The Hormuz Crisis and India’s Economic Reckoning

With the war in West Asia choking the Strait of Hormuz, India’s economic resilience is tested by energy, its deepest structural dependency.

The dawn of 2026 brought optimism for India’s economy, with the EU trade deal finalized, a stable Union Budget, and U.S. tariffs cut from 50 percent to 18 percent, easing fiscal pressures and allowing the RBI to hold rates steady. This momentum was abruptly derailed as tensions between the U.S., Israel, and Iran escalated into direct military conflict. The series of attacks were followed by Tehran’s blockade of the Strait of Hormuz, causing global economic shockwaves. For India, the proverb “When elephants fight, it is the grass that suffers” rings true - the “grass” being its fast-growing economy, structurally tied to the Persian Gulf for energy security, trade routes, and the welfare of its diaspora. The conflict has shaken India’s macroeconomic foundations, exposing the fragility of its energy security.

India has long been a net importer of crude, meeting nearly 90 percent of its consumption through imports, 55 percent of which come from the Middle East. This dependence leaves the economy highly vulnerable to global price shocks. Refineries, calibrated to Gulf grades and often running above capacity, further limit flexibility to diversify suppliers. As the world’s third-largest consumer, accounting for 12–13 percent of global trade, Indias current annual crude imports are to the tune of 250 MMT equivalent to 1800 million barrels per year.

Fragile Energy Security

Indias Procurement strategy has shifted sharply in recent years. After the 2022 Ukraine invasion, refiners leaned on discounted Russian Urals, raising Moscow’s share above 35 percent. By early 2026, however, reliance fell to 19.3 percent as India reverted to Gulf suppliers and expanded U.S. imports due to sanctions, shrinking discounts, and trade pressure. This pivot left India more exposed to West Asian volatility.

The crisis also underscored India’s dependence on the Middle East for gas as nearly 65 percent of LPG and 50 percent of LNG imports originate there, with all LPG shipments transiting the Strait of Hormuz. When QatarEnergy declared force majeure after strikes on Ras Laffan, Indian industries were forced into costlier spot purchases or production halts, highlighting the fragility of India’s energy security.

India’s resilience during a sustained blockade rests on its layered storage system, combining government-controlled Strategic Petroleum Reserves with commercial holdings of state-run oil companies. Together, these reserves provide about 74 days of cover of roughly 370 million barrels thereby allowing the country to sustain at least two months without new crude arrivals through rationing and controlled distribution. This buffer offers a critical window to secure alternative supplies or negotiate safe passage. While India has built crude oil reserves, it lacks equivalent strategic buffers for LPG and natural gas. These resources are harder to substitute but equally vital for households and industry.

The war has forced India to recalibrate energy sourcing, with refiners turning to prompt Russian cargoes to offset lost Gulf volumes. Despite political sensitivities, Russia remains the most practical tactical alternative to West Asian disruptions. Venezuela offers another option, though its crude quality poses challenges for Indian refiners.

Over the past decade, India has expanded its supplier base from 27 to 41 countries across six continents, adding crude from the America, supplies from Africa, gas and uranium from Central Asia, and long-term LNG and uranium deals with Australia. These ‘non-Hormuz’ routes now account for a significant share of imports. Yet the recent crisis revealed their limits, as alternative suppliers could not quickly replace Middle Eastern barrels, due to tighter global capacity.

Vulnerable Sectors

Nearly 10 percent of India’s non-energy imports come from the West Asia, leaving key sectors exposed. The $30 billion gems and jewellery trade has been paralyzed. With Dubai suspending flights, rough diamond imports of 68 percent sourced from the UAE and Israel has witnessed temporary halt. Over half of India’s gold jewellery exports to the Gulf are blocked. Agriculture has been hit equally hard, with 400,000 tonnes of Basmati rice stranded and fertilizer supplies disrupted, as 40% of urea and NPK imports originate from West Asia. The result is a dual shock of collapsing export revenues abroad and rising subsidy burdens at home.

