The escalating conflict between Israel and Iran has heightened concerns over regional stability, particularly regarding India’s energy security. Despite increasing oil imports from Russia, India remains heavily reliant on Middle Eastern oil. The situation has worsened following Iran’s recent missile attacks on Israel, raising fears of a potential full-scale war, which could disrupt crucial oil supplies and impact India’s economic trajectory.
Oil prices surged over 3% on Wednesday after Israel and the U.S. vowed retaliation, with Brent crude futures rising to $75.82 per barrel and U.S. West Texas Intermediate climbing to $72.22. The market had already seen increases of over 5% earlier in the week, reflecting the growing uncertainty.
A full-blown conflict could lead to soaring crude prices, posing significant risks to India’s economy, which is already grappling with inflation and slow growth. In August, Indian oil imports from Russia dropped to about 36%, down from 44% in July, while the share of Middle Eastern oil rose to 44.6%. Key suppliers include Iraq, Saudi Arabia, the UAE, and Kuwait. Additionally, Qatar remains India’s primary supplier of liquefied natural gas (LNG).
Critical shipping routes for India’s oil imports, particularly the Red Sea and the Strait of Hormuz, could be threatened by the conflict. The Strait of Hormuz, a crucial chokepoint for global oil transit, sees two-thirds of India’s oil and half of its LNG imports passing through. Any blockage could lead to severe delays and skyrocketing energy prices.
An increase in energy costs would have widespread repercussions, driving inflation higher and potentially forcing the Reserve Bank of India to maintain elevated interest rates. With the government heavily subsidizing fuel, a shock to oil prices could necessitate a re-evaluation of infrastructure spending and fiscal deficit targets, impacting the broader economy and the middle class.
