Shambhu Ghatak, Economist
The ongoing Iran war in the West Asia has exposed significant vulnerabilities in India’s economic and energy security framework. As a country deeply integrated with the region through trade, energy imports, and a large diaspora, India faces multidimensional risks stemming from geopolitical instability. The disruption of the Strait of Hormuz, a critical global energy transit route, has emerged as a central concern, affecting oil and gas supplies, pushing up prices, and triggering broader macroeconomic pressures.
One of the most immediate impacts has been on global crude oil prices. Following the escalation of hostilities in February 2026, including military operations by the United States and Israel, supply disruptions and attacks on commercial vessels sharply tightened oil markets. WTI (West Texas Intermediate) crude oil futures reached US$ 98 per barrel on 17 March 2026, while Brent crude futures climbed close to US$ 104.61 per barrel on the same date (at the time of writing this piece), despite the International Energy Agency’s member countries releasing 400 million barrels from emergency reserves, as announced on 11 March, 2026 (See Figure 1 and Figure 2 in the Appendix). These developments reflect the sensitivity of global energy markets to geopolitical shocks, particularly in chokepoints like the Strait of Hormuz.
The energy shock has translated into severe domestic disruptions, especially in the liquefied petroleum gas (LPG) segment. India imports nearly 62% of its LPG requirement (around 31.3 million tonnes) and maintains limited reserves of 25-30 days for LPG and about 10 days for LNG. As supply chains were disrupted, the price of a 14.2-kg LPG cylinder rose by Rs 60 to Rs 913 in Delhi, while commercial cylinders increased by Rs 114.50 to Rs 1,883. The shortage has had cascading effects across sectors, forcing industries to scale down operations, disrupting urban services, and triggering panic buying among households. Notably, LPG bookings in Kolkata surged from 2.5 lakh to 5.8 lakh within 48 hours, highlighting the scale of consumer anxiety.
Beyond the energy sector, the crisis is exerting pressure on key macroeconomic indicators. Year-on-Year (Y-o-Y) retail inflation based on the Consumer Price Index (CPI-General) of 2024 base year rose from 2.74% in January 2026 to 3.21% in February 2026, while the inflation based on Consumer Food Price Index (CFPI) increased from 2.13% to 3.47% during the same time period.
Simultaneously, the Indian rupee has depreciated significantly, from Rs. 88.7241 per US$ on 31 October, 2025 to Rs. 92.3966 per US$ on 16 March, 2026, reflecting the widening of current account deficits. A weaker currency not only raises the cost of imports but also discourages foreign investment by reducing returns in foreign currency terms and increasing exchange rate risk.
Another critical channel of impact is remittances. The Middle East hosts around 9.6 million Overseas Indians, including approximately 9.5 million Non-Resident Indians (NRIs). India received US$ 118.7 billion in remittances in 2023-24, a substantial portion of which originates from this region. However, prolonged instability could affect employment conditions in Gulf economies, potentially reducing remittance inflows and weakening India’s foreign exchange reserves.
Fiscal pressures are also likely to intensify. While India has been on a path of fiscal consolidation, reducing the fiscal deficit from 9.2% of GDP in 2020-21 to 4.4% in 2025-26 (R.E.) and further to 4.3% in 2026-27 (B.E.), the current crisis may reverse this trend (See Figure 3 in the Appendix). The government may need to increase spending on subsidies and support measures, even as revenue collection is adversely affected by slowing economic growth. Recent supplementary demands for an additional expenditure of Rs. 2.81 lakh crore, underscore the scale of fiscal stress arising from global uncertainties.
A rising fiscal deficit as a percentage of GDP tends to increase the yield on 10-year Government Securities (G-secs) through several interrelated mechanisms. A higher deficit requires the government to borrow more, leading to increased issuance of bonds; when supply rises faster than demand, bond prices fall and yields rise. At the same time, large deficits often raise expectations of future inflation due to higher government spending, prompting investors to demand higher yields to protect their real returns. Additionally, concerns about fiscal sustainability can trigger the response of “bond vigilantes”, who sell bonds or insist on higher returns if they perceive fiscal policy to be imprudent. This too pushes yields upward. Heavy government borrowing can crowd out private investment by raising overall interest rates.
The impact is uneven across sectors. Rising fuel costs, global uncertainty in trade and a rise in the interest rate (due to the hike in repo rate by the central bank) may dampen profitability of the formal sector. The informal sector, already weakened by past shocks such as demonetization and the COVID-19 pandemic, is particularly vulnerable. Informal food vendors, and cash-dependent small enterprises are bearing a disproportionate burden, with many forced to shut down or switch to alternative fuels like kerosene. In the black market, kerosene oil is being sold at 106-115 per litre whereas domestic cylinders are sold at Rs. 2,500 at many places.
In response, the Government of India has implemented a range of measures, including diversification of energy imports, prioritization of domestic fuel supply, and expansion of LPG sourcing to countries beyond the Gulf. Price stabilization efforts, such as absorbing Rs 74 of a Rs 134 price increase for 14.2-kg cylinder and approving Rs 30,000 crore compensation for oil marketing companies, aim to shield consumers. Additionally, regulatory interventions, anti-hoarding measures, and promotion of alternative fuels reflect a coordinated attempt to manage the crisis.
The Iran war underscores the structural fragility of India’s dependence on external energy sources, particularly from the Middle East. The cascading effects, from rising oil prices and LPG shortages to inflation, currency depreciation, and fiscal strain, highlight how geopolitical conflicts can rapidly transmit economic shocks. While short-term policy responses have mitigated some immediate impacts, the crisis calls for long-term structural reforms. Strengthening domestic energy production, building strategic gas reserves, diversifying import sources, and accelerating the transition to renewable energy are essential to enhancing India’s resilience against future geopolitical disruptions.
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