Israel is heading into one of the most important elections in its recent past as Prime Minister Benjamin Netanyahu battles for his political life and is dealing with a rising political crisis in an area marked by violence, as tensions with Iran, Hezbollah and the rest of the Middle East have the potential to escalate into another major conflict. The issue is no longer just if Israel has the military power to deal with Tehran's threat, but whether it can. It was whether a new conflict, which started in the midst of electoral uncertainty and economic pressure, would boost Israeli security or leave it vulnerable to a drawn-out regional war.

Netanyahu said on Oct. 14 that he does not want an immediate U.S. or Israeli military strike to go ahead against Iran. He told Army Radio that it was "an inconvenient moment" after he was quoted as telling US President Donald Trump to think about new military action in the wake of reports that he had urged Trump to do that before Israel's October 27 parliamentary election, and before the US midterm elections in November.

This is a significant contradiction, as it were. Netanyahu's office has dismissed the television report of him seeking Washington's backing for action. Yet, the accounts are divided on how very closely military planning, political calculations and American decision-making have become intertwined. Military preparations do not stop if people have not prepared to undergo an operation. Likewise, any rumours of a possible attack should not be confused with an actual attack being approved.

Netanyahu's current political environment is a very awkward one. His Likud-led government is facing a lack of parliamentary margin of victory as voters' polls keep the bloc short of the 61 seats it would need to form a government in Israel's 120-seat Knesset. Smaller right-wing parties that sit around the 3.25% threshold could make the difference between winning seats in Parliament or their votes going to waste.

The pressure that Likud and Finance Minister Bezalel Smotrich's Religious Zionism party reportedly exerted on smaller ideological partners to drop out is explained here. The election has turned into a fight for votes, and for the life of a political bloc.

But at the same time, there's another extraordinary face-off between the security establishment. Former Shin Bet chief Ronen Bar launched a defamation action against Netanyahu demanding NIS 3 million ($975,000), challenging claims that he did not share intelligence on the Hamas-led October 7, 2023 attack.

Bar's legal filing reportedly included multiple warnings issued in the months leading up to the assault, such as a strategic warning in July 2023 of a political division within Israel. He further reports talks on intelligence in August, September and early October and that Netanyahu's military secretariat was briefed at 3:55 a.m. on the morning of the attack.

The allegations made in the court proceedings are not judicial findings. Bar has accepted that he has an institutional responsibility for intelligence failures. But the spat highlights a larger national issue: the split in Israel over responsibility for the nation's biggest security failure in decades.

For Israel's enemies, these institutional conflicts could leave a sense of weakness. For Israel, however, giving up on the possibility of political differences not interfering with the work of intelligence agencies is a much more lethal error than a purely electoral one.

It is in this context that the Iranian dimension comes into play. Defence Minister Israel Katz has cautioned that if Hezbollah were to contribute to an Iranian offensive, Israel would not be able to avert an escalation that could lead to a wider ground incursion in southern Lebanon perhaps as far as the Litani River and Nabatieh.

This would have significant humanitarian, diplomatic and military implications. Southern Lebanon is not only a battlefield, it is also inhabited by communities, engaged in agriculture, with existing transport networks and commercial connections already damaged by repeated hostilities. More territorial operations may result in significant displacement and make relations with the Lebanese government and international peacekeeping institutions more difficult.

The economic impacts would be far reaching, not just from the battle front.

Israel is already spending on defence at the expense of internal development plans. The government's approval of an urgent purchase of 12 Apache helicopters for Rs 1 billion is testament to the military procurement challenges. Reports that much of the funding would be taken from a five-year initiative to also improve conditions in Arab communities present challenging questions around the domestic opportunity costs of ongoing military mobilisation.

Uncertainty means more expensive insurance premiums and delayed investment choices for businesses, more security spend, and more pressure on government borrowing. Israel's technology sector is a big contributor to the export of goods, investment and tax revenue, and is reliant on international confidence and capital funding.

The longer this regional conflict drags on, the more it would affect tourism recovery, construction and labour. Short military interventions are acceptable to investors but repeated escalations without a foretold political conclusion become much more difficult for investors to plan over the long term.

The regional situation has deteriorated even further after renewed Houthis' attacks against Saudi Arabia. A blow to Saudi Aramco's Dhahran headquarters on Oct. 14 followed by further threats of strikes by Iran's proxy group against Saudi airports and petroleum resources. Saudi authorities reported minimal fire damage, but no loss of life, while media outlets abroad reported damage to the upper levels of the complex.

The danger has already been felt by the financial markets. Saudi Arabia's main share index dropped around 0.7 percent, while Saudi National Bank and shares of Aramco, the state-owned oil company, fell 1.3 percent and 0.5 percent, respectively, according to Reuters. Brent crude has also been trading higher this week above $106 a barrel, due to worries about supply lines in the Gulf. They are a sign of a growing costly security environment for energy producers, airlines, insurers and importing economies.

The effects are direct for India. India is an import dependent economy that imports over four-fifths of its crude oil consumption, is likely to have to pay more for crude oil imports, have to face pressure on the rupee and also have to pay higher prices for transportation, aviation, manufacturing, petrochemicals etc. Each rise in international crude prices adds to the challenge for inflation control and profitability of companies.

In the United States the calculation is different. Washington faces what's known as a balancing act: how to ensure Israel's security while avoiding the negative impact on the Israeli economy that another large-scale clash with Iran will have. The rise in energy costs can lead to loss of consumer confidence in America before the mid-term elections, and the potential for military escalation will add further pressure on Gulf allies facing significant threats to their infrastructure.