The US-Israeli war on Iran has exposed India’s vulnerability on multiple fronts, threatening the world’s fastest-expanding major economy’s “Goldilocks” combination of strong growth and low inflation.
The war also poses a pressing foreign policy challenge to New Delhi, which has previously sought to maintain close ties with all three warring nations as part of its adherence to “strategic autonomy”.
India depends on Gulf nations not only for oil and gas but for everything from flight connections to fertiliser. Nearly 10mn Indians work in the six Gulf Cooperation Council countries, sending home over $51bn a year in remittances, while the GCC is India’s biggest trading bloc and a major source of foreign investment.
“The collateral damage to the GCC countries is, in a sense, collateral damage to Indian economic interests as well, because it’s so interconnected to GCC economies now,” said Ashok Malik, chair of the India practice at the Asia Group consultancy.
The Iran war now threatens what India’s central bank governor Sanjay Malhotra described at the end of last year as a “rare Goldilocks period” of strong growth and low inflation, analysts say.
Prolonged conflict in the Gulf could disrupt energy supplies to India, the world’s third-largest oil importer, while widening its trade deficit and pushing up domestic prices.
That could threaten India’s high growth, forecast by the IMF before the conflict at 6.4 per cent this year. It could also push inflation up from the 2.75 per cent reported in January.
“Even if we have a very robust macro position in terms of high growth and low inflation, I do not think the financial buffers the economy currently has are as robust to deal with a shock like this,” said Dhiraj Nim, an India economist at ANZ Group.
Such worries have pushed the rupee to record lows against the US dollar, forcing the central bank to intervene. Bankers in Mumbai estimate that the Reserve Bank of India has deployed about $15-20bn of its $730bn foreign exchange reserves since the start of the war to shore up the currency.
Finance minister Nirmala Sitharaman on Monday played down the economic risks, telling parliament “the impact on inflation is not estimated to be substantial at this point”.
But analysts are less confident, pointing out that India relies on the Strait of Hormuz — where shipping has almost halted since the US and Israel launched strikes on Iran — both for energy supplies and much of its other trade.
“The disruption has been immediate because the Gulf region sits at the centre of India’s global logistics network,” said Jitendra Srivastava, chief executive of Mumbai-based Triton Logistics & Maritime. About $48bn of India’s non-oil annual exports were “directly tied” to Gulf markets dependent on shipping through the Strait of Hormuz, Srivastava said.
“Because a large portion of international shipments relies on transit connectivity through Gulf hubs, flight cancellations or rerouting can create congestion at export gateways,” he added. “Exporters are therefore facing longer dwell times, higher storage costs and tighter capacity for time-sensitive shipments.”
State-owned gas suppliers including Petronet LNG have declared force majeure, exempting them from contractual obligations, due to the hostilities. Airlines IndiGo and Air India have been forced to cancel or reroute flights because of airspace restrictions. India is the largest country market for Dubai’s international airport, with nearly 12mn passengers last year.
“India has little insulation from a block in the supply chain around the Hormuz strait choke point,” said Hasnain Malik, head of geopolitical risk at Tellimer.
Kunal Kundu, India economist at Société Générale, estimated that a sustained post-conflict $10 increase in oil prices would widen India’s current account deficit, currently forecast to be around 1 per cent of GDP in the year ending March 2027, by about half a percentage point. It would also cut economic growth by 0.3 per cent, Kundu said.
But the problems for Prime Minister Narendra Modi stretch well beyond the economy. The US torpedoing of an Iranian warship off Sri Lanka that had taken part in an Indian naval exercise brought the war almost to his country’s doorstep.
The sinking raised uncomfortable questions for Modi’s government, which opposition politicians accuse of abandoning New Delhi’s traditions of non-alignment and hewing instead to the US and Israel.
Modi, who is keen to keep good relations with President Donald Trump following a hard-won trade deal, has largely avoided public comment on the war, limiting himself to calls for dialogue and an early end to hostilities.
New Delhi has shown limited appetite for solidarity with Tehran, once an important regional partner seen as India’s gateway to Afghanistan and Central Asia.
It took India’s government five days to sign the condolence book for supreme leader Ayatollah Ali Khamenei at Iran’s New Delhi embassy. Foreign minister S Jaishankar did not condemn the US sinking of the Iranian frigate in the Indian Ocean, saying only that the vessel had “got on the wrong side of events”.
“This war has been a strategic and diplomatic nightmare for India,” said Brahma Chellaney, professor of strategic studies at the Centre for Policy Research in New Delhi.
“Modi is trying to navigate the different pressures . . . [and] pursue a balanced approach. But the perception is growing that India is aligning itself more closely with the US and Israel against Iran.”
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Nirupama Rao, a former top Indian diplomat, acknowledged the “mercurial nature” of US foreign policy, but criticised what she called the Modi government’s “silence is golden” approach.
“We have to have the courage to speak when a war threatens to consume the entire region,” Rao said. “I think we can afford to be a little more confident and a little more self-assured.”
