The US-Iran-Israel conflict has completely changed the landscape of the world because it has become a trigger point for major consequences across different parts of the world. The developments in the region have also impacted India on a large scale.
However, in this article, we will primarily discuss how the crisis is affecting the Indian economy by putting pressure on multiple fronts of the economy.
Why Is the Indian Economy Under Immense Pressure?
The Indian economy is going through immense pressure due to the ongoing Middle East conflict.
This change is primarily driven by growing oil prices, high market volatility, LPG and LNG shortages, and a reduction of remittances from the Gulf region.
But high energy import bills and a weakening of the Indian currency were the most concerning part for India.
These challenges are part of a single complex mechanism, in which they are integrated and interconnected with each other.
They basically feed each other in a vicious cycle that creates multifold pressure on the Indian economy. There is a term in the economy for this effect called a “Double Whammy.”
But the question over here is, how did we reach that extreme point where India is struggling with these challenges?
It can be understood by knowing the role of oil in the world’s geopolitics and its influence on international relations.
How Oil Shapes Global Geopolitics and India’s Economy
The influence of global geopolitics on our daily lives is often barely visible. But it plays a crucial role in our lives, whether we are filling petrol or diesel in our vehicle or buying anything from the market, everything is interconnected. The deeper you go, the more complicated it will get.
The entire global economy has developed around oil and the geopolitical shifts primarily revolve around this single commodity therefore, every state in the world wants it.
It holds tremendous potential of transforming the world because it powers the global energy systems, drives international trades and shapes the geopolitics of the world.
That’s where it starts playing a game-changing role in shaping the world we live in. India is the world’s third-largest crude oil importer and consumer after China and the United States.
India’s crude oil imports range between 85% and 90% of total consumption. Therefore, India is heavily dependent on crude oil imports from other countries.
But here is the critical part: India’s import dependency has now surged to nearly 89% of its total consumption. It makes our Indian economy vulnerable to global shocks.
Let’s understand how these global shocks play crucial role in shaping India’s geopolitical strategy and economy.
Wars and India’s Shifting Oil Strategy
Before the Ukraine-Russia war in 2022, India used to buy oil from the West Asia region. And Iraq, Saudi Arabia, and the UAE were the leading suppliers of oil for India.
But after the outbreak of the Russia-Ukraine war, the global oil market changed completely. After this major event, the United States and Europe imposed strict sanctions on Russia. As a result, Russian oil companies lost their most important European market where they used to sell their oil.
Hence, these companies started finding new alternative markets for oil to absorb the losses. They started selling this oil at heavily discounted prices.
During that time, China and India started buying more oil from Russia at highly discounted prices. India’s oil purchase went from 2% in 2021 to a peak of nearly 40% by 2023-24, making it one of the highest jumps.
As a result, India’s oil dependency on the Middle East dropped from roughly 60% to 44% during this period and India saved approximately 16 billion dollars over three years.
The United States and Europe were disappointed with India’s decision because they wanted to isolate Russia. Furthermore, the United States went a step further by accusing India of funding the Ukraine-Russia war.
But the Irony was, the Europe was also benefiting from this oil purchase because India was supplying refined oil, such as refined diesel and jet fuel, to the European countries.
The United States started creating more pressure on India through high tariffs and major trade policy changes.
After considering all these geopolitical changes, India gradually diversified its oil basket by increasing purchases from the United States and other suppliers, while Russian imports moderated from their peak levels.
This was a significant strategic move for India because both the United States and Russia remain crucial geopolitical partners.
However, the situation started changing the trade balance after the eruption of the West Asia crisis. The escalation of conflict impacted the Strait of Hormuz, affecting the global trade.
The Strait of Hormuz Crisis and Its Impact on India
The present US-Iran-Israel conflict has started creating problems for the global economy, including India. Because one of its most immediate consequences has been the heightened risk around the Strait of Hormuz.
The Strait of Hormuz is one of the geo-strategically important chokepoints in the Middle East region. Any disruption or threat of disruption in this waterway directly affects India’s energy security.
Nearly 20% of the world’s oil supply passes through this route, making it one of the most critical energy lifelines of the global economy. It is almost one-fifth of total global oil consumption. In other words, approximately 21 million barrels of oil per day pass through that waterway.
