West Asia Conflict: Impact And Government Policies

By S. Mahendra Dev

Over the last decade, the world appears to be in a permanent state of disruption – marked by galloping technological progress, particularly AI, geopolitical conflicts, trade wars, supply chain problems and more recently the US-Israel war with Iran. It has been more than two months since the conflict in West Asia began on February 28th. Energy experts have long warned that war in Iran was causing the biggest oil supply shock in history. The conflict does not appear to be closer to a resolution. In this context, what is the impact of the war on the Indian economy? What are the measures taken by the Indian government for the management of the West Asian crisis?

It is true that the conflict will have a significant adverse impact on the Indian economy as the country imports 90% of its crude requirements and 50% of its gas (LNG) requirements. However, India has displayed resilience in the face of global headwinds generated by the war in West Asia. The economy has been strong and robust due to strong fundamentals: fiscal deficit is 4.4% of GDP; Debt-GDP Ratio of the Centre is 56% of GDP; combined with states, it is 81% of GDP; India's debt is among the lowest as compared to the high debt of others; external debt-GDP ratio is only at 19.1%; the current account deficit is around 1.2%; banking and private sector are in good shape; and the government has been increasing capital expenditure

Although there have been supply shocks, the demand side is still strong with higher passenger vehicle sales, GST collection, medium and heavy vehicle sales, etc.

Trade data for March has shown a limited impact on the trade balance, with the merchandise trade deficit actually narrowing to USD 20.67 billion from USD 21.69 billion. This shows that the impact of the war is being mitigated by a good export performance to a diversified set of markets. It is true that the rupee has depreciated, and it was 94 to 95 per US dollar. It is partly due to the selling by foreign portfolio investors in the stock market. The FPIs will return to India once normalisation happens in West Asia.

The gross FDI inflows are expected to be $90 billion in 2025-26. Annual inflows could touch $100 billion by 2030, supported by reforms and supply chain shifts. India’s investment momentum is a direct outcome of policy clarity, institutional commitment and the trust global investors place in India’s systems. There are also indications that states such as Andhra Pradesh, Gujarat, Madhya Pradesh, Telangana and a few other states have emerged as top investment destinations due to proactive policies and infrastructure development.

Unlike COVID, India confronts the West Asia shock with strong growth and benign inflation. GDP growth in 2025-26 is estimated at 7.6%, and 2026-27 growth was estimated, pre-conflict, at close to 7%. According to RBI projections, real GDP growth for 2026-27 will be 6.9% with 4.6% inflation, assuming $85 per barrel of crude oil. Under the assumption of $95 per barrel of crude oil, the GDP growth would be 6.7% and 5% inflation in 2026-27. It shows that the impact on growth and inflation would be contained even if there is an increase in global crude oil prices. Of course, all this analysis is contingent on how long the war will continue and how long the disruption will actually be.

What are the government policies to manage the impact of the West Asia crisis? To cushion the impact of the ongoing conflict in West Asia, a combination of fiscal, monetary, trade and supply-side interventions is being deployed. The government has developed an emergency response mechanism, which has helped it respond to crises since Covid.

On the financial side, the Reserve Bank of India has taken measures to ensure currency stability, ease liquidity pressures, and extend export credit timelines, while targeted support is being provided to exporters and affected sectors. Institutional mechanisms such as an inter-ministerial coordination group and empowered groups are actively monitoring trade disruptions and enabling swift policy responses, including the creation of a war-risk insurance framework. The increase in LPG prices is only for the commercial sector, while the ordinary consumer is not affected.

Similarly, ATF prices are only for international flights, while domestic airline passengers are spared. On the external front, efforts are focused on diversification of energy sources, securing long-term fuel supplies, and maintaining adequate reserves, alongside leveraging FTAs to diversify trade markets. Domestically, inflation management measures such as continued fertiliser subsidies and discouraging panic buying are helping maintain stability. These are complemented by sustained public capital expenditure, availability of fiscal space for targeted interventions, and strengthened emergency response systems, all of which together enhance India’s resilience to external shocks.

