It was a huge stroke of luck for Prime Minister Narendra Modi, but that has finally run out, big time, thanks to the Iran conflict.
When Modi stepped into office in May 2014, India’s economy was being battered by sky-high crude oil prices that had peaked at $106 a barrel. But just three months later, the picture began changing dramatically. In August, oil prices fell below $100 and by December 2014, they had plunged to $59 a barrel.
Why delve into the history of crude oil prices? Because the price of oil has again topped $100 a barrel and India imports nearly 90 per cent of its crude oil. Oil has long been India’s Achilles’ heel: whenever prices surge, economic vulnerabilities surface.
Today, soaring oil prices, combined with a sliding rupee, fleeing foreign investors and shortages of LPG and LNG, are putting serious pressure on the economy.
“A major shock is coming through the oil price rise,” says Uday Kotak, founder and director of Kotak Mahindra Bank. Economists warn that last week’s three-rupee-per-litre fuel price hike for petrol and diesel is only the beginning, with price rises likely to spread across the economy. Goldman Sachs has slashed its 2026 growth forecast to 5.9 per cent from its pre-Iran war prediction of 7 per cent.
With Iran and the US still far apart on a peace deal that could end the Strait of Hormuz blockade, analysts warn crude prices could surge to as high as $120 a barrel. Since India imports nearly 90 per cent of its crude oil needs and 50 per cent of its natural gas, any rise in energy prices drives up inflation and piles more pressure on the rupee.
That’s why Modi is asking the country to “accept the challenge of patriotism” and spend less on fuel, fertiliser, imported goods including gold, and foreign travel to conserve foreign exchange. The government has already hiked tariffs on gold and silver imports to 15 per cent from 6 per cent to ease pressure on the beleaguered rupee.
The finance ministry says it is seeing the “first signs of a slowdown” in economic data as analysts warn crude prices could surge as high as $120 a barrel amid a prolonged regional conflict.
India is still reasonably well cushioned with $700 billion in foreign reserves, and economic growth remains among the world’s strongest, but warning lights are flashing.
The rupee has fallen more than 6 per cent this year alone, making it Asia’s worst-performing major currency. It was trading at around Rs 85-86 to the dollar in January 2025. Last week, it touched an all-time low of Rs 96.14.
A falling rupee makes imports much more expensive, especially oil, fertilisers, electronics and industrial components, feeding inflation throughout the economy. Last month, wholesale price inflation surged to a three-and-a-half-year high of 8.3 per cent.
Petroleum and natural gas prices rose more than 67 per cent year-on-year in April, while manufactured goods inflation also accelerated.
Manufacturers are facing their highest cost pressures in nearly four years, mirroring the disruption seen during the Covid-19 supply shock.
Normally, the central bank would cut interest rates to boost slowing growth. But with inflation surging and the rupee on the skids, Goldman Sachs expects the Reserve Bank of India to hike lending rates by half a percentage point.
India’s benchmark 10-year government bond yield has climbed above 7 per cent, reflecting growing expectations that interest rates may soon rise.
In other words, economists fear India could be drifting towards the worst of both worlds: slower growth combined with rising prices. Adding to concerns are forecasts of a sharply weaker monsoon.
A prolonged disruption in oil supplies could “entrench inflation, limit policy flexibility and challenge investor confidence,” warns Moody’s, while the IMF says “risks are decisively on the downside.”
And the bad news doesn’t stop there. Crude oil prices, up from $60 a barrel before the US and Israel attacked Iran in late February, have sharply widened India’s import bill. The merchandise trade deficit increased to $28.4 billion in April from $20.7 billion in March as imports have grown much faster than goods exports.
The crisis is exposing a long-standing weakness. India’s merchandise trade deficit has doubled over the past decade, rising from $148 billion in 2013-14 to nearly $300 billion as the economy has become more consumption-driven.
More cars have hit the roads, aviation has boomed, industry has consumed more fuel and petrochemical demand has surged.
Electronics are the second major factor. Since 2013, India has become one of the world’s largest smartphone and electronics markets. Although many devices are assembled here, India still imports vast quantities of semiconductors, electronic parts and telecom equipment from China, Taiwan and South Korea.
