The escalating conflict in West Asia could have “significant” economic repercussions for India if it persists, the Finance Ministry said on Friday. Prolonged tensions may widen the current account deficit, weaken the rupee amid risk-averse capital flows, and raise inflation, while liquefied natural gas (LNG) and crude-dependent sectors such as fertilisers and petrochemicals face pressure, the finance ministry economists led by V. Anantha Nageswaran said.
“The implications of this conflict for India are significant and may be longer-lasting in ways that are not immediately understood,” they said in the monthly economic report for February, offering the first official assessment of how the war could impact the Indian economy.
The US-Israel strikes on Iran on February 28 killing Iranian Supreme Leader Ali Khamenei and sparking retaliatory threats, have disrupted shipping through the Strait of Hormuz—the world’s most critical oil chokepoint handling 20% of global oil flows—and damaged key energy infrastructure assets in the Middle East. This marks a pivotal escalation echoing the 1991 Gulf War oil shocks, potentially reshaping global energy geopolitics for decades.
This conflict has already driven Brent crude up around 9% to near $80/bbl. and LNG prices by around 50%, according to the report.
Despite the country’s high import dependency on crude oil, it has sufficient foreign exchange reserves, a low CAD (which stands at 0.8% of GDP in H1 FY26), and low inflation rates, which collectively allow it to effectively mitigate the impacts of rising global crude oil prices and ensure domestic energy security, it said.
“However, if the crisis persists, it could have material implications for the exchange rate and the current account deficit and could stoke inflationary pressures (which otherwise have supportive supply-side dynamics),” it said.
Higher energy prices could also feed into domestic inflation. While India currently benefits from supportive supply-side conditions in food and other essential goods, persistent increases in oil and gas prices may gradually pass through to transportation, manufacturing and household energy costs. This would complicate the task of maintaining price stability, the report noted.
Certain industries are particularly exposed to fluctuations in global energy markets. Sectors such as fertilisers and petrochemicals rely heavily on natural gas and crude oil as key inputs, and prolonged price spikes could raise production costs and compress margins.
“Fiscal resources have to be found, and hence reprioritisation may be necessary in the coming years. That will be as true of states as it is true of the Union government,” the report emphasised.
The importance of certainty, predictability, continuity, and stability in tax policies and tax administration for attracting foreign direct investment has risen a few notches in the current global political scenario, it said. “Even if only latent for now, the risks to India’s balance of payments may have become elevated due to this conflict,” it said.
The government has recently concluded several free trade agreements and continues to negotiate others, creating new opportunities for exporters.
India enters the coming financial year with relatively strong economic fundamentals compared with earlier periods of instability in the Gulf region. Economic growth remains robust, inflation is moderate, credit expansion is healthy, and fiscal consolidation efforts are underway.
Analytical exercises suggest that crude oil prices would likely need to remain above $100 per barrel for an extended period before significant macroeconomic stress emerges. However, oil is only one part of the equation; the availability of natural gas, the safety of maritime trade routes and global investor sentiment will also play critical roles, it added.
