How India’s economy deals with West Asia war

Three pillars of India’s ties with West Asia 

Energy, trade, and labour migration constitute the three key pillars of India’s engagement with West Asia. Among them, energy is the most important link. 

Energy 

India relies significantly on fuel imports to meet domestic demand – over 80 per cent of its crude oil, about 60 per cent of its LPG, and 50 per cent of its LNG are channeled through imports. A large share of these imports comes from Gulf producers such as Iraq, Saudi Arabia, and the United Arab Emirates. 

The continued closure of the Strait of Hormuz, a narrow maritime corridor through which nearly one-fifth of the global oil trade passes, has already sparked a global energy crisis. Prior to the conflict, the Strait accounted for about half of India’s total oil imports, 60 per cent of its LNG imports, and a whopping 90 per cent for LPG. 

However, the Ministry of Petroleum and Natural Gas has said that India’s crude supply is secure and about 70 per cent of the country’s crude import is now coming from outside the Strait of Hormuz – a significant increase from 55 per cent earlier. 

In the last 11 years, India has also diversified imports of its energy needs. Today, it imports energy from 41 countries as compared to 27 countries in the last decade. At the same time, India is working on adding 6.5 mmt more to its 5.3 million metric tons of strategic petroleum reserves.  

Trade

India’s trade ties with West Asia is also vital, as the region accounts for roughly 15 to 18 per cent of its merchandise trade. Indian exports to the region include food products, textiles, engineering goods, chemicals, and construction materials. 

India Exports to GCC Countries (FY24-25)

Source: Directorate General of Foreign Trade (DGFT) 

Remittances 

The labour migration forms another important pillar. The Economic Survey 2025-26, released earlier this year, noted that India remained the world’s largest recipient of remittances, with inflows reaching $135.4 billion in FY25, supporting stability in the external account. The Gulf Cooperation Council (GCC) remained a critical contributor, accounting for roughly 38 per cent of India’s total inward remittances in FY24. 

Indian workers form a substantial portion of the labour force in Gulf economies, particularly in construction, services, and healthcare. If the war drags on, labour demand could weaken. affecting remittance flows to India.

But the share of remittances from advanced economies has also increased, reflecting a growing contribution from skilled and professional workers. The remittances are important not just for higher purchasing power in the receiving hands but also for the forex inflow they bring. 

Oil prices and macroeconomic vulnerability  

But it is the global energy market that takes the first hit from geopolitical tensions in the Gulf. For India, such volatility has immediate macroeconomic implications. As the world’s third-largest importer of crude oil, India’s external balance remains sensitive to changes in energy prices. When oil prices spike, every $10 rise in crude oil prices adds an estimated $12-18 billion to India’s import bill, according to a report by DSP Mutual Fund. 

The effects unfold in various ways. First, higher oil prices widen the current account deficit (CAD) by increasing the import bill. According to the Reserve Bank of India, India’s CAD stood at around 1.2 per cent of GDP in FY 2023-24, reflecting relatively stable external balances. 

Second, higher oil prices place pressure on the exchange rate as demand for foreign currency rises to finance imports. Third, rising fuel prices contribute to inflation by increasing transportation costs and raising production expenses across sectors. 

India’s economic history illustrates the importance of such shocks. The 1991 balance-of-payments crisis, which triggered major economic reform, was partly driven by rising oil prices during the Gulf War. While India now has stronger foreign exchange reserves – over $716.8 billion as of early March 2026 – dependence on imported energy remains a structural vulnerability.

According to a recent release by the Ministry of Statistics and Programme Implementation (MoSPI), headline CPI inflation stood at around 3.2 per cent in February 2026. The energy prices play an important role in shaping this trajectory. Higher diesel prices raise the cost of transporting goods across the country. Industries that rely on petroleum-based inputs, such as fertilisers, chemicals and plastics, pass rising costs to consumers, generating cost-push inflation. 

Impact on industries  

Industries that depend on imported fuel or petrochemical inputs see production costs rise when oil and gas markets become volatile. The ceramic cluster in Morbi, Gujarat, illustrates this clearly. Morbi produces around 80 per cent of India’s ceramic tiles and is one of the largest tile manufacturing hubs in the world. These factories rely on natural gas and propane to run their kilns. Industry associations have reported that more than a hundred units temporarily halted operations as energy costs surged. 

The pressure is not limited to ceramics. India’s fertiliser sector, which depends on imported natural gas and ammonia-based inputs from the Gulf region, also faces rising costs when energy markets tighten. The higher gas prices increase the cost of producing urea and other fertilisers, which raises the government’s fertiliser subsidy burden. 

The petrochemical and plastics industries face similar pressures. The many chemical feedstocks are derived from crude oil and natural gas. When global oil prices rise, the cost of producing plastics, synthetic fibres, and packaging materials increases, squeezing margins for manufacturers. 

The shipping disruptions have added another layer of difficulty. The exporters in sectors such as ceramics, granite, marine products, and agricultural commodities are reporting delays and rising freight charges as vessels avoid high-risk routes in the Gulf region. The higher shipping insurance premiums have further raised logistics costs. 

The Airlines face a similar challenge. Aviation Turbine Fuel (ATF) remains the single largest cost component for airlines, accounting for 30–40 percent of total operating expenses in India. When crude oil prices rise, ATF prices follow, increasing operating costs for airlines and putting pressure on ticket prices. 

Further, for many small and medium enterprises, the margin between profit and loss is narrow. When fuel costs rise and the supply chain becomes uncertain, even a short disruption can force factories to slow down or temporarily close. 

Trade and logistics disruptions 

The Gulf region lies along some of the most important shipping corridors in the global economy. When geopolitical tensions rise, war-risk insurance premiums increase. Freight charges rise as shipping companies reroute vessels to avoid conflict-prone areas, increasing transit times and fuel consumption. 

For India, such disruptions are economically significant. Nearly 90 per cent of the country’s external trade by volume moves through maritime transport. The export-oriented sectors, including agriculture, seafood, textiles, and engineering goods, depend on predictable shipping schedules. Increased freight costs and delivery delays can erode the competitiveness of Indian exports in international markets. 

To sum up, the ongoing conflict in West Asia serves as a reminder that India’s economic stability is linked to the developments in global energy markets. Oil shocks, shipping disruptions and supply uncertainties have shifted from the realm of geopolitics into the spheres of inflation, trade costs and industrial production. 

In an interconnected world, wars are not solely confined to the battlefield. In India, their effects appear in fuel prices, supply chains and household budgets. Therefore, the policy response needs to focus on building economic resilience before the next shock arrives. 

Post read questions

Analyse the impact of rising crude oil prices due to the Iran war on India’s inflation, current account deficit, and exchange rate.

India’s engagement with West Asia is structural rather than transactional. Analyse with reference to energy, trade, and diaspora linkages.

In the context of the Iran war, analyse the strategic importance of the Strait of Hormuz for India’s energy security. How can India mitigate associated risks?

Analyse the impact of the Iran war on India’s labour-intensive sectors. 

(Pushpendra Singh is an Assistant Professor of Economics at Somaiya Vidyavihar University, Mumbai, and Archana Singh is an Assistant Professor of Gender and Economics at the International Institute for Population Sciences, Mumbai.)

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