The escalating conflict in the Middle East, particularly the recent tensions between Iran and Israel, presents a multifaceted array of risks to India's economic stability, energy security, and strategic interests. As the situation unfolds, it is crucial to analyze the potential ramifications for India's economy, trade relations, and geopolitical positioning.
One of the most immediate risks is the potential for increased energy costs. India relies heavily on the Middle East for its crude oil and Liquified Petroleum Gas (LPG) imports. Approximately 66% of India's LPG consumption is sourced from this region. Disruptions to supply chains, whether through geopolitical tensions or the closure of critical maritime routes like the Strait of Hormuz, can lead to a surge in global oil prices. The Strait of Hormuz is a critical maritime chokepoint through which about 20 per cent of the world's oil and gas supplies transit. Rising oil prices directly impact transportation, manufacturing, and energy production costs, leading to higher inflation rates. Experts caution that oil reaching $100 per barrel could elevate both wholesale and retail inflation. Such increases are likely to translate into higher LPG prices domestically, exerting inflationary pressures on Indian households. Given that LPG is a primary cooking fuel for many, any price hikes could disproportionately affect lower-income families.
Moreover, increased energy costs can cascade into broader macroeconomic challenges. A $10/bbl increase could lower India's real GDP growth by 0.3 percentage points and raise consumer inflation by 0.4 points. This threatens to reverse India's recent inflation relief, which had eased to 2.82% in May 2025. The rise in crude oil prices could also lead to a weaker rupee, reducing the purchasing power of Indian businesses and households that rely on imported goods and exacerbating inflationary pressures.
The conflict also poses risks to India's trade relationships with the region. West Asia is not just the source of 54% of India's oil imports but also accounts for over $170 billion in trade. Any escalation in the region, especially one that disrupts the Hormuz Strait, would severely affect India's energy security, increase shipping costs, and drive up inflation. Disruptions to shipping lanes, port access, or financial systems in this corridor would severely impact India's trade flows. The conflict has already started impacting India's trade with Iran and Israel, and any further escalation could endanger exports to countries such as Iraq, Jordan, Lebanon, Syria, and Yemen. India exported goods worth $1.24 billion to Iran in FY25, primarily Basmati rice, banana, soya meal, Bengal gram, and tea. Trade with Israel was larger, with $2.1 billion in exports and $1.6 billion in imports during 2024–25.
Beyond economics, the Middle East conflict also has geopolitical implications for India. India has historically maintained a balanced approach, nurturing ties with both Saudi Arabia and Iran. However, escalating tensions may force India to take a clearer stance, potentially straining relations with one or both partners. This balancing act is crucial as India seeks to maintain its influence in the region and protect its strategic interests. Plans for the India Middle East Europe Economic Corridor had already run aground after the October 7 attacks. With the current crisis, India's investment in the Chabahar port project and the International North-South Transport Corridor for trade and connectivity to Afghanistan, Central Asia, and Eurasia will be affected.
In response to these risks, India has been diversifying its energy sources and strengthening ties with alternative suppliers like Russia and the United States. India has sharply increased its crude oil imports from Russia and the United States in June, surpassing the combined intake from traditional Middle Eastern suppliers. Diversifying crude oil sourcing, reviewing energy contingency plans, and ensuring that strategic petroleum reserves are adequately stocked are crucial steps. India's recent shift towards importing more crude oil from Russia, which is logistically detached from the Strait of Hormuz, offers some buffer against Middle Eastern supply disruptions.
The Middle East conflict presents significant risks to India, spanning economic, energy, and geopolitical domains. By proactively diversifying energy sources, strengthening trade relationships, and carefully navigating its foreign policy, India can mitigate these risks and safeguard its interests in the region.
