Economic Impact of West Asia Crisis on India

General Studies Paper II: Effect of Policies & Politics of Countries on India’s Interests

Why in News?

Recently, India’s Chief Economic Advisor warned that the ongoing West Asia crisis due to the US-Israel-Iran conflict, may slow India’s economic growth, as rising oil prices and inflationary pressures affect overall economic stability, posing short-term risks to growth momentum.

Strategic Interests of West Asia for India

Energy Security: West Asia is India’s primary energy supplier, providing over 60% of crude oil imports and about 40% of natural gas. Countries like Iraq, Saudi Arabia, and UAE dominate supply. Any disruption directly impacts inflation, fiscal deficit, and growth, making the region central to India’s energy strategy.
Economic Engagement: West Asia is a major economic partner with bilateral trade exceeding $120 billion (FY23). UAE is India’s 3rd largest trading partner, while Saudi Arabia ranks among the top. The region is crucial for exports like petroleum products, food, textiles, and engineering goods.
Diaspora & Remittances: Around 8.5–10 million Indians live in West Asia, especially in GCC countries. They contribute significantly through remittances (over $40–50 billion annually from the Gulf) and act as a bridge for economic and cultural ties, making their welfare a key strategic concern.
Geostrategic Connectivity: West Asia connects Asia, Europe, and Africa, making it vital for India’s trade routes and maritime security. Projects like International North-South Transport Corridor (INSTC) and Chabahar Port (Iran) enhance India’s access to Central Asia and Europe.
Maritime Security: Critical chokepoints like the Strait of Hormuz, through which 20% of global oil passes, are essential for India’s energy imports. Securing these sea lanes is vital to prevent disruptions in oil supply and global trade flows.
Security Cooperation: India collaborates with West Asian nations on counter-terrorism, intelligence sharing, and anti-radicalization efforts. Stability in the region is crucial to prevent terror networks and extremism from affecting India’s internal security.
Sovereign Wealth Funds: West Asian countries, especially UAE and Saudi Arabia, are major investors in India through sovereign wealth funds. Investments are directed toward infrastructure, energy, real estate, and technology, supporting India’s long-term development goals.
Food & Energy Supply: India exports food grains, rice, and essential commodities to West Asia while importing energy. This interdependent supply chain strengthens mutual dependence and enhances India’s role as a reliable food supplier.

Impact of 2026 West Asia Conflict on India’s Economy

The US-Israel-Iran conflict of 2026 has escalated into direct warfare following initial strikes on February 28, severely destabilising West Asia. This regional crisis now poses a persistent threat to India’s economic growth:

Hormuz Blockade: The Strait of Hormuz faces a near-complete halt in maritime traffic, with weekly ship transits plunging from 200 to just one. India is exceptionally vulnerable because nearly half of the supplies are now-blocked. The delay in LNG shipments has already caused a 15% spike in domestic piped natural gas (PNG) prices.
Import Costs & Inflation: Brent crude prices have surged past $117 per barrel as of late March 2026, with some benchmarks hitting $137. Experts estimate that every 10% rise in crude prices pushes India’s Consumer Price Index (CPI) up by 40–60 basis points, threatening to drive headline inflation toward 5.5% if high prices persist.
Moderation in GDP Forecasts: The Ministry of Finance warns that India’s projected growth of 7.0–7.4% for FY27 faces “considerable downside”. Major agencies like ICRA have already lowered expectations to 6.5%, while Goldman Sachs has cut its 2026 forecast to 5.9% due to rising energy costs and supply disruptions.
Trade Disruptions & Logistics Strains: Shipping routes bypassing the conflict zone via the Cape of Good Hope add 15–18 days to transit times, significantly increasing freight and war-risk insurance premiums, which have jumped from 0.25% to 3%. This uncertainty impacts 56% of India’s goods exports.
Agricultural and Fertiliser Crisis: Disruptions in natural gas and urea supplies from the Gulf threaten India’s food security ahead of the Kharif sowing season. Global urea prices surged from $484 to $652 per tonne in just ten days, potentially increasing the government’s subsidy burden by ₹250 billion.
Currency Depreciation & Capital Outflows: The Indian rupee hit a record low of 95 per USD in March 2026, driven by a widening trade deficit and massive capital outflows. Foreign institutional investors withdrew roughly $11.8 billion in March alone, forcing the RBI to intervene with nearly $12 billion to stabilise the currency.
Remittance & Diaspora Risks: The Gulf region hosts millions of Indian expatriates and contributes roughly 38% of India’s total remittances ($11.4 billion annually). A prolonged conflict risks mass displacement and a sharp decline in these inflows, which are crucial for maintaining India’s foreign exchange stability.