This conflict has highlighted how exposed India is to commodity shocks, especially oil. How can we address this? The current conflict underscores the importance of a systematic risk-management approach. First, India needs to identify critical economic chokepoints—across energy, food, fertilisers, metals and critical minerals—and actively mitigate both volume and price risks. This requires significantly expanding physical buffers, including strategic petroleum reserves and stockpiles of key commodities, moving beyond the traditional focus on forex and food stocks. Second, excessive import dependence must be reduced through diversification of sourcing and trade routes, supported by more effective use of FTAs. Third, over the medium term, the most durable solution lies in reducing structural dependence on fossil fuels by accelerating the transition towards renewables, energy storage, and electrification, thereby insulating the economy from recurring external commodity shocks. Fifth, studies have shown that there are other choke points that exist. About 70% of India’s active Pharmaceutical ingredients (APIs) are sourced from China, with some estimates that this ratio rises to almost 90% for antibiotics.

Also, all of India’s polysilicon (used for solar panels) and more than 90% of its lithium-ion batteries are imported from China. Therefore, India is trying to follow a multi-pronged approach to mitigate these concentration risks. Looking ahead, the objective should not be to simply maximise “average growth rates”, but to minimise growth volatility by being better prepared to absorb shocks. This “risk management” mindset should pervade all levels of government.

The current energy shock from the West Asia war will accelerate the shift away from fossil fuels. India has already committed to the vision of Net Zero by 2070. The recent updates to the Nationally Determined Contributions (NDC) for 2031-35 lay out clear targets in this regard, including reducing emissions intensity of GDP, increase in non-fossil based installed capacity and creating additional carbon sink through forest and tree cover. It should be noted that the targets for previous NDCs were achieved well ahead of time. With regard to nuclear power, the SHANTI Act provides a conducive ecosystem for the participation of private players. The prototype Fast Breeder Reactor recently achieved criticality, and this is an important milestone towards achieving long-term energy security.

At the national level, there are various policy initiatives which lower the dependency on oil, especially in the transport sector, like the use of biofuels, compressed biogas (CBG), Sustainable Aviation Fuel (SAF) and the electric mobility push. The recent events have re-emphasised the importance of a diversified basket of sources of energy supply. The power of oil monopolies will fall over time. Oil prices are unlikely to stay high because of alternative sources.

This year, another concern for Indian agriculture and economy is the El Niño effect on the monsoon. The impact of El Niño on Indian agriculture depends on its severity and the spatial and temporal distribution of rainfall. The forecast says there is likely El Niño development post-July. The rain in July is the most important one for crop growth. Similarly, regional distribution will be different. Indian Ocean Dipole (IOD) can offset the El Niño impact.

While a below-normal monsoon can pose risks, its impact on the rural economy today is structurally different from earlier decades. There have been substantial improvements in irrigation coverage, water management practices, better seeds and crop diversification, which mean that—unlike in the 1970s and 1980s—a weaker monsoon does not automatically translate into sharp increases in food inflation or severe output losses. Storage and supply chain infrastructure have also been strengthened. Thus, the overall impact on agriculture is likely to remain muted compared to earlier decades due to comfortable water reservoir levels and improved irrigation. However, the situation remains evolving and warrants close monitoring, particularly to assess any adverse effects on crop yields and input costs faced by farmers

The West Asia conflict has significant concerns for the Indian economy. However, overall, while the extent of impact will depend on the duration of the conflict, India’s strong macroeconomic fundamentals place it in a relatively resilient position to absorb such shocks. Similarly, to offset the possible impact of El Niño, the government is already better prepared through several policy measures.

The writer is the Chairman of the Economic Advisory Council to the Prime Minister, Government of India.

(Disclaimer: The opinions expressed in this article are those of the writer. The facts and opinions expressed here do not reflect the views of ETV Bharat)