By Nirendra Dev
For now, India watches the Strait of Hormuz with a concern it can no longer afford to disguise.
Finance Minister Nirmala Sitharaman has sought to reassure markets, saying there is no cause for alarm. But economists argue that the scale of the challenge demands more than reassurance.
The Fiscal Squeeze
The government faces an uncomfortable dilemma. Controlling fuel prices through excise duty cuts or expanded subsidies would protect consumers — but would widen an already stressed fiscal deficit. Passing costs on to consumers would stoke inflation and dampen demand.
“Keeping things manageable will require burden-sharing between the government, via fiscal absorption, and households and businesses".
Iran War: A Perfect Storm for India’s Economy
Supply disruptions, stock market fallout and a weakening rupee are battering India’s growth story
The US-Israel war on Iran has emerged as a severe economic storm for India, disrupting oil supplies, battering stock markets and weakening the rupee — threatening the country’s enviable growth trajectory just as it was closing in on becoming the world’s fourth-largest economy.
India’s Chief Economic Advisor V. Anantha Nageswaran has warned that the country’s growth forecast of 7.0%–7.4% for the financial year ending March 2027 now faces “considerable downside risk” — a remarkably candid admission from within government ranks.
A Perfect Storm, At the Worst Possible Time
Only weeks ago, the stars seemed to be aligning for India. Prior to the war — which erupted on February 28, 2026 — India was one of the fastest-growing major economies in the world, consistently outpacing its powerful neighbour China. It had surpassed Britain to become the world’s fifth-largest economy and was within striking distance of overtaking Japan for fourth place.
India had what economists rarely see together: moderate inflation and strong growth.
Its skilled labour force, fiscal discipline and healthy currency reserves made it a safe harbour in a world already beset by risks — from the Russia-Ukraine war to Donald Trump’s unpredictable tariff moves.
That advantage may no longer hold. The Oil Dependency Problem
At the heart of India’s vulnerability lies a structural dependence on Middle Eastern energy.
India relies on supplies flowing through the Strait of Hormuz for approximately 50% of its crude oil needs and for most of its LPG imports — the primary cooking fuel for hundreds of millions of households.
The Middle East accounts for roughly 40% of India’s oil imports and 80% of its gas. The conflict has severely disrupted goods movement through the Strait of Hormuz, a narrow but critical waterway that carries 20% of global oil traded worldwide.
Since the energy crisis of the 1970s, India has relied heavily on this corridor. Today, that dependence has become its single greatest economic vulnerability.
In a formal assessment, CEA Nageswaran has identified four distinct channels through which the Iran war will damage India’s economy:
Supply Disruptions — Oil, gas and fertiliser supplies are being disrupted, directly impacting India’s agricultural sector, which depends heavily on imported fertilisers and urea.
Higher Import Prices — Soaring energy costs are pushing up prices across the economy. Every rupee spent on costlier oil is a rupee not spent on growth.
Higher Logistics Costs — Freight and insurance costs have risen sharply, squeezing exporters and adding to the burden on supply chains.
Declining Remittances — India is the world’s largest recipient of remittances from workers abroad, with approximately 40% coming from the Middle East. Any hit to the earnings or employment of the estimated one crore Indians working in
Gulf countries will directly weaken an already softening rupee and reduce household incomes across several states.
The 74-Day Warning
Perhaps the starkest indicator of India’s exposure is its strategic petroleum reserve capacity — sufficient for only 74 days of demand, including both Strategic Petroleum Reserves and commercial crude stocks held by Oil Marketing Companies.
China, by contrast, maintains reserves for 180 days.
That gap — 74 days versus 180 — tells the story of a critical preparedness deficit that now leaves India with limited buffer against prolonged supply disruptions. Markets React Sharply
Financial markets have already delivered their verdict. India’s stock markets have fallen approximately 10% over the past month, with Foreign Institutional Investors recording massive selling — estimated at nearly $20 million in March alone.
The rupee, which stood at ₹73 to the dollar when Prime Minister Narendra Modi first took office, has now touched ₹95 — a depreciation of nearly 30%.
Finance Minister Nirmala Sitharaman has sought to reassure markets, saying there is no cause for alarm. But economists argue that the scale of the challenge demands more than reassurance.
The Fiscal Squeeze
The government faces an uncomfortable dilemma. Controlling fuel prices through excise duty cuts or expanded subsidies would protect consumers — but would widen an already stressed fiscal deficit. Passing costs on to consumers would stoke inflation and dampen demand.
“Keeping it manageable will require burden-sharing between the government, via fiscal absorption, and households and businesses,” Nageswaran noted, adding that higher import prices passed on to end-users “will also moderate demand growth.” The current account deficit is expected to widen significantly as import costs rise and export revenues from Gulf markets come under pressure.
Pain will not Vanish
Analysts warn that even when the conflict ends, normalisation of supply chains and energy markets will take several months. The next twelve months, they caution, could be among the most difficult for the Indian economy in recent years — particularly if fertiliser shortages begin to affect the agricultural sector and food production.
One proposal gaining traction within government circles is a significant expansion of strategic fuel storage infrastructure — to move India’s reserve capacity closer to the international benchmark and reduce future vulnerability.
courtesy - The Raisina Hilla
ends
No comments:
Post a Comment