India’s Measures to Safeguard Economic Interests

Strategic Oil Reserves: India has strengthened its energy security by maintaining 60 days of crude oil supply and expanding storage capacity up to 74 days. This strategic buffering helps absorb short-term shocks from disruptions in the Strait of Hormuz and ensures uninterrupted domestic fuel availability.
Diversification of Sources: To reduce dependence on West Asia, India has expanded sourcing to 41+ countries, including the US, Russia, and Latin America. This diversification minimizes geopolitical risks and stabilizes supply chains, ensuring long-term resilience.
Boosting Domestic Energy: India has increased domestic LPG production by 40% (to 50,000 metric tons/day) and secured 800,000 tons of LPG imports from alternative sources. This reduces reliance on Gulf supplies (earlier 90%) and protects household energy consumption.
Trade Policy Measures: The government restored full benefits under the RoDTEP scheme, supporting exporters facing rising freight costs and trade disruptions. This policy ensures competitiveness of Indian exports and stabilizes foreign exchange earnings.
Crisis Management Framework: India has established 7 empowered groups to monitor impacts on energy, supply chains, and essential commodities. This institutional mechanism enables real-time assessment and coordinated response, ensuring proactive economic risk management.
Supply Chain Stabilisation: Industry bodies like CII have recommended strategic stockpiling, diversification, and job protection measures. Government-industry coordination aims to maintain industrial output and price control, reducing economic shocks.
Balanced Diplomacy: India is following a nuanced diplomatic approach, maintaining relations with Iran, Israel, and Gulf nations simultaneously. This ensures continued energy flows, trade access, and investment inflows, while avoiding geopolitical alignment risks.

Way Forward

Permanent Maritime Security Architecture: India must institutionalize a Maritime Security Escort Architecture (MSEA) beyond temporary missions. With 90% of India’s trade by volume via sea, deploying naval escorts, drones, and surveillance systems in the Arabian Sea and Gulf of Aden can protect merchant vessels.
Rupee-Based Energy Trade Mechanism: To counter financial disruptions, India should expand rupee-settlement mechanisms and develop CBDC-linked payment corridors with Gulf partners. This will reduce dependence on SWIFT systems, ensure uninterrupted energy trade, and protect imports.
Alternative Trade Corridors (INSTC Push): Operationalizing the International North-South Transport Corridor (INSTC) can reduce reliance on vulnerable maritime chokepoints. By enabling 30–40% faster and cheaper trade routes to Central Asia and Europe, India can bypass conflict zones and secure supply chains for critical sectors.
Strategic Diaspora Reintegration: India should implement a National Expatriate Skill-Mapping framework for returning workers. With structured reintegration into sectors like renewable energy, construction, and manufacturing can convert crisis-driven return migration into a productive economic asset.
Undersea Digital Infrastructure Security: India must treat submarine cables (carrying ~95% global data) as critical infrastructure. Establishing cyber-defense units, AUV monitoring, and satellite backup systems can protect IT exports (worth $200+ billion) from disruptions caused by grey-zone maritime threats.
Integrated Energy Transition Strategy: Accelerating renewable energy (target: 500 GW by 2030) and green hydrogen can structurally reduce dependence on West Asia. This long-term shift will limit exposure to oil shocks, stabilize inflation, and strengthen India’s energy sovereignty and sustainable growth trajectory.