Prof M K Bhat
drmkb1963@gmail.com
With Iran declining American offer to surrender, the ongoing Israel /America – Iran war from last seven days has put Indian economy at cross roads with a high projected growth rate of 7.6 percent in financial year 26, driven by strong manufacturing and service sector performance. The economy has maintained a high growth rate trajectory on the one side to meet its target of Vikshit Bharat by 2047 and on the other, the war has reshaped energy flows. Middle East sources account for about 55% of India’s imports, roughly half of its crude imports around 2.5-2.7 million barrels per day, come mainly from Iraq, Saudi Arabia, UAE, and Kuwait. The importance of this region for Indian economy becomes emphatically clear by the fact that India in 2025 imported goods worth $157 billion from the region while as exports to the West Asian economies stood for around $67 billion. It is not only India but tremors of war will be noticed throughout the world by the escalation in crude prices.
It is no doubt that India at present can bear the escalation in energy prices because of its sufficient foreign exchange reserve of $728 .5 bn on Feb. 27, 2026, along with low current account deficit and inflation rate collectively can help India to mitigate the impact of rising global crude prices and ensure domestic energy security despite country’s high dependence on imported crude oil as per Finance Ministry on March 7 ,2026 but if the war continues it will be difficult for India to maintain a high growth rate. Prolonged disruption could spike global crude prices, raise India’s oil import bill substantially, fuelling inflation in transport, goods and will push up raw material prices. The inflation will curtail savings and thereby investments. It may also increase freight and insurance costs and rerouting of ships may cost both money and time. It will translate into greater shipping costs for Indian exporters. Insurance costs have increased by more than 30% ever since the war started.
This can hit exports/imports badly. (A temporary respite to exporters has come through government charges waiver for ships bound for West Asia). Sectors like aviation, paints, tyres, chemicals and automobiles will face pressure from costlier inputs. Travel & Tourism may be affected directly due to air space disruptions in the Middle East. The price rise will influence the domestic demand.
It is worthwhile to point out that prolonged war will have an adverse impact on the Indians working in Middle East. There are 9 to 10 million Indians living and working across middle east. The highest concentration is in UAE (3.5 million) followed by Saudi Arabia (2.6 million) and a significant population in Kuwait, Qatar and Bahrain. In the year 2023-24 India received approximately $40billion to $51.5 billion in remittances from gulf cooperation countries. This accounts for 38 % to 40% of India’s total remittances ($118.7 billion – $135 billion), with UAE being the top source in the region.
The fuel to fire was added by disruptions by Iran in the state of Homruz through which nearly 20% of global oil flows and over 40% of India’s crude imports transit. India now has only 25-50 days of crude oil supply, apart from some Russian oil in transit. Qatar the world’s largest Liquified Natural Gas exporter has shut down production after Iranian attack and the devastation will take it not less than one month to start production again. The decision to stop production in one stroke switched off 20 % of the world Liquified Natural Gas supply. This has escalated Gas prices in Europe by 54%. India imports 40 % of its imported Liquified Natural Gas from Qatar. Out of the total Liquified Natural Gas in India about 28% is used for the production of Urea, Piped Natural Gas is used for Kitchen and Compressed Natural Gas is used for Cars. It is also used for fuelling power plants and industries. India imports 60% of Liquified Natural Gas from West Asia. Cuts in gas supplies to fertiliser and power companies can reduce output in these sectors in the near term, weighing on growth rate of the country as agriculture and manufacturing are important sectors of Indian economy.
The repercussions of escalated oil price and interrupted gas supplies are reverberating through the markets. The rupee closed at 91.75 against the dollar on March 6, 2026, down by 15 paisa from the previous close of 91 .6. after pressure from higher crude oil prices and foreign fund outflow. The stock markets are facing a rude shock due to the deteriorating geo political situation in West Asia. The Sensex was down by nearly 1100 on Friday. The index closed below 79K mark for the first time since April 2025. The investment atmosphere is getting vitiated by withdrawals of foreign investors. Morgan Stanely has turned cautious on Asian equities, including India, amid concerns that the conflict in the Middle East could disrupt supply chains if oil flows through the Strait of Hormuz fail to recover. According to the Bloomberg report, global investors are pulling money out of emerging Asia’s major markets. Since the war began, foreign investors have pulled about $1.3 billion from India.
The pertinent question is whether India can maintain its high growth rate with the escalation in insurance premiums and disruption in supply chain. Will the manufacturing sector slow down? will the war open new opportunities for investors in the defence sector? will the war generate inflationary pressure in the economy and lower the domestic demand for goods? Will it lead to withdrawal of investments from India? Can Russia fulfil our energy requirements? Is dependence on Russia justified? Will it increase India’s current account deficit? Will it heat up inflation in the economy?
India enjoys good relations with both Israel/America and Iran. It shares critical strategic, economic and geopolitical interests with Iran. These interests are primarily focussed on regional connectivity, energy security and stability in Afghanistan. The key areas of operation include the development of Chabahar port to bypass Pakistan, the international north south transport corridor (INSTC) to central Asia and maintaining bilateral trade despite American sanctions on Iran. India has a special strategic partnership with Israel driven by mutual interests in defence, technology and security. India is a top buyer of Israeli arms and both countries collaborate on AI, cyber security and agriculture to enhance security and economic growth. India US relations in 2026 are defined by a comprehensive strategic partnership focused on counterbalancing China in the Indo pacific, accelerating defence technology and economic cooperation and securing supply chains, key interests include defence coproduction, AI/ semi -conductor collaboration and expanded trade.
India has officially maintained a neutral stance in the regional disruption, wants immediate de-escalation, dialogue and diplomacy regarding the conflict. It has expressed anxiety over regional stability. While avoiding condemnation of actions against Iran to protect its large diaspora in the gulf and energy interests, India has strongly denied allegations of supporting the military action or providing port access to America.
It will be prudent for India at this juncture of its economic growth to mediate between the concerned parties to have stability in middle east. India is having comfortable relations with all the concerned countries and world has accepted leader in Modi.
(The author is Professor Emeritus (M.A.I.T) Guru Gobind Singh Indraprastha University, Delhi)
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