Iran War: West Asian Disturbances Threaten India's Economy, Strategy and Diplomacy

As the Middle East is plunged into a war orchestrated by the United States in collusion with its footholds in the region, Iran is not the only country to be severely affected by it. Apart from Iran and the countries in its immediate vicinity in the region, India, along with the rest of the world, is likely to witness the knock-on effect of the West Asian disturbances.

Tensions escalated even as the US and Iran were in talks over allegations of Iran harbouring nuclear weapons, with Iran hoping for the lifting of long-standing US economic sanctions on the country. Despite not reaching a consensus over three rounds of negotiations, there was hope of peace, even indicated by US President Donald Trump, when he called Tehran “very difficult”, but said that he preferred a peaceful resolution. He then went on to order military strikes jointly with Israel on February 28, which ultimately led to the killing of Iran’s Supreme Leader, Ayatollah Ali Khamenei.

In retaliation, Iran launched attacks using hundreds of missiles and drones against Israel and several Gulf Arab nations that host US military assets, including the United Arab Emirates(UAE), Bahrain, Qatar, Kuwait, Iraq, and Saudi Arabia.

How This Affects Indian Economy

Oil and Natural Gas

One of the first actions from Iran, apart from launching direct attacks, was to block the Strait of Hormuz, which threatens to unsettle the global markets. The strait is a narrow, but very crucial sea route, through which close to 20 per cent of the world’s crude oil supply and around one-fifth of the global liquefied natural gas shipments pass. As a result of Iran’s move, crude oil prices have already jumped from USD 65 per barrel to nearly USD 72-73 per barrel. The volatility in the oil, currency and equity markets is expected to remain high for the immediate future amid direct military engagement and fears of further escalation.

India’s exposure is significant. The country consumes about 5.5 million barrels of crude oil daily and depends on imports for more than 80 per cent of its requirements. Of this, an estimated 1.5 to 2 million barrels per day pass through the Hormuz corridor. In FY2025 alone, about 50 per cent of India’s crude oil imports and 54 per cent of its LNG imports were shipped via this route.

Cascading effect

Rising crude costs typically increase fuel and transportation expenses, which then feed into overall inflation. Economists warn that higher energy imports may widen the current account deficit and add pressure on the fiscal deficit through greater subsidy commitments. The rupee is likely to witness a fall against the dollar as an increase in oil prices translates to rising demand for the US currency. Further,  remittance flows could also face strain as Indian expats in the Middle East navigate through tough times.

Across sectors, oil marketing companies may experience margin compression if retail fuel prices are not fully adjusted. Industries such as aviation, logistics, chemicals and paints are expected to confront higher input costs, while automobiles, financial services and FMCG firms may see softer demand.

Exports hit

Apart from apparel, leather, and engineering goods, Iran is the second-largest market for basmati rice exports from India. Shipments are likely to be affected due to the ongoing situation, with the uncertainty reportedly leading to a price drop of Rs 4 to Rs 5 per kilogram already. Iran is also one of the largest importers of Indian tea, with the conflict threatening shipments.

Volatile markets

Meanwhile, investor sentiment has already weakened. In February, India’s Nifty 50 remained negative on a year-to-date basis. Market experts caution that any expansion of the conflict could spark widespread sell-offs in risk-sensitive assets across advanced and emerging economies.

Strategic Interests Hampered

INSTC

The International North-South Transport Corridor, a crucial trade bypass connecting the Indian Ocean and Persian Gulf to the Caspian Sea and Russia, is a 7,200 kilometer multi-modal network of ship, rail, and road routes which was launched by India, Iran and Russia in 2000, to reduce freight costs by 30 per cent and transit time by 40 per cent compared to the traditional Suez Canal route.

It has 13 members, including the above trio, along with Azerbaijan, Armenia, Turkey, Ukraine, Belarus, Oman, Syria, and Central Asian countries, including Kazakhstan, Kyrgyzstan, Turkmenistan and Tajikistan, with Bulgaria as an observer. It operates through three main routes: Western via Azerbaijan, Central via the Caspian Sea and Eastern via Turkmenistan.

Iran’s Bandar Abbas port and the under-construction Rasht-Astara rail line are key components of the route, and the war, which is expected to intensify in the coming days, is likely to restrict the cargo traffic between Russia, Iran and India, increasing pressure on India.

Chabahar

India invested in developing the Shahid Beheshti freight terminal of the Chabahar port to connect to Afghanistan and Central Asia, bypassing Pakistan. Apart from being a practical solution, it is also a strategic one. Despite reports so far suggesting the initial days of the war have not affected the terminal, escalation expected in the coming days may change the situation.

The port holds crucial geopolitical significance for India in countering China’s influence in the region through the Gwadar port in Pakistan, which it has developed as part of its Belt and Road Initiative (BRI). China aims to grow its influence not only in the West and Central Asia, but also in the Indian Ocean region through this massive infrastructural push, something India cannot openly allow.

IMEC

The India-Middle East-Europe Economic Corridor is seen as India’s response to China’s BRI. The 6,000 kilometers long network was launched in 2023 to connect India, the Middle East, and Europe via railways, shipping, and pipelines.

Passing through Saudi Arabia, the UAE and Israel, key entities embroiled in the current situation in the Middle East due to the war, the yet-to-be-operational project is likely to face setbacks, jeopardising India’s strategic interests.

Pakistan's prominence

Pakistan shares a long border with Iran, and during regional crises, geography becomes a strategic advantage. If the United States seeks coordination or logistical access, Pakistan’s location makes it more relevant, even without openly taking sides. Its position alone can increase its importance in regional calculations, raising its value in the eyes of the US, which can damage India’s interests.

Meanwhile, China is closely watching the situation. With strong ties in Pakistan and across the region, Beijing could expand its role through infrastructure, energy and connectivity projects if India’s engagement with Iran slows. For India, maintaining balanced ties with both Israel and Iran may become harder if Iran is politically or militarily weakened.

Diaspora Dilemma And Diplomacy

Diaspora

The human cost of war is perhaps the last thing that comes to mind when conflicts begin. For the Indian government now, a major concern remains the over 90 lakh of its citizens living in the Gulf countries, forming one of the largest concentrations of overseas Indians. The UAE, among these countries, hosts the largest Indian population at approximately 35.5 lakh, followed by Saudi Arabia at around 26 lakh. Iran itself has approximately 9,000 to 10,765 Indian citizens, and the attacks and retaliations have left them in the crossfire. It would take a huge effort from the government to bring them back, while establishing its commitment to citizens living abroad to the world.

Meanwhile, 350 flights operated by domestic airlines in India were cancelled today due to the Middle East airspace restrictions after the war broke out, in addition to 410 scrapped flights yesterday. Passengers have been advised to check and confirm flight status with airlines before heading to airports and remain in close contact for assistance.

Diplomacy

While India’s strategic interests lie in the de-hyphenation of the Israel-Palestine issue, largely successful in increasing its proximity to both Israel and Iran, opposite parties in the ongoing war, the current situation may force India to recalibrate its stance. Closeness to either side is likely to be seen as distancing by the other, which will impact India’s long-term strategic goals in the region and elsewhere.

Current News

With all of that in mind, Prime Minister Narendra Modi has reportedly commenced a high-level meeting of the Cabinet Committee on Security (CCS) in Delhi. Its outcomes will clear the air around India's future course of action in navigating the US-Israel-Iran war.

Also Read: De-Hyphenation of Israel-Palestine: How India Navigated West Asian Geopolitics