The Economic Impact of the Israel-Iran Tensions on India

The ongoing conflict between Israel and Iran is having a big impact on India’s economy—especially with trade disruptions, rising oil prices, and inflation on the rise.

How’s trade affected?

The conflict is hitting key shipping routes like the Red Sea and Suez Canal, which are crucial for Indian trade with Europe, the US, and West Asia. These routes handle goods worth over USD 400 billion each year. If tensions keep escalating, it could mean longer delays and higher shipping costs.

Exports are already feeling the pinch. In August 2024, Indian exports dropped by 9%, driven by a 38% decline in petroleum product exports. Europe, which buys 21% of India’s petroleum, is especially affected. And as shipping costs rise by 15-20%, industries like textiles and engineering are struggling to stay competitive.

Oil prices and Inflation

With oil prices climbing, inflation is a real concern. Even though India doesn’t import much oil directly from Iran, it’s still heavily reliant on global oil imports. A $10 per barrel increase could push up India’s Consumer Price Index (CPI) by 0.5 percentage points, squeezing household budgets further.

Since 88% of India’s oil needs are met through imports, a sustained rise in prices could hurt economic stability, making it tough for the government to balance fuel subsidies and infrastructure spending.

Bigger Picture

Higher shipping and oil costs could slow economic growth. Plus, if the conflict disrupts energy flows through critical chokepoints like the Strait of Hormuz, it could impact India’s imports of LNG from Qatar and oil from Iraq and Saudi Arabia.

Geopolitically, India will need to navigate its relationships in the Middle East carefully, especially with initiatives like the India-Middle East-Europe Economic Corridor (IMEC) in play.

In short, the Israel-Iran conflict brings complex challenges for India. As tensions rise, India’s ability to manage its energy imports and trade relationships will be key to minimizing the economic fallout.

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