The India–Middle East–Europe Economic Corridor (IMEC), once envisioned as a transformative link between India and Europe, has been rendered non-viable by the war. The Hormuz blockade disrupted its maritime route, Saudi Israel rail plans have stalled, and the I2U2 framework has shifted from cooperation to crisis management. The intensity of the conflict has shattered the stability assumptions on which IMEC was built, leaving its future uncertain.

The crisis has unsettled India’s macroeconomic stability. Surging energy prices have lifted production costs, widened the trade deficit, and pressured the rupee through higher oil bills and dollar demand. The Current Account Deficit, once 0.8 percent of GDP, is now projected near 2 percent as crude remains in triple digits. While the government and oil companies can absorb short-term shocks, prolonged disruption risks an emergency. Informal sectors such as hotels and street food vendors face immediate strain from reduced gas supplies, while a Rs. 21 hike in industrial fuel will sharply raise MSME costs. Gulf instability further threatens remittance flows, undermining household incomes and external stability. If the conflict endures, growth will weaken, forcing fiscal and monetary recalibration and eroding India’s recent ‘Goldilocks’ advantage.

India’s global outreach has shifted in recent years, prioritizing diaspora interests and pragmatic partnerships over moral posturing or entanglement in conflicts. Despite U.S. pressure to halt Iranian oil imports, India maintained ties with Tehran and invested in the Chabahar port, securing vital connectivity to Central Asia and Afghanistan while bypassing Pakistan. This proved crucial during the current crisis, enabling clearance of some stranded vessels in the Persian Gulf. At the same time, India expanded Russian oil imports to capture economic opportunities, later trimming volumes to balance U.S. trade relations. Yet Russia remains India’s largest supplier - a position deliberately preserved to ensure strategic flexibility and resist full alignment with Western pressure.

The war has highlighted fossil fuels’ unavoidable role in India’s energy mix, despite ambitious climate goals. While renewables remain the long-term path, the immediate needs of a $5 trillion economy still hinge on oil, gas, and coal. To tackle the 2026 crisis, India has combined urgent measures with structural reforms: gas distribution rationed under the Essential Commodities Act, industrial and commercial use capped at 80 percent to prioritize households; retail fuel prices stabilized despite losses to state firms; and LPG refill times rationalized to curb hoarding. Alongside utilising Strategic reserves, Russian oil imports have doubled to a record 2 million barrels per day, while LPG sourcing has diversified with rising imports from the US, Argentina, Norway, and Canada.

Ramping up Capacity

The current crisis has underscored the requirement of fast tracking the ramp up of capacity of strategic petroleum reserves, with emphasis on building LPG reserves. Accelerating domestic oil and gas exploration particularly after recent Andaman discoveries is essential, alongside strategic overseas investments in crucial assets to safeguard supplies. Refineries and storage facilities should be securitized as national security assets with military-grade protection. Together, these measures will help contain current shocks while building resilience against future disruptions.

India must look beyond energy security to address deeper vulnerabilities. Dependence on China, exposed during last year’s rare earth shortages, remains a strategic risk. While Make in India and production-linked incentives are advancing, reforms in ease of doing business and deregulation are critical. The U.S. draws strength from its corporate ecosystem, just as China leverages manufacturing dominance. India must similarly foster strategic corporate initiatives, positioning large firms as pillars of national development rather than political agents. The current conflict is a direct threat to prosperity, and only proactive diplomacy paired with structural resilience can safeguard India’s long-term interests.

Though the exact GDP impact is uncertain, ongoing crises will weigh on growth in Q4 FY26 and Q1 FY27. Temporary pauses may ease pressure, but prolonged conflict risks an emergency. As global powers clash, India’s resilience depends on building robust economic infrastructure. By strengthening domestic capacity and safeguarding critical sectors, the nation can withstand instability and emerge stronger amid global fractures.

(The author is a Chartered Accountant with a leading company in Mumbai. Views personal.)