It has created a serious problem for India’s energy supply because the rising geopolitical tensions have shaken oil prices, ultimately leading to inflation in the local market.
But the reality is It’s not just about the fuel in our tanks. The Middle East is a primary source of India’s fertilizers, LPG, and LNG supply. As energy prices rise and the Rupee falls, the cost of farming increases, leading to ‘cost-push’ inflation. This means the weakening Rupee eventually hits the price of the food on your plate.
It is a crucial waterway for all of the surrounding oil-rich countries because they are heavily dependent on this sea route for their oil exports. Hence, the disruption of this region not only affects the region but also impacts the world, including India.
India has now started buying Russian oil, but at a market price with narrowed discounts. It means, India is now paying more for the same quantity of oil, which it used to get at a low price.
Finally, that is ultimately burdening India’s forex reserves and increasing India’s oil import bill.
However, the impact of this crisis does not end with rising oil import bills alone; it has gradually started spilling over into the currency market, creating fresh pressure on the Indian Rupee.
How the Rupee Started Weakening
The change in the geopolitical conditions led to weakening of the Indian Currency. This market shift started putting downward pressure on the Indian Rupee by creating a demand and supply imbalance in the foreign exchange market.
That mainly happened because majority of transactions in the global markets are settled in the US dollars. To make the settlements of payments, importers need more US dollars to buy oil, gold and silver and electronics items from the global market.
Therefore, Indian importers sell more Indian Rupees to buy US Dollars to pay for the goods. In this situation, the market gets flooded with more Indian Rupees, leading to a weakening of the Indian currency. In other words, more supply means less value in the market.
The fall of the Indian rupee not a new change for India, it had already been weakening for the last few months. Recent data showed the Indian Rupee has emerged as Asia’s worst-performing currency and has depreciated by roughly 7.5% to 8% against the US dollar during this period.
The currency was already under pressure due to the exodus of foreign portfolio investors and India’s weak trade negotiations with the United States. For Instance, Trump had imposed 50% reciprocal tariffs on India, and foreign investors had taken out 18.5 billion dollars from the Indian market.
However, after the reduction of tariffs from the United States, the rupee slightly improved and recovered. But it did not last for long because again, a new hurdle of a Middle East conflict started impacting the Indian rupee.
It became one more layer of pressure on an already stressed currency, pushing the Indian currency towards one of its historic lows.
But it is just one side of the story; the weakening of the Indian rupee also widened the current account deficit dramatically.
Rising Current Account Deficit and RBI’s Defence Mechanism
India’s Current Account Deficit increased after disruption of global energy supply. When this deficit widens, it signals that India is spending far more foreign currency than it is earning and it means more downward pressure on the Rupee.
The Current Account Deficit is a significant component of the balance of payments and reflects a country’s financial health in international markets.
To manage market volatility and protect the Indian Rupee, the RBI has been forced to step in aggressively. The RBI has reportedly deployed tens of billions of dollars from forex reserves to reduce excessive volatility to stop the Rupee from a total freefall.
As a result, our forex reserves have declined significantly dropping from an all-time high of around $728.49 billion to roughly $697 billion.
This massive intervention by the RBI provided a temporary relief and floor for the Rupee, but this relief did not last for long. This means it pressured the Indian rupee, and India’s import bill kept growing.
But we must not forget that the Middle East conflict isn’t just about oil—it’s a test of resilience. We are fighting a global tide where high US interest rates and geopolitical wars are draining liquidity from emerging markets like ours.
However, eminent economists and the RBI continue to indicate that India’s forex reserves remain at comfortable levels. The RBI’s massive $700 billion forex shield provides a critical buffer for our economy.
India’s High-Stakes Balancing Act in a Fractured World
So, where does this leave us? India is currently caught in a high-stakes balancing act, navigating a ‘new normal’ where global trade and energy are being used as weapons.
We are wedged between a protective U.S. trade policy, a shifting Russian energy deal, and a volatile Middle East.
In this environment, the true strength of our economy won’t just be measured by our GDP growth, but by how effectively we manage this ‘Double Whammy’ of expensive energy and a weakening Rupee.
The real question is how long India can protect its energy security, currency stability, and strategic autonomy in an increasingly fractured world. Only time—and the price of a barrel—will tell.