Riding Out the West Asia Storm

The ongoing conflict in West Asia which has continued for nearly two months now, has delivered what the International Energy Agency describes as the largest oil and gas shock the world has faced in a generation. With the Strait of Hormuz which is the transit route for close to a fifth of global oil supply, effectively weaponised, every net commodity-importing economy is feeling the reverberations. For India, which sources 40-45 per cent of its crude and about half its natural gas from the Gulf, the crisis is both a stress test of macroeconomic buffers and an inflection point for external strategy.

The numbers tell the story with unsparing clarity. The Indian crude basket, averaging $70 per barrel before the war broke out in February, crossed $146 by mid-March and peaked at $157 on March 23, before a basket composition rejig and excise cuts brought the April average price closer to $115. Surging freight and war-risk insurance premiums on Hormuz transits have further compounded the landed cost.

Against this backdrop, the latest IMF’s April 2026 World Economic Outlook still marks India as an outlier of strength. India’s FY27 growth forecast has been revised upward to 6.5 per cent, even as global growth has been pared to 3.1 per cent, a 0.2 percentage point downgrade from January. India remains the only major economy to be upgraded. That said, it would be imprudent to treat this resilience as automatic: The crisis is likely to transmit to the Indian economy through five channels that merit close policy attention.

First, the external account. With crude at elevated levels, our internal research shows that a sustained $10 increase in crude prices could raise India’s oil import bill by about $13-14 billion, which could potentially widen the current account deficit by 0.3 per cent of GDP. The current account deficit, which comfortably averaged under 1 per cent of GDP in the last fiscal, could move above 2 per cent if prices do not normalise. Compounding this, the Gulf region continues to account for close to 40 per cent of India’s remittance inflows; thus, any slowdown in Gulf construction and services activity will squeeze this critical buffer. The rupee, predictably, has come under depreciating pressure.

Second, the input-cost channel for industry and agriculture. The Gulf supplies over 80 per cent of our ammonia requirements and a significant share of di-ammonium phosphate (DAP) imports, the lifeblood of our fertiliser sector on the cusp of the kharif sowing season. Shortages of key solvents and polymers such as methanol, acetone, isopropyl alcohol (IPA) and HDPE are already adversely impacting pharmaceuticals, specialty chemicals, packaging and textiles.

Third, the fiscal arithmetic. The excise cuts on petrol and diesel, partly offset by higher export duties on aviation turbine fuel and diesel, will leave a net dent. The fertiliser subsidy bill, too, will almost certainly need upward revision to shield farmers. Yet India enters this shock with a fiscal deficit glide path that has been credibly delivered for four consecutive years, giving the Centre room to absorb targeted interventions without destabilising the broader consolidation agenda.

Fourth, the external demand channel. India’s total exports crossed $860 billion in FY26, growing 4.2 per cent on an annual basis, even with the volatility of US tariff shifts. Services exports remain the bulwark of India’s external sector, reinforced by a deliberate diversification of the goods basket. Critically, the welcome reduction of additional US tariffs on Indian goods from 50 per cent to 10 per cent was cited by the IMF as a driver of India’s upgrade, along with the slate of free trade agreements now in force, which place India in a more defensible position than in previous shocks.

Fifth, the financial conditions channel. Tighter global financial markets and a firmer dollar are likely to raise borrowing costs at the margin and exert depreciating pressure on the rupee. Here, India’s $700 billion-plus foreign exchange reserves, sufficient to cover 11 months of imports, constitute a formidable firewall against currency volatility, while the RBI’s calibrated liquidity management has kept domestic yields well-anchored.

The government’s response has been timely and forward-looking. Domestic refineries are running at high utilisation, strategic inventories are being closely managed, and diversification efforts have materially enhanced resilience, with nearly 70 per cent of crude imports now routed through suppliers bypassing the Strait of Hormuz, up from 55 per cent earlier.

The lessons from the current crisis extend well beyond immediate risk mitigation. India must now accelerate the expansion of strategic petroleum and gas reserves, address structural vulnerabilities in liquefied petroleum gas and liquefied natural gas supply chains, and scale up the ethanol blending programme with renewed urgency. Equally critical is broadening the renewables base — solar, wind and green hydrogen — with India already among the world’s fastest-growing renewable energy markets. The energy transition is no longer just a climate imperative — it is a strategic one. India’s macroeconomic story remains intact. What the West Asia crisis reminds us is that resilience is built, deliberately, through policy foresight and private-sector partnership. CII stands ready to contribute to both.

 Note: This article was first published in Business Standard