By Sumita Dawra, Former Union Secretary (Labour and Employment) and former Special Secretary (Logistics)
As the West Asia crisis continues, it is important to assess its implications for the Indian economy in the coming weeks. The government of India has managed to keep petrol and diesel prices in control even as several countries across Southeast Asia, Europe, and North America have allowed prices to rise by 20-50%. However, LPG and air travel costs have already risen in the country as a consequence of the war.
If the conflict drags on, India will have to manage the economic fallout of the Gulf turmoil across several fronts—energy supplies, trade flows, manufacturing, agriculture, and even sectors like hospitality. At the same time, there will be pressure on managing financial markets, fiscal revenues, and foreign exchange reserves.
That said, this moment could also push India to rethink and reset its policy options with respect to the energy mix, currency mechanisms for settling trade, and building more resilient logistics networks.
India’s strategic petroleum reserves (SPRs) and oil marketing companies’ buffers together provide around 60 days of cover and can cushion short-term spikes only. Diversification of oil imports and temporary easing of sanctions on imports from Russia and Iran offer a window to strengthen SPRs. This may also be an opportune time to expand rupee-based trade settlements for energy imports, building on the institutional arrangements already put in place by the RBI.
India’s operational SPR storage sites accommodate only about 10 days of national crude demand. India can, however, quickly expand capacity for SPRs by collaborating with friendly geographies to lease storage—such as in Singapore, Japan, and South Korea.
Besides oil prices and strategic reserves, the current situation highlights the logistics vulnerability of energy and critical raw material imports for several countries, including India. The chokepoint of the Strait of Hormuz could upend global supply chains, with potential challenges of supply of helium for semiconductors and movement of fertilisers for timely sowing operations already emerging.
For India to secure alternative shipping routes, it will require strong coordination among the shipping ministry, oil companies, and port authorities—besides a need to strengthen agreements with global shipping lines. While use of Saudi Arabia’s East-West pipeline and Oman’s Duqm port are proactive steps, India’s Geographic Information System-based PM GatiShakti National Master Plan should be leveraged to identify multimodal connectivity for energy logistics, improving efficiency of movement both domestically and internationally.
Logistics risks are further compounded by threats in the Bab el-Mandeb that connects the Indian Ocean to the Red Sea. The re-routing of Indian shipments around the Cape of Good Hope adds to transit time and costs, potentially impacting exports of agro-products, steel, auto components, textiles, etc. to Europe. Equal focus is required for export logistics, especially for agricultural and manufactured goods bound for Europe.
In the immediate term, India must contend with imported inflation, driven by rising oil prices and a weakening rupee—a double whammy. The currency’s slide to an all-time low of over `94 per USD is widening the current account deficit—compounded by elevated oil prices and depreciation. The risk of this dynamic driving up transportation and production costs could translate to price increases across sectors.
A prolonged conflict also brings the risk of a broader economic slowdown or a recession. Maintaining currency stability and orderly financial markets remains critical, even as we position ourselves as a reliable investment destination amidst the ongoing global uncertainty.
Sectors such as steel, automobiles, textiles, and other labour-intensive industries rely on LPG as a key fuel. Even short-term stress could impact the financially stretched MSMEs, causing a cascading effect on employment and consumption. The situation echoes Covid-19 when coordinated inter-ministerial responses and targeted financial packages were necessary.
The Prime Minister’s virtual meeting with chief ministers on March 27 focused on ensuring smooth supply of petroleum products and LPG, curbing hoarding and black-marketing, and supporting trade and industry. It is critical for state governments to establish control rooms and monitoring mechanisms to track availability and pricing of essential commodities.
Measures include promoting piped natural gas, preventing additional charges by hotels and restaurants, and ensuring optimal allocation of the non-domestic LPG use by labour-intensive industries. With the kharif sowing season approaching, timely supply and distribution of fertilisers will be crucial.
To absorb the shock, the government must continue to actively manage oil and gas supplies, strengthen strategic reserves, and build alternative logistics networks to safeguard trade. Close oversight of supply chains for manufacturing and fertiliser distribution will be essential. Expanding high-value digital exports—such as IT, SaaS, and fintech—along with scaling up global capability centres can boost foreign exchange earnings and job creation.
The key policy challenge will be balancing inflation—especially in food and essentials—while protecting growth and livelihoods. A broader strategic shift is required for external sector strategies, including localisation of supply chains and currency use in trade. Coordinated action can lay the foundation for greater economic resilience.