As a result, electronics imports have grown far faster than exports.
Gold imports are another chronic pressure point. Households continue to buy huge quantities of gold for weddings, savings and protection, especially during uncertain times. Gold and silver imports cost India around $84 billion in the last fiscal year alone.
Factories increasingly rely on imported machinery, specialty chemicals, industrial components, solar equipment, fertilisers and precision tools. This means manufacturing growth often raises imports alongside domestic output, unlike East Asia’s export-led model, where industrialisation sharply boosted exports.
Meanwhile, exports have underperformed relative to the size of India’s economy. Goods exports have risen, but not nearly fast enough to match import growth, and India has remained dependent on pharmaceuticals, chemicals, petroleum products, engineering goods, gems and jewellery, and textiles to fuel sales abroad.
On the stock market, a falling rupee, a stronger US dollar, rising Treasury yields and better returns in developed markets are driving a steady flight of foreign money from India. Higher taxes on equity investments have also discouraged some foreign institutional investors. Overseas investors have dumped Rs 2 trillion worth of Indian equities since the Iran conflict.
Analysts say that if foreign sentiment remains gloomy, India could fall out of the world’s top five stock markets by market capitalisation. The country’s weight in the MSCI emerging markets index has fallen to 12 per cent from 19 per cent last year amid worries that India has missed the boat in the AI race. (India has already slipped back to sixth position in the global economy rankings, with the UK reclaiming fifth place.)
Stock market conditions would be far worse were it not for domestic retail investors continuing to pour money into SIPs and mutual funds. In March, retail investors bought a record Rs 32,087 crore worth of shares. The big question now is whether domestic investor confidence holds or falters.
Both foreign direct investment (FDI) and foreign portfolio investment (FPI) have weakened sharply, though the reasons behind the fall in FDI are more complicated. As India has become a bigger and more profitable market, multinationals are increasingly repatriating profits rather than simply reinvesting earnings locally. Hyundai, for instance, transferred Rs 10,782 crore to its parent company in 2024 before its $3 billion Indian IPO.
At the same time, Indian firms have been investing aggressively overseas in search of technology, resources and global market access. Tata Sons, for instance, committed billions to battery manufacturing investments in the UK, while pharmaceutical, technology and manufacturing firms have steadily expanded abroad. Indian companies invested $35 billion overseas in 2024.
Meanwhile, the IT services industry, the crown jewel of India’s white-collar boom, is confronting what could become an existential crisis due to artificial intelligence. Giants like Tata Consultancy Services, Infosys and HCL Technologies are seeing their traditional labour-intensive business model come under pressure from what is increasingly called “AI deflation,” as coding tools such as those developed by Anthropic’s Claude automate tasks once carried out by large engineering teams.
HCL Technologies recently cut its revenue growth guidance for the year to March 2027, triggering an 11 per cent plunge in its share price. The shift away from billing for hours worked toward charging for outcomes, while unrelated to oil, is another cloud over the economy, threatening jobs, wages and exports.
India is already feeling the strain. In April, the country received only around 4.6 million barrels per day of crude against normal consumption of roughly 5.6 million barrels per day. But the greater immediate danger may revolve around shortages of LPG and LNG.
LNG shortages could have an even broader impact because natural gas powers key industries including ceramics, glass, steel, petrochemicals, refining and chemicals. The fertiliser sector is especially vulnerable because gas is a key feedstock for urea production. Any prolonged shortage could hit agricultural output and stoke food inflation.
While a weaker rupee helps export-oriented sectors such as IT services, pharmaceuticals, specialty chemicals and textiles by increasing the rupee value of dollar earnings, import-dependent sectors such as aviation, automobiles, FMCG, electronics and oil marketing companies face much higher costs.
For years, relatively cheap oil helped offset economic weaknesses. With crude back above $100 a barrel, the rupee under pressure and energy shortages beginning to bite, India is entering a far more difficult economic period.
“Before the Iran war, we used to say India’s economy was in a Goldilocks situation. That’s no longer the case,” says one analyst.