panic.” This pattern played out during the Iran war. After the initial mild panic, markets quickly recovered, with many markets setting new records.
In India, Nifty recovered more than 10 per cent from the lows following the outbreak of the war. The Investors who panicked and sold out didn’t benefit from this recovery. The lesson for investors is not to panic but to remain invested. Perhaps this war may prove these famous words of Baron Rothschild true: “Fortunes are made when cannonballs bombard the harbors, not when violins play in the ballroom.” ===================== Disclaimer: This article is written by VK Vijayakumar, chief investment strategist, Geojit Investments. Views expressed are his own.