The shock of the crisis in West Asia finally registered on India’s economic radar earlier this month. The prime minister himself signalled its gravity with an appeal for voluntary restraints on the consumption of fuels, gold and on foreign travel and more. Import duty hikes — from 6% to 15% — on gold and silver followed, alongside retail fuel price rises in four tranches to date. Further fuel price adjustments are expected. Scattered reports of informal limits on fuel purchases at pumps and power outages across states amid the punishing backdrop of an intense heat wave have since made the crisis tangible at the household level. Shielded for the first two months, households are now beginning to bear a growing share of the cost. It is no surprise that public sentiment has turned cautious, fearing the economy’s prospects. There is little cause for optimism: while every country is troubled by one of the most challenging oil shocks in recent history, India ranks among the most vulnerable given its heavy dependence on imported energy.
Two features define this crisis. The first is that the oil shock is structurally more complex because of its physical and multi-commodity character unlike past episodes. It is less a price spike and more a chokepoint closure — the Strait of Hormuz has essentially been shut for a full quarter — with cascading effects across crude oil, LPG, fertilisers, chemicals, and a broad range of petro products. The crude price increase is moderate in historical comparison — roughly 70-80% against the near-quadruple of 1973 or the briefly-double of 1991 — restrained by large strategic reserves, coordinated releases and stock drawdowns. But the trade route closure itself is without direct historical precedent. The result is a supply disruption that is broader, more entangled, and harder to offset than a price shock alone. Spare capacities are limited; alternative supply routes are costly — freight, shipping, and insurance costs have surged to extreme levels — and constrained. Geopolitical uncertainty is extreme and the path to resolution opaque.
India is exposed on both counts — prices and supplies. It sources much of its fuel, LPG, fertilisers, and petrochemicals from the West Asian region through the Strait of Hormuz and exports goods and services through the same channel. It has sizeable numbers of low- and semi-skilled workers, businesses, and professionals engaged in the Gulf economies. Remittance flows and export earnings add a second order of vulnerability beyond import costs alone.
The second defining feature is the pre-existing conditions of India’s external balances upon which this shock has landed. The rupee’s slide well precedes this crisis. It is the consequence of persistent foreign capital withdrawal — direct investment or FDI has been thinning since 2022, collapsing to below 1% of GDP and was barely a billion dollars in net terms by 2024-25 when the decline in short-term portfolio capital inflows also slipped to 0.09% of GDP. Critically, unlike past episodes of external stress, such as the global financial crisis of 2008-09 or the taper tantrum of 2013, in which the current account (the balance of goods and services’ trade, individual remittances and investment incomes) is the source of pressure, this time it is the drying out of foreign capital. In fact, the current account balance has been below 1% of GDP but even this modest gap was difficult to finance, weakening the rupee 13.5% in the three years leading to 2024-25 — even before this crisis.
The oil shock now simultaneously raises the import bill and widens the financing gap, compounding the depreciation pressure on an existing vulnerability as seen in the daily play out. Between March and May, the rupee’s slide was a further 5-6%.
Both features demonstrate the scale and the complexity of the challenge. The shock, by nature, is stagflationary — it pushes up prices while dragging down growth. The longer the disruption, the greater the risk of deep supply-chain damage and broader demand destruction through persistently higher costs of fuel, transport, fertilisers, and food.
What is the economy’s capacity to hold up?
The fiscal space to absorb the energy shock through fuel subsidies or price caps is limited. The government’s sequential shift to burden-sharing with households indicates this. Earlier, it hinted at absorbing the fertiliser subsidy load, which had already risen ahead of the disruptions. The scope for further fiscal cushioning beyond this is narrow: confidence and credibility in a crisis are non-negotiable anchors, particularly with the rupee under sustained pressure, and excessive fiscal slippage risks unravelling both. Moreover, lower growth will impact tax revenues. Capex cuts, if compelled, will extract growth sacrifice.
Households were already weak entering this shock. Successive years of high inflation, especially in food, had eroded real purchasing power, financial positions, and consumer spending to an extent that required fiscal stimulation — income-tax relief and cuts in the goods and services tax — last year to prop up consumption. A fresh inflationary bout will compress demand even as supply disruptions reduce employment in the exposed segments. In contrast, the corporate sector has the healthiest balance sheets in recent history due to strong profit growth from 2019-20 with sizeable cash holdings. This resilience, however, buys time, not immunity because the rapid rise in input costs, weakened demand, and supply-chain disruptions will wear these buffers down.
Obviously, the biggest pressure point is the external sector, manifest in the rupee’s continuing downfall. It has been ranked as the worst-performing currency by investor assessments for some time. From a macroeconomic management standpoint, currency stabilisation is the overriding priority. A depreciating rupee aggravates import costs, stokes inflation, erodes investor confidence, and feeds back into fiscal and external vulnerabilities in a self-reinforcing loop. This may not be easy in one of the most difficult external environments despite large levels of forex reserves. Policymakers will have to alter incentives for foreign capital and investments to return to the country.
What lies ahead?
The duration of the conflict is the single-most critical variable but this is unknowable. Even if the Strait of Hormuz reopens, supply resumption and onward transit would take several weeks, with scarcity-driven price pressures persisting considerably. Policy options are narrowing. Monetary policy, which eased rapidly last year, is now effectively frozen: the rising inflation risk precludes further easing. Fiscal restraint is essential for credibility, restricting the ability to shield households. Structural buffers like forex reserves provide some comfort but not indefinitely; other measures, including more exchange rate adjustment, will be needed. Growth forecasts have been lowered; those of inflation raised. In sum, economic pain is unavoidable.
Renu Kohli is Senior Fellow, Centre for Social and Economic Progress, New Delhi. Views are personal