The escalating tensions involving Iran, the United States, and Israel have triggered global economic and geopolitical concerns. While the conflict is geographically distant, India - due to its deep energy, trade, and diaspora links with the Gulf region - is particularly exposed. Policymakers and markets in India are closely watching developments as the ripple effects begin to emerge.
India imports a large portion of its crude oil from the Middle East. The region experiences oil price hikes whenever there is a disruption or any threat of disruption. The current conflict has created concerns about supply chain interruptions which will lead to higher costs and it could significantly increase Indian import bill.
India will experience the following effects if crude oil prices stay high:
- Higher petrol and diesel prices
- Pressure on government subsidies
- A widening current account deficit
- Rising inflation
Economists warn that oil could even approach $100 per barrel in a worst-case scenario, which would strain India’s macroeconomic stability. (1)
The Strait of Hormuz represents one of the most important maritime transit points in the entire world. Closing of The Strait of Hormuz have resulted in increased shipping costs together with operational delays.
India encounters several challenges which include:
- Slower cargo movement
- Higher shipping and logistics costs
- Insurance premiums rising for vessels
- Export delays
Reports indicate that the ongoing West Asian conflict will disrupt Indian trade activities while driving up shipping costs. An actual case has already emerged: about 400,000 tonnes of Indian basmati rice shipments are stuck due to war-related disruptions and soaring freight costs. (2)
Airspace tensions across the Middle East are already affecting global aviation.
Potential impacts include:
- Flight suspensions
- Flight rerouting
- Longer travel times
- Higher airfares
Multiple international airlines have suspended their normal flight operations because of the current regional airspace restrictions which are in effect. The increase in travel expenses will create operational difficulties for airlines which handle the high volume of travellers between India and the Gulf region.
Geopolitical conflicts typically trigger global risk aversion, and India is no exception.
Recent developments have already caused:
- Equity market declines
- Rising bond yields
- Weakening of the rupee
- Investor caution
The ongoing conflict will create major obstacles which will impact India's economic progress. It will create two major risks: energy shortages and challenges in international trade.
The Gulf region has almost 10 million Indian workers whose safety New Delhi considers to be a top priority.
The potential risks which may occur include:
- Evacuation problems
- Job uncertainty in Gulf economies
- Decrease in remittance payments
The disruption of remittances which serve as a major financial stream to India will result in decreased household income and reduced foreign exchange reserves. The Gulf region serves as a vital component for India's overseas workforce system because it functions as a central hub. (3)
The Indian government has announced that it is currently supervising the situation while developing backup plans. The officials stated that Indian oil and gas reserves today provide enough capacity to handle temporary supply interruptions. Refiners seek new crude supply options which will help them decrease their reliance on oil from conflict areas. India maintains its demand for dialogue and diplomatic solutions which will help decrease regional tensions.
The conflict also demonstrates how the worldwide economy has developed interconnectedness. In the short term, India appears cushioned by adequate reserves and policy preparedness. However, if the conflict escalates or prolongs, the country could face higher fuel costs, inflationary pressure, trade disruptions, and financial market volatility. The success of diplomatic efforts to reduce tensions in West Asia will determine the future developments.
