US-Iran & persian gulf crisis big test for foreign policy, economy

Dr. Tomasz Lukaszuk

The Persian Gulf conflict represents one of the most significant tests for Indian foreign policy in the 21st century. The war highlighted the limitations of India’s influence on US actions in the Indian Ocean, as well as the boundaries of the strategic autonomy India has been cultivating over the past decade. Economically, the conflict compelled India to adjust its supply chains regarding energy security and to reassess Gulf markets for Indian goods, services, and labour exports.

It has also underscored the need to accelerate the development of domestic energy capabilities and to diversify gas sources for fertilizer production. Implementation of the India-Middle East-Europe Economic Corridor (IMEC)—a hybrid transport and economic corridor utilizing Red Sea ports, a railway line across Saudi Arabia, and Israeli ports on the Mediterranean—is expected to accelerate.

Since 2014—the start of Prime Minister Narendra Modi’s tenure—India has pursued a multi-vector foreign policy. India itself terms this “strategic autonomy,” a concept that draws elements from the tradition of non-alignment, while experts in the US and Europe often describe it as a “pendulum” policy. India simultaneously cultivates relations with Israel, Iran, and the Persian Gulf states. Indian diplomacy is driven primarily by economic considerations, as all these nations play a crucial role in the country's trade and investment landscape.

Israel is a key trading partner—with a trade volume exceeding $6 billion and investments surpassing $300 million—and a source of advanced technologies in agriculture, irrigation, water desalination, the defence industry, and medicine.

Iran has been a traditional, vital source of oil and gas—though constrained by US sanctions—as well as a market for Indian rice. Furthermore, India has invested in the Chabahar port near the Strait of Hormuz; this facility is intended to serve as a counterweight to the Chinese-Pakistan port of Gwadar, the southern terminus of the China-Pakistan Economic Corridor.

From India’s perspective, Iran also plays a significant role in monitoring and balancing Pakistan’s influence in Afghanistan. Persian Gulf states account for 50% of India’s oil demand and 40% of its liquefied gas needs, as well as 15% of its exports and 20% of its imports. The Indian diaspora in the region—numbering nearly nine million—is the largest in the world, generating 50 billion US dollars in additional annual revenue. Indian citizens make up 35% of the population in the United Arab Emirates.

The war that began in February poses a challenge for India and its balancing act in foreign policy. Initial reactions from Prime Minister Modi and Foreign Minister Jaishankar were measured, expressing concern and calling for dialogue and the protection of civilians. India sought to maintain neutrality while indirectly supporting the US and Israel and condemning Iran for attacks on the Gulf states. In this context, Modi’s visit to Israel two days before the war began served as a significant signal.

The sinking of an Iranian ship off the coast of Sri Lanka—which had been sailing from Visakhapatnam, India’s largest naval base in the Bay of Bengal, following the joint MILAN exercises—sparked concern in Delhi. It highlighted the limits of the status India had gained, with the US assistance, as a security guarantor in the eastern Indian Ocean. Despite the belief in India’s broad strategic autonomy, these limits are still defined by the administration of President Donald Trump. To counterbalance the negative impact on its image, Indian authorities agreed to provide shelter to Iranian ships at the naval base in Kochi, on India’s west coast.

A significant aspect of the US-Iran conflict and the war in the Persian Gulf, from India’s perspective, was the US acceptance of Pakistan’s proposal to act as a mediator in peace negotiations with Iran. External Affairs Minister S Jaishankar criticised Pakistan for effectively acting as a “broker” rather than a “mediator,” emphasising that India would not agree to play such a role. At the same time, he stressed the need for a swift end to the conflict in the Persian Gulf. India’s reaction reflects its ongoing rivalry with Pakistan for influence in the Gulf and for the quality of its relationship with the US.

The lack of extensive comment from the government in Delhi on this matter was viewed in India as an indication of compliance with Trump’s request to Modi to grant the US greater freedom of action in India’s immediate neighbourhood than previously allowed. The top priorities for Indian diplomats remain stabilising supply chains and ensuring the safety of the Indian diaspora. A blockade of the Strait of Hormuz is a critical factor regarding supply chains, given that 2 million barrels of oil per day passed through the Strait prior to the war. Indian diplomacy successfully secured permission for over a dozen ships to transit through Iranian territorial waters.

The Indian government also obtained authorisation to import oil from Russia. This enabled the replenishment of strategic oil reserves, which are estimated at 25 million barrels. The blocking of imports of gas and other fertilizer production inputs has forced India to switch suppliers and reroute vessels along paths connecting India to Morocco and Jordan via the Cape of Good Hope, as well as to Indonesia and Malaysia via the Bay of Bengal. Domestic producers in India are operating at 60% capacity due to LNG supply shortages.

Approximately one million citizens have already returned to India through individual or group repatriation efforts. Authorities in Delhi recognise the impossibility of providing them with jobs given the protracted war, a situation that could escalate into a social crisis. Returnees fear losing their assets, jobs, and social benefits in the Gulf countries, where more than half of them were employed in the construction sector. Another issue concerns 14 Indian merchant vessels still located in waters adjacent to the Strait of Hormuz and the associated need for humanitarian assistance. Initially, 37 ships were blocked, but thanks to the efforts of Indian diplomats, clearance was secured for 23 of them to proceed.

With Iran and the US forces continuing to exchange strikes despite a temporary ceasefire signed, and both sides offering different versions on talks’ progress, India shall need to gear up for further economic vulnerabilities and perhaps consider tweaking its foreign policy