India Grapples with Economic Risks Amid Iran-Israel Conflict

The escalating conflict between Iran and Israel has prompted India to hold emergency talks with key stakeholders to assess and mitigate potential economic fallout. With approximately $825 billion in trade at risk, the Indian government is closely monitoring the situation, focusing on potential disruptions to critical trade routes and rising freight costs.

The Commerce Ministry is actively exploring strategies to safeguard India's economic interests amid growing regional instability.

Highlights

• India's Commerce Ministry is holding emergency talks to assess the impact of the Iran-Israel conflict on its $825 billion trade.
• Key concerns include potential disruptions to vital shipping routes like the Strait of Hormuz and the Red Sea, impacting oil and LNG imports.
• India's exports to Israel have already declined, and the conflict could further exacerbate trade imbalances and increase logistical costs.

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Top 5 Key Insights

• Trade Route Disruption: The Strait of Hormuz, a critical passage for nearly two-thirds of India's crude oil and half of its LNG imports, is under threat of closure, potentially spiking energy prices and shipping costs. Any military disruption in the Strait of Hormuz would sharply increase oil prices, shipping costs, and insurance premiums, triggering inflation, pressuring the rupee, and complicating India's fiscal management. This narrow waterway, only 21 miles wide at its narrowest point, handles nearly a fifth of global oil trade and is indispensable to India, which depends on imports for over 80 per cent of its energy needs.

• Impact on Exports: Tensions in the Red Sea, through which nearly 30% of India's westbound exports pass, are escalating, increasing risks to commercial shipping and potentially raising logistics costs by 15-20%. The Red Sea route is crucial for 80% of India's merchandise trade with Europe and a substantial portion of its trade with the US. Both these geographies account for 34 per cent of the country's total exports.

• Declining Trade with Israel: India's exports to Israel have already seen a sharp decline, falling from USD 4.5 billion in FY24 to USD 2.1 billion in FY25, signaling the immediate economic impact of the conflict. Imports from Israel also decreased to USD 1.6 billion in the last fiscal year from USD 2.0 billion in FY24. The conflict adds to the pressure that the world trade was under after the US President Donald Trump announced high tariffs.

• Energy Security Risks: India, highly dependent on oil imports from the West Asia region, faces the risk of increased inflation and a strained current account deficit due to potential oil price surges. Analysts predict that oil prices could reach $120 per barrel, significantly impacting India's economy by increasing inflation and straining the current account deficit. Higher oil prices would also affect transportation costs, leading to increased prices for goods and services across the board, which could squeeze household budgets and impact economic growth.

• Balanced Diplomatic Stance: India is in a challenging position, needing to balance its strong defense ties with Israel and its historical and cultural connections with Iran, while ensuring its energy and trade security. India maintains amicable relations with both Israel and Iran, the result of a delicate balancing act stretching back decades. While India has strengthened ties with Israel, particularly in defense and technology, it also values its historical and cultural connections with Iran.

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Expert Insights

Global Trade Research Initiative (GTRI): "Any closure or military disruption in the Strait of Hormuz would sharply increase oil prices, shipping costs, and insurance premiums, triggering inflation, pressuring the rupee, and complicating India's fiscal management."

Federation of Freight Forwarders Associations in India (FFFAI) Chairman Dushyant Mulani: "The alternate shipping route through Cape of Good Hope is likely to impact the schedules for Indian exporters, marine insurance costs may rise as well, and shipping and air freight costs may rise."

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Wrap Up

The Iran-Israel conflict poses significant economic challenges for India, primarily through potential trade route disruptions and rising energy costs. India's ability to navigate this crisis hinges on its diplomatic agility and strategic economic planning.

By diversifying its supply chains and maintaining a balanced foreign policy, India can mitigate the risks and foster resilience in the face of geopolitical uncertainty.

Author

Omar Hassan - An experienced international affairs correspondent with a global perspective on major world events and diplomacy. He brings insightful commentary on global trends and international relations to Enlightnr.