GEOPOLITICAL conflicts affect the lives of people who hardly have any role in initiating the conflict. The ruling class of conflicting nations engage in wars and the burden of the disruptions caused in the process is asymmetrically imposed upon common people. The national leaders of Israel and the US decided to attack Iran out of desperation as both could sense a decline of their control over the Middle East. According to official statements it was to salvage the Iranian people from the tyranny of Islamic rule. They didn’t succeed. Instead, the US and Iran are caught in a quagmire that does not have an immediate solution. The US misread the civilisational resilience and military capacity of Iran and the right-wing adventurism was primarily driven by a desperation to resist the declining control of US over countries in the region. Instead of making America great, Trump essentially exposed its economic vulnerability and the failed attempts to punish the countries of the world through punitive tariffs and arm-twisting through trade deals. The war waged against Iran didn’t get any internal or external support and is going to increase military expenditure across the world, which would crowd out social sector expenditure.

The World Economic Outlook (WEO) released by the IMF acknowledges the potential decline in economic growth rates because of the military conflict. Apart from the humanitarian costs and rise in commodity prices caused by rise in oil and fertiliser prices and general disruption in air and marine traffic, inflation expectations are high and commodity importing countries are likely to face currency depreciation. Also, investments are likely to be shaky in an uncertain environment.

Higher food and energy prices hit the poor most because these constitute the largest share of their consumption basket. The Iranian people had to bear the direct cost of the war. Their livelihoods and critical infrastructure had been damaged. The common people of the US have to bear the cost of the war as borrowing becomes difficult and America’s credit ratings have deteriorated and most importantly people of the world have to face a declining growth rate because of the high oil prices, which is set to shoot up to unprecedented levels as predicted.

The Indian establishment tried to foreground their friendship and allegiance to President Trump and the Zionist-imperialist combine including Netanyahu compromising India’s autonomy to the extent of maintaining silence on criminal acts of assassinating leaders of sovereign countries. As a result, the nation has to pay the price and the consequences of the war have to be borne by the working people, who can’t be held responsible for the conflict.

GROWTH DECLINES

The conflict situation is going to affect the economy in different ways. The immediate impact would be a rise in oil and gas prices due to the closure in the Strait of Hormuz which is going to adversely impact all energy intensive goods and services such as chemicals, fertilisers, food and transportation. This, in the second order, would increase expectations of inflation which in advanced countries may trigger a wage-price spiral causing higher costs for imports. On the other hand, rising uncertainty in the global financial environment is going to raise risk premium that may cause capital flight, once again appreciating the dollar. As the dollar appreciates, the cost of imports would rise further, which would create pressure on our forex reserves if it is not offset by an adequate rise in exports. But exports from Asia would also be disrupted by the recent conflict, hence the current account balance is likely to worsen. The WEO also projects a rise in debt in many developed and developing countries. US debt is expected to climb from 124 per cent of GDP in 2025 to 142 per cent in 2031. Similarly, the debt to GDP ratio is going to rise in developing countries and emerging markets from 74 percent to 86 percent during the same period.

As a result of the conflict and its direct and indirect effects global growth is projected to fall from 3.5 per cent in 2025 to 3.1 per cent in 2026, which would be the slowest in the post-pandemic period. Inflation is expected to rise reaching a three-year high of 2.8 per cent in advanced economies and 5.5 per cent in developing economies in 2026. If the conflict is prolonged, the WEO suggests that global growth may further come down to 2.5 per cent, which would be the lowest since the financial crisis. With devastating effects on energy infrastructure and disruptions in supply chain continuing for longer period it is estimated that the world economy can slip to further lowering of growth to 2 per cent while inflation rises to 6 per cent. The forecast also says that the fall in growth would be higher in developing and emerging economies and may prolong longer than in advanced economies. In the case of China, growth slows down from 5 per cent in 2025 to 4.4 and 4 per cent in the coming two years and in case of India it is expected to decline from 7.6 per cent to 6.5 per cent in the next two years. Global trade is expected to decline. Exports growth would decline sharply from 7.1 per cent in 2025, to 3.7 per cent in 2027 and services from 7.3 per cent to 5.7 per cent during the same period. Rise in import prices and decline in export growth would widen our current account deficits. All these ultimately impact consumer prices and consumer price index is estimated to double soon.

BURDEN ON THE POOR

The clarion call for austerity in the context of conflicts in West Asia is nothing but shifting the direct and indirect burden of war on the working people. The ruling class of the world and the political elite decide the war, but the common people must face its consequences. Austerity and national concerns also become a plea to control the rising demand for higher wages of the working people. They prevent new employment while work intensity of existing workers increase without commensurate returns. A decade-long stagnated real wages with rising prices in the future would further worsen the wellbeing of the working people.

The huge profits that oil oligarchs of India made in the past taking advantage of geopolitics especially during oil imports from Russia, or the excise duties that both centre and state governments garner through rising oil prices should be used to absorb the price shocks of crude instead of passing that to consumers. In fact, spikes in food prices causes a redistribution against the poor and the middle class since they have a larger share of food expenditure in total consumption basket compared to the rich. Therefore, the poor suffers more due to food inflation. Restriction in mobility and ‘work from home’ also affects the poor more as the well-to-do are disproportionately represented in contact-less activities. Those who perform physical labour and receive wages on daily basis work will be heavily hit by these restrictions. Particularly education of children, those without access to digital devices, suffer the most in case of online teaching. The irony however is that none of these people are responsible for growing conflicts. Also, as conflicts increase defence expenditure of many countries both developed and developing countries show a rising trend. This might trigger some short-term growth in economic activities for producer countries but with declining growth rates the net effect would result in cuts in welfare expenditures that once again adversely affect the poor and the working people.