The fresh Israel-US war with Iran puts India’s economy on watch, as economists say inflation, deficits, and trade risks hinge less on the shock itself than on how long the tensions persist.
India is a net commodity importer, especially oil and fertilisers. Indian oil marketing companies will be able to absorb costs if crude remains around $80/barrel. If it goes beyond $80, they could incur losses but may not pass the cost on to retail consumers and recoup when prices fall, as they have in the past. However, elevated oil and gas costs for a longer period may push up heavily subsidised fertiliser costs.
Following the escalation, Iran has announced the closure of the Strait of Hormuz. While Indian refiners may be able to source crude oil from alternative locations, such as the United States, Africa, and South America, elevated energy prices could result in a higher import bill.
Beyond Retail Petrol Prices
“All depends on how long the conflict continues. If the conflict and supply disruption continue for a week or so, it is unlikely to have a significant impact on inflation and fiscal arithmetic,” India Ratings chief economist DK Pant said.
While the retail petroleum product prices are deregulated, the impact could come from higher gas prices leading to higher fertiliser prices, he said.
In the Budget for FY27, fertiliser subsidy is estimated to decline 8.4% to Rs 1.7 lakh crore from the revised estimate of Rs 1.8 lakh crore for FY26. Hardening of import-dependent urea and nutrient-based fertilisers may push up overall fertiliser subsidy further in FY27.
“The supply disruption due to closure of the Gulf of Hormuz could impact both supply/prices of both exports and imports,” Pant added.
The issue is whether the price crosses $70/barrel and remains at this level for a long time, Bank of Baroda chief economist Madan Sabnavis said. “If it does, then depending on our oil mix, the average import cost will go up. This will affect the current account deficit (CAD),” Sabnavis said.
Fiscal numbers may not be impacted much as presently retail prices are fixed.The gains shared between the government and oil marketing companies (OMCs) will come down. Therefore, fiscal arithmetic is unlikely to be stressed, Sabnavis added.
Remittance Risks
“The situation in West Asia is unfolding, and the extent to which it prolongs and widens would have a bearing on India’s macros, including things like the impact of fuel prices on inflation and the twin deficits, as well as remittances,” ICRA chief economist Aditi Nayar said.
Indians received a record $135.46 billion (around Rs 11 lakh crore) in remittances in 2024–25, the highest ever. The Gulf Cooperation Council — including the United Arab Emirates, Saudi Arabia, Qatar, Kuwait, Oman, and Bahrain — remains a key source, contributing roughly 38–40% of inflows and supporting household incomes and the broader economy.