Managing the fallout: West Asian conflict can be challenging for India

Oil imports account for 3.1% of gross domestic product, and according to Nomura, every 10% rise in oil prices worsens India's current account by 0.4 percentage point

From rising fuel prices to a shrinking remittance economy and the safety of the Indian diaspora, the conflict between Iran, on one side, and the United States (US) and Israel, on the other, has underscored India’s exposure to West Asia. Zero visibility on the endgame means  India needs to deploy all the policy tools at its disposal to manage the consequences of the unpredictable conflict. Inevitably, fossil-fuel imports remain the biggest challenge if Iran chooses to block the Strait of Hormuz, which accounts for a fifth of the global flows of petroleum and liquefied natural gas. Although Tehran has not officially notified the closure of the strait, hundreds of shipments have already been suspended. Benchmark Brent crude oil also shot past $80 a barrel when the conflict broke out, before settling at $77 levels — the highest since June 2025, when the US attacked Iran’s nuclear capabilities. India, the world’s third-largest consumer of oil, buys over 80 per cent of its requirements from abroad. Over half of this comes from Iraq, Saudi Arabia, and Kuwait — a dependence that has grown as US pressure has forced a cutback in accessing cheaper Russian oil.

 

India’s strategic oil reserves currently meet the country’s oil demand for about 10 days (excluding the oil companies' reserves that can meet the demand for another 60 days)  and a week’s worth of fuel stocks, underlining the challenges arising from possible supply and price shocks. Serious efforts to build robust strategic reserves for oil and gas would be worthwhile. Oil imports account for 3.1 per cent of gross domestic product, and, according to a Nomura calculation, every 10 per cent rise in the price of oil worsens the current account by 0.4 percentage point. Although India has been running a modest current-account deficit, turmoil in financial markets could affect capital flows, which were anyway under pressure, and make financing more difficult. The rupee could come under renewed pressure.

 

Furthermore, the concurrent inflationary pressures will demand a rethink on budgetary and monetary assumptions. To be sure, India could diversify sourcing options, from Venezuela and the US, for example, but both are relatively costly. To leaven the impact on inflation, though not a big worry at the moment, the government could absorb part of the hit by reducing the central excise on petrol and diesel. A major impact could also be felt on the gas economy. India imports 85 per cent of its liquefied petroleum gas from the Gulf and has no strategic reserves.  

 

In contrast to the relative flexibility to deal with fuel-supply disruption, India has fewer options when it comes to ensuring the safety of its roughly nine million diaspora members. In countries that are now on frontlines of Iranian attacks — Bahrain, Qatar, and the United Arab Emirates — Indians account for more than a third of the population. Most are employed in low-skilled jobs in construction and hospitality and they come from the poorer parts of Uttar Pradesh, Bihar, West Bengal, and Telangana, while skilled workers mostly belong to Kerala and Tamil Nadu. Evacuating such large numbers from these hot zones will be challenging in itself. The additional issue to contend with will be the diminution of remittances. West Asia remains the largest source of remittance after the US. An indefinite suspension of this source of money could impose fresh hardships on thousands of dependent families. Therefore, managing these multiple known unknowns will test the government in new ways. A lot will depend on how long the conflict lasts and in what ways it changes the geopolitics of the region.