Mr Trump promised he would never drag America into costly foreign wars. The Iraq war cost $3 trillion and thousands of lives, according to Nobel Prize-winning economist Joseph Stiglitz. Another $2.3 trillion was spent on Afghanistan, with nothing to show for it in return. Yet, here we are again, with another costly US-initiated war of choice, which could spread even wider unless sense prevails. It reminds me of the song, “When will they ever learn?”
The spectre of stagflation faces countries across the world, but will cost some more than others. A $20 increase in the price of oil (currently projected if the war ends soon) sustained over a year costs the US - 0.2 percentage points of gross domestic product (GDP) growth, the world economy around -0.2 to -0.4 percentage points of GDP growth, China -0.4 percentage points, highly oil-dependent countries like Japan -0.4 to -0.8 percentage points of GDP growth, and India as much as -0.6 to -1.0 percentage points of GDP growth ( see Table). If the war continues longer and the price of oil averages an increase of over $40 per barrel from base lines, it could reduce global GDP growth by 0.6 percentage points — down from 3.3 per cent to 2.7 per cent. India’s GDP growth could fall by as much as 1.5-2 percentage points.
Inflation would also rise by as much as 1.5 percentage points for the world. Despite being a surplus oil producer, petrol prices in the US have already jumped from $3 per gallon to over $4 per gallon. Diesel prices have risen even higher, affecting transport costs. US inflation will rise by 0.4-0.8 percentage points for every $20 per barrel increase in the price of oil. This may even force the Federal Reserve (the US central bank) to raise, rather than lower, interest rates. Inflationary effects in other parts of the world would be even higher, with energy-import-dependent countries like India, the Philippines, Pakistan, Thailand, Japan, and the European Union likely to see closer to a 1 percentage point increase in inflation. Rising fertiliser prices will affect next year’s food production across the world and could create a food crisis.
This latest jolt comes just as the world economy had adjusted to Mr Trump’s 2025 tariffs. World GDP growth had declined but only a bit from 3.3 per cent in 2024 to 3.1 per cent in 2025 and world merchandise trade growth had surprisingly increased from 2.6 per cent in 2024 to 3.3 per cent in 2025. But Mr Trump has reimposed a 15 per cent across-the-board tariff for 150 days and is using Section 301 of the 1974 Trade Act to reimpose his earlier country-by-country tariffs.
The use of ground troops to reopen the Strait of Hormuz quickly carries the risk of a prolonged war and even greater damage to the region’s energy infrastructure. If Iran keeps the Strait of Hormuz effectively closed for an extended period, and petrol pump prices keep rising and stock markets (which affect people’s retirement accounts) keep falling, the political costs to Mr Trump will escalate.
An anti-Trump “No Kings” rally last week drew widespread support across the US. A mid-term election for the US Congress in November could bring the Democrats back in control of the US Congress and put a check on Mr Trump’s imperial ambitions — he next wants Cuba and has not given up on Greenland.
The war could result in huge geoeconomic shifts. The big immediate winner is Russia, benefitting from higher oil prices and the removal of sanctions. For every $20 per barrel increase in oil prices, Russia’s GDP growth increases by 1.4-2 percentage points. This windfall is likely to prolong the Ukraine conflict. China appears to be losing in the short term but may emerge as a major geopolitical winner in the longer run. The Gulf Cooperation Council (GCC) countries are hit hard by the war, and their future as major transport and investment hubs could be diminished.
India’s economy of 2025, called “Goldilocks” by the Reserve Bank of India governor, given its high GDP growth of over 7 per cent and low inflation below 2 per cent, has taken a sharp U-turn. If the war persists and oil prices rise by $40 per barrel on average, India’s 2026 GDP growth will drop from the projected 7.5 per cent to a range of 5.5- 6 per cent, and inflation could rise to 5-6 per cent, making it difficult to loosen monetary policy.
As India goes to the polls in five states, it has foregone ₹10 per litre in excise duty to keep petrol prices from rising, but at a huge fiscal cost. G-Sec yields have risen. India faces tough choices also in managing rupee depreciation, which crossed 95 to the dollar. Eventually fiscal and current account pressures will force politically difficult but economically necessary price adjustments for petrol, diesel, and fertiliser.
The oil shock is surely also a wake-up call that India needs to transition to renewables much faster. Today, India gets less than 5 per cent of its energy needs from renewables. India must also spend more to build air and naval capacity to project greater military power in the Indian Ocean, where three critical chokepoints — Hormuz, Bab el-Mandeb at the end of the Red Sea, and the Strait of Malacca — lie. But for now, let us hope April ends the madness of March.
The author is distinguished visiting scholar, Institute for International Economic Policy, George Washington University
 "Illustration: Binay Sinha")