West Asia crisis: India’s economic stress test

New Delhi: In the last few weeks, long, serpentine queues have been reported at petrol pumps across several parts of the country, including Karnataka, Telangana, Gujarat, Uttar Pradesh and Jammu & Kashmir. People have been rushing to fill their vehicle tanks amid uncertainty. There have also been reports of fuel hoarding, with petrol and diesel being stored in buckets, water tankers, and even household containers such as pressure cookers, milk cans and jars. At the same time, delays in LPG bookings have caused concern among households, while a shortage of commercial cylinders has forced several hotels to shut operations, exacerbating the disruption. 

While the authorities say that “panic buying” of LPG, petrol and diesel has been due to certain rumours, key concerns arise from India’s heavy dependence on the Strait of Hormuz for the supply of energy resources. Though India has not been buying any oil from Iran since 2019 due to US sanctions, roughly 40% of crude oil, 80% of liquefied natural gas (LNG), and 90% of liquefied petroleum gas (LPG) imports to India pass through the waterway between Iran and Oman.

India is the third-largest importer of crude oil globally, with 5.5 to 6 million barrels imported per day. Roughly 85% of India’s crude oil requirements are met through imports. Between April and November 2025, 32.4% of total imports came from Russia, 17.6% from Iraq, 13.6% from Saudi Arabia, 11.1% from the UAE, and 8.1% from the United States, according to petroleum ministry data. 

Retail prices of oil and gas have risen over the past month in most countries. Prices have increased by 30% in North American countries, including the US and Canada; around 30%-50% in Southeast Asian countries; 20% in Europe and 50% in African countries, Union Petroleum Minister Hardeep Singh Puri said in a post on X.

In India, the prices of cooking gas, industrial diesel and premium petrol have gone up, while normal diesel and petrol have remained largely unchanged, despite the crude oil price in international markets rising by around 75%.

According to Puri, oil marketing companies are incurring a loss of Rs 24 per litre on petrol and Rs 30 per litre on diesel. Data shared by the petroleum ministry indicates that these companies are losing around Rs 2,400 crore per day.

To ease the burden on oil marketing companies, the Union government has reduced the special additional excise duty on petrol and diesel by Rs 10 per litre. The special additional excise duty on diesel has been removed, while on petrol it has been cut to Rs 3 per litre. As a result, the overall excise duty on petrol has fallen from Rs 21.9 per litre to Rs 11.9 per litre, and on diesel from Rs 17.8 per litre to Rs 7.8 per litre.

The tax cut is expected to result in a revenue loss of Rs 7,000 crore for the Centre over 15 days. Analysts estimate that the annual revenue loss for 2026-27 could range between Rs 1 lakh crore and Rs 2 lakh crore due to the duty cut on petrol and diesel. 

However, opposition leaders allege that the government is buying time, warning that petrol and diesel prices are likely to rise sharply after the assembly elections in five states and union territories conclude by the end of April.

Leader of the Opposition in the Lok Sabha, Rahul Gandhi, said the hike in industrial diesel would hit Micro, Small and Medium Enterprises the hardest and drive up inflation. He also expressed concern that the rupee could weaken to Rs 100 against the dollar.

The Modi government adopted a similar strategy during the outbreak of the Russia-Ukraine war, when assembly elections were underway in five states. Petrol and diesel prices were increased in May 2022, after the elections concluded.

Wider impact

However, the impact of the West Asia crisis is not limited to petrol, diesel and cooking gas prices. It is expected to have a wider impact. Sectors ranging from fertilisers and pharmaceuticals to key manufacturing industries such as steel, cement and power are heavily dependent on raw materials imported from Gulf nations.

It is likely to affect key macroeconomic indicators such as GDP, inflation, and the fiscal and current account deficits. High energy prices are likely to drive up inflation and increase government spending on subsidies, particularly for fertilisers and LPG. Lower tax revenues due to the excise duty cut, combined with higher subsidy outgo, may lead to reduction in the government’s capital expenditure, potentially impacting the country’s growth and development in the medium to long term.

GDP growth

In the Economic Survey tabled in Parliament in January, the government projected India’s gross domestic product (GDP) growth for the 2026-27 financial year in the range of 6.8 to 7.2%. For the fiscal year ending March 31, the GDP growth is estimated to be 7.6% in real terms, based on the 2022-23 base year, according to the National Statistics Office.

In its latest policy review, the Reserve Bank of India (RBI) projected FY26 GDP growth at 7.4%, with 6.9% growth for the April-June 2026 quarter and 7% for the July-September quarter. The RBI’s projections were released prior to the government’s release of the new base series at the end of February.

These projections were based on crude oil prices of around $70 per barrel. The recent spike in crude oil prices is likely to weigh on economic activities.

According to an analysis by SBI Research, high oil prices are likely to reduce India’s economic growth by 20–25 basis points in 2026–27. If crude oil prices average $90 per barrel in FY27, India’s GDP growth is estimated to slow to 6.8%. Each $10 per barrel increase in crude is expected to reduce GDP growth by around 20 basis points, and an average price of $120 per barrel could bring GDP growth down to 6.2%.

According to the Organisation for Economic Cooperation and Development (OECD), India’s economic growth is projected to slip to 6.1% in 2026–27.

