Impact of Middle East Conflict on India's Economy: Rising Prices and Supply Chain Disruptions
Escalating Conflict and Its Effects on India
As the conflict involving Israel, the United States, and Iran intensifies, Indian households are starting to feel the repercussions, affecting everything from cooking gas costs to remittance flows and supply chains. Approximately 50% of India's crude oil imports, along with a considerable portion of liquefied natural gas (LNG) and liquefied petroleum gas (LPG), typically transit through the Strait of Hormuz, a crucial energy passage that is currently facing disruptions due to the ongoing tensions. The threat to shipping in this vital corridor is causing swift repercussions, impacting global energy markets and the costs faced by Indian consumers.
Economic Connections Beyond Energy
India's economic relationship with West Asia extends well beyond energy resources. This region serves as a significant trade partner and a crucial source of remittances. Approximately 10 million Indians reside and work in Gulf nations, sending substantial amounts of money back home, which supports millions of families and plays a vital role in India's external finances. Brokerage firm Jefferies reports that West Asia accounts for 17% of India's exports, 55% of its crude oil imports, and 38% of remittances. In 2025, India imported goods valued at around $98.7 billion from this region, including energy, fertilizers, and essential industrial inputs. Should the conflict persist, India may encounter disruptions in energy supplies, supply chains, and remittance inflows, alongside the challenge of maintaining diplomatic relations with Washington, Tehran, and Gulf states.
Government's Stance on Energy Security
Currently, the Indian government is taking a cautious 'wait and watch' approach. Officials assert that the country is in a 'comfortable position' regarding energy security, with ongoing assessments of supply levels. They highlight that only about 40% of India's crude imports pass through the Strait of Hormuz, with the remainder sourced via alternative routes. Furthermore, they emphasize that there is no global shortage of crude oil, LNG, or LPG, and India continues to procure supplies from various partners.
Immediate Energy Concerns
Despite these reassurances, energy remains a pressing concern. India imports nearly 90% of its crude oil, with approximately 2.5–2.7 million barrels per day typically transported through the Strait of Hormuz from nations like Iraq, Saudi Arabia, the UAE, and Kuwait. Jefferies indicates that a $10 rise in crude prices could lead to an inflation increase of about 0.2–0.25 percentage points if the costs are passed on to consumers. If the government opts to reduce fuel taxes to mitigate the impact, it could also exacerbate the fiscal deficit.
Vulnerabilities in LPG and LNG Supplies
Experts warn that the greater risk may not lie in crude oil but in cooking gas. India has emerged as the world's second-largest LPG importer after China, with most shipments passing through the Strait of Hormuz. Unlike crude oil, India does not maintain extensive strategic reserves of LPG, with current stocks sufficient for only two to three weeks of demand. In contrast, crude oil reserves can cover approximately 30–35 days of consumption.
Natural gas imports are also at risk. Last year, India imported around 25 million tonnes of LNG, with about 14 million tonnes transported via Hormuz, positioning the country among the largest LNG buyers globally alongside China, Japan, and South Korea. LNG is essential for fertilizer production, power generation, and city gas networks supplying CNG for vehicles and piped cooking gas for households. Early signs of strain have already been noted, as Qatar's Petronet LNG reportedly suspended deliveries to GAIL from March 4 due to restrictions affecting vessel movement.
Rising Domestic LPG Prices
In light of these pressures, domestic LPG prices have already seen an increase. As of March 7, the price of a 14.2-kg cooking gas cylinder has risen by Rs 60 nationwide. The revised prices are as follows:
- Delhi: Rs 853 → Rs 913
- Mumbai: Rs 852.5 → Rs 912.5
- Kolkata: Rs 879 → Rs 930
- Chennai: Rs 868.5 → Rs 928.5
Fertilizer Supply Risks
India's agricultural sector is also heavily reliant on imports from West Asia. In 2025, India imported $3.7 billion worth of fertilizers from the region, including $2.2 billion in NPK fertilizers and $1.5 billion in nitrogen fertilizers. Any disruption during the crop cycle could tighten fertilizer supplies, increase subsidy burdens, and ultimately drive up food prices.
Impact on the Diamond Trade
The ongoing conflict is also affecting India's gems and jewelry sector, which heavily depends on the Middle East for trade routes and raw materials. In 2025, India imported $6.8 billion worth of diamonds from the Middle East, which constituted over 40% of total imports. The region also accounts for about a quarter of India's $30 billion annual jewelry exports, with the UAE supplying more than two-thirds of India's rough diamond imports. Flight cancellations and airspace closures could disrupt supply chains and impact employment in this industry.
Manufacturing and Industrial Risks
Several manufacturing sectors rely on raw materials from West Asia. In 2025, India imported approximately $1.2 billion worth of polyethylene polymers from the region, which are widely used in packaging, plastic products, and irrigation systems. Disruptions could therefore have a cascading effect across industries ranging from consumer goods to agriculture.
Construction Sector Challenges
India's construction industry also depends on mineral imports from the region. In 2025, India imported $483 million worth of limestone from West Asia, a crucial component in cement production. A prolonged shortage could escalate construction costs and delay infrastructure projects.
Metal Supply Chain Vulnerabilities
West Asia is a significant supplier of metals as well. In 2025, India imported around $190 million worth of direct reduced iron (DRI) and $869 million worth of copper wire from the region. Copper wire is vital for power transmission, electrical equipment, and renewable energy infrastructure, meaning disruptions could hinder India's energy transition.
Financial Implications
Experts suggest that the initial impact may be financial rather than physical. Rising crude prices, increased shipping costs, and higher war-risk insurance premiums could substantially inflate India's import bill, even if physical supplies remain stable.
Remittances and the Diaspora
India's overseas population is estimated at around 18.5 million, with approximately 10 million residing in Gulf countries such as Saudi Arabia, the UAE, Qatar, Kuwait, Oman, and Bahrain. These workers contribute significantly to India's remittance inflows, particularly in sectors like construction, services, and energy. In 2024-25, India received a record $135 billion in remittances, solidifying its status as the world's largest recipient. States like Kerala, which receives about one-fifth of India's remittance inflows, are particularly susceptible to any disruptions. A prolonged conflict could lead to evacuations and interrupt income flows that support millions of families.
Strategic Risks to Chabahar Port
India's strategic investment in Iran's Chabahar Port is also under threat. This port, developed as a gateway to Central Asia bypassing Pakistan, has been a crucial element of India's regional connectivity strategy. However, U.S. sanctions and the ongoing conflict have rendered the project increasingly uncertain. Although a temporary waiver permits operations until April 2026, the future of the port remains ambiguous if tensions escalate further.
A Comprehensive Supply Shock
India's reliance on the Middle East extends well beyond oil and remittances. With nearly $100 billion worth of imports from the region, experts caution that a prolonged disruption could impact various sectors, including agriculture, plastics, diamond cutting, and infrastructure. If the conflict persists, what began as a geopolitical crisis in the Gulf could evolve into a broader economic shock for India.