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Modi’s historic visit to Israel comes with the usual benefits in the areas of defense and technology. What’s unusual is the strategic diplomatic shift wherein India has now officially de-hyphenated foreign policy for Israel from Palestine. What’s more – this is happening at a time when geopolitical alliances are shifting rapidly.

Defense and diplomatic ties – on a strong footing

As a prequel to PM Modi’s visit to Israel, diplomatic and defense collaboration had been strengthening. Over the past year, India has successfully tested jointly developed long range surface-to-air missile (70 km range) and Israel-made SPYDER quick reaction surface to air missiles. In April 2017, India-Israel inked deals worth USD 2 billion for the advanced missile system – the largest ever contract for the state-owned Israel aerospace industries.

On the diplomatic front, high level visits to Israel have been pretty consistent since 2014 when the NDA came to power. The Home Minister, President and External affairs minister have visited Israel, in 2014, 2015 and 2016, respectively.

While the defense and military collaboration is nothing new, it has strengthened over the years as both nations continue to face broadly common threats of terrorism and border conflicts.

 India – the largest importer of arms from Israel

As per SIPRI (Stockholm International Peace Research Institute), India’s share in global arms imports have increased by 13 percent during 2012-16 (vs. 9.7 percent in 2007-11 period). Israel is the third largest exporter to India after Russia and USA. However, for Israel, India is their biggest export market for arms (USD 599 million in 2016).

Israel’s arm export to India (USD million)

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Source: SIPRI

One of the key imports from Israel which has drawn attention is the import of unmanned aerial vehicles (UAVs). In the year 2016, as per SIPRI database, air defense systems have constituted 28 percent of Israel’s arm exports and India has been the largest importer of the same. Not surprisingly, the current visit aims at sealing another such deal on UAVs/drone (Heron TP) expected to be worth USD 400 million.

 A subtle but substantial change in foreign policy

What stands out in this visit is the strategic importance attached to India-Israel relations. This has not only been addressed in a symbolic way by the first ever visit by an Indian PM, but also in terms of India’s stance towards Israel – de-hyphenating reference to Palestine. In our view, this indicates an independent foreign policy approach for Israel unlike in the past when relations with Israel were measured in context with India’s relation with Arab world.

While this looks like a step towards stronger relations between India and Israel, it also hints at a re-assessment of geopolitical fault lines. With this, India overtly aligns to US-Israel geopolitical axis as far as defense deals and military cooperation is concerned.

The timing of this development is significant. There has been almost a U turn in the Trump-Xi relation with respect to latter’s handling of North Korea’s isolation. North Korea, on the other hand, continues to up the ante with the recent ICBM missile test. Trump made it clear to Prime Minister Modi during the latter’s recent visit to the US that he is counting on India for isolating North Korea. US’s arm sales to Taiwan incidentally has further flared up the Asia’s regional tensions.

Sino-India relation – a new low?

On the Sino-India relationship, border issues on the north-east front has escalated suddenly and could take a while to ease. Hope lies in the Modi-Xi interaction on the sidelines of G-20 meeting in Germany followed by NSA level meet later in July. While Xi Jinping may have internal compulsions for the aggressive diplomatic stance, as he awaits party’s endorsement of a second term, geo-political tensions have risen with China having dominant economic influence on India’s hostile neighbour.

Given this backdrop of the historic visit of India’s PM to Israel, a remarkable shift in India’s Middle-East/Israel foreign policy stance and the unprecedented and rapidly moving geopolitical equations, it is prudent for investors to take note of rising risk premium. In the context of already elevated valuations, a correction in benchmark indices cannot be ruled out in the event of increased geopolitical tension.

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