Goldman Sachs has cut its forecast for India’s GDP growth in the 2026 calendar year to 5.9%, down from an earlier estimate of 7% made before the West Asia conflict.

Inflation

Energy costs influence the prices of a wide range of goods and services. High oil prices are expected to drive up transportation and logistics costs, impacting the prices of nearly all consumer items. Oil prices are also closely linked to electricity generation and manufacturing, as petroleum products serve as critical inputs in the production of plastics, chemicals, fertilisers, pharmaceuticals and synthetic materials. Consequently, the prices of these products are likely to rise alongside increasing oil and gas prices.

“There is a surge in prices of not just oil and gas but a lot of other commodities like plastics, chemicals etc due to supply being cut off from West Asia,” said Prashant Vashisht, Vice President at ICRA.

“Additionally, the oil marketing companies would be making high marketing losses on auto fuels and if the situation persists, there may be a relook at pump prices," he said, adding that the increase in petrol and diesel prices would push the prices of other commodities higher.

“Higher commodity and fuel prices could slow the demand for several products, adversely affecting economic growth,” he added.

After more than a year of decline, inflation has started firming up. Consumer Price Index (CPI)-based retail inflation rose to a 10-month high of 3.21% in February, while wholesale inflation reached an 11-month high of 2.13%, according to the latest official data.

Low food and fuel prices have been the key factors for favourable inflation numbers in recent months, but the situation is likely to reverse in the coming months. Fuel prices have already been partially increased and if the crisis continues, further hike is imminent.

According to Ernst & Young, if the West Asia crisis persists throughout FY27, it would erode India’s GDP growth by around 1 percentage point to 6% and push the CPI inflation to 5.5%.

“The Indian economy is particularly vulnerable to such external shocks, with the adverse effects likely to cascade across multiple sectors through strong forward and backward linkages with crude oil and energy,” EY noted in its monthly ‘Economy watch’ report.

Rupee hits new low

The Indian rupee has been hitting new lows almost every passing day. It slipped to a record low of 94.56 against a dollar on Friday. Since the onset of the West Asia conflict on February 28, the Indian currency has weakened by nearly 3.5% against the US dollar.

Analysts warn that the rupee is likely to weaken further and may hit the critical 100 threshold if the West Asia conflict escalates further.

“The concern of higher crude oil price for a prolonged period is weighing heavily on the currency and overall macro outlook. Sustained dollar demand and energy-led inflation risks are keeping the rupee under stress,” said Jateen Trivedi, vice president at LKP Securities. “Bias remains weak unless crude prices show meaningful correction,” he added.

Increase in farming cost

Anticipating a price hike, farmers have reportedly been stockpiling diesel for the upcoming wheat harvesting season. Farming activities, from plowing and sowing to irrigation and harvesting, are heavily dependent on diesel, and increases in diesel prices would raise the cost of farming.

Supply and cost of fertilisers is another big worry for farmers. India relies heavily on imports of certain fertiliser categories, including Di-Ammonium Phosphate (DAP), Muriate of Potassium (MOP), followed by urea and Nitrogen (N), Phosphorus (P) and Potassium (K). While 75% of the urea requirement is met domestically, domestic urea producers depend on LNG imports to operate their plants.

“Natural gas is vital for urea production, making up nearly 80% of production costs, and approximately 60% of LNG for urea is sourced from Qatar,” says Pushan Sharma, Director, Crisil Intelligence.

Ongoing supply chain disruptions caused by the West Asian crisis are having a significant impact on fertiliser production and availability, as current stocks — around 180 lakh MT — are sufficient for only 2 to 2.5 months. Substantial demand during the Kharif season may further strain stock replenishment and affect crop yields.

“In case the conflict prolongs, the impact could become more severe, since fertiliser demand for the Kharif season is concentrated in the months of May to July,” Sharma added.

Anand Kulkarni, Director, Crisil Ratings, says disruption in LNG and ammonia supplies for three months would lead to a 10-15% dip in production of both urea and complex fertilisers.

In 2025, India exported agricultural and food products worth $11.8 billion to West Asia, including key items such as cereals, fruits, vegetables and spices. Supply chain disruptions have affected these exports, impacting farmers’ incomes.

Fiscal math

From fertiliser and LPG subsidies to the fiscal deficit and inflation, key macroeconomic indicators are set to be affected by the West Asia conflict. When the Union Budget 2026–27 projections were made, crude oil prices ranged between $60–70 per barrel. A surge of over 50% in crude prices is likely to significantly widen subsidy bills.

“Even if the crisis resolves imminently, the baseline energy prices would be higher than what had been presumed in the Union Budget for FY2027, complicating the Government of India’s fiscal math,” ICRA said in a note. 

According to SBI Research, every $10 per barrel increase in crude oil prices may widen the country’s current account deficit by 36 basis points in 2026-27. An average $120 per barrel of crude oil may widen the country’s current account deficit to 2.5% of GDP.

It also poses an upside risk to the fiscal deficit target of 4.5% of GDP announced in the Union Budget. Prolonged elevated crude oil prices would further dampen the Union government's revenues, including corporate tax collections and dividend receipts from both downstream oil companies and other entities.