Even as Indian economy was on the path to recovery, the US-Israel-Iran war erupted and it has entered the third week, causing geopolitical shock to the global economy.
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As the US-Iran War enters its third week, New Delhi is increasingly feeling the pressure as tensions in the Middle East show no signs of abating. High oil prices are expected to further inflate the country's already significant energy import expenses, while disruptions to flight routes are hindering airline operations. Countries such as Thailand, Korea, Taiwan, and India are likely to face greater risks to their growth due to their broader oil and gas balances. The rapidly escalating conflict in West Asia, which now includes direct military engagement between the United States, Israel, and Iran, has become the most severe geopolitical shock to the global economy since the Ukraine crisis. Although India and most South Asian economies have limited direct trade ties with Iran, the conflict has significantly heightened risks through energy markets, shipping routes, trade logistics, currencies, and inflation, highlighting the region's profound vulnerability to disruptions in the Gulf. Countries such as Thailand, Korea, Taiwan, and India are likely to face greater risks to their growth due to their broader oil and gas balances. The rapidly escalating conflict in West Asia, which now includes direct military engagement between the United States, Israel, and Iran, has become the most severe geopolitical shock to the global economy since the Ukraine crisis. Although India and most South Asian economies have limited direct trade ties with Iran, the conflict has significantly heightened risks through energy markets, shipping routes, trade logistics, currencies, and inflation, highlighting the region's profound vulnerability to disruptions in the Gulf.
Just as it appeared that the $3.8 trillion Indian economy was on the path to recovery, conflict has erupted between Iran and the U.S.-Israel alliance, spreading to other regions of the Middle East. This situation has highlighted risks to the external sector of the South Asian nation that have not been completely accounted for. A drawn-out conflict, coupled with a significant increase in energy prices, would pose a substantial macroeconomic challenge for India.
Markets have reacted quickly to incorporate this uncertainty. Indian equity indices experienced a significant decline. The rupee depreciated against the dollar, while crude oil prices escalated. The markets have been unsettled. Stock indices have decreased, oil prices have risen, and the rupee has fallen. For India, the calculations are clear. With daily crude imports estimated at approximately 4.7–4.9 million barrels per day, every $1 increase in oil prices contributes an additional $5 million to the daily import expenditure—totaling nearly $1.8 billion on an annual basis. Should prices remain $10 per barrel higher for an entire year—a worst-case scenario—the import costs could increase by about $18 billion. Nevertheless, this would represent roughly 5–6% of India’s FY25 trade deficit of $282 billion, or about 0.5% of GDP. From a macroeconomic perspective, this is manageable, particularly with the current account deficit below 1%. The greater concern lies in prolonged uncertainty. A downturn in the economies of Middle Eastern countries could adversely affect the substantial remittances that India receives from workers in that region, while also jeopardizing businesses.
Each $10 increase in crude oil prices contributes an additional $12–$15 billion to India's import expenses, which may lead to higher consumer prices and an expanded current account deficit. Delays of 2 to 8 days are currently being experienced in shipping through the Red Sea and Gulf of Oman, which is impacting the export of agricultural goods such as basmati rice and raising freight and insurance costs. A considerable portion of the $50 billion in Indian remittances is jeopardized if instability affects the substantial Indian diaspora residing in the Gulf region. Industrial Impact: The fertilizer, diamond, and chemical sectors are encountering shortages and increased input costs due to the situation in the Gulf. India ranks as the second-largest consumer of LPG globally, primarily because of the growth in clean cooking access facilitated by the Pradhan Mantri Ujjwala Yojana. The underground LPG storage capacity in India is approximately 1.4 lakh tonnes, which is sufficient for less than two days of consumption, while the daily demand stands at around 80,000 tonnes, with more than 85% of this being utilized by households.
India can implement measures to alleviate the effects of the West Asia Conflict.
Although India has diversified its crude oil sources by importing from Russia, it is essential to further extend long-term agreements with suppliers from Latin America (such as Brazil and Guyana), West Africa, and the United States to diminish excessive dependence on the Strait of Hormuz. India has the potential to enhance its Strategic Petroleum Reserves to align with the global standard of 90 days of oil imports, as the current total reserves only cover approximately 70–75 days. Expanding larger underground storage facilities would create a buffer during geopolitical crises or supply interruptions. Additionally, it is crucial to expedite exploration efforts under initiatives like the Hydrocarbon Exploration and Licensing Policy (HELP) to boost domestic natural gas production.
Summing up India's evolution from a susceptible importer to a robust economic force necessitates a transition from 'just-in-time' supply chains to 'just-in-case' strategic reserves, utilizing maritime autonomy, owned overseas resources, and trade frameworks denominated in rupees.
Prof. Mithilesh Kumar Sinha
Retired Professor
Nagaland University, Lumami