The West Asia conflict shows no signs of an immediate resolution even after over a month, leaving global markets preoccupied with three imponderables: How long the conflict will last, how severe it may become, and what the new normal might look like once it ends. Much of the global commentary has focused on projecting oil price paths as a shorthand for these uncertainties. Yet the impact of this conflict extends well beyond energy prices. Its multidimensional nature has prompted countries to respond through varied strategies — administrative interventions, fiscal buffers, monetary adjustments, and, in some cases, simply relying on market-driven price adjustments.
Oil price shocks have repeatedly tested the world economy in the past. Real oil prices tripled during the 1973 crisis and doubled again in 1978-79. By contrast, the recent increase — roughly 50% — appears modest. Still, the International Energy Agency has described the current episode as “the largest supply disruption in the history of the global oil market.” Unlike earlier episodes driven primarily by price spikes, the present challenge stems from physical supply shortages in oil and, more critically, natural gas. This distinction between price-driven and quantity-driven shocks is essential when drawing lessons from historical precedents.
In this context, India is relatively better positioned than several Asian peers. One important reason is that natural gas accounts for only about 3% of India’s electricity generation. Thailand and Bangladesh rely on gas for more than 60% of their power needs, while Malaysia, Japan, and South Korea derive roughly a third of their electricity from it. Since the current disruption has been more acute in natural gas than in crude oil, countries with a heavier gas dependency face significantly greater vulnerabilities.
A second advantage for India is its status as a net exporter of petrol and diesel, with one of the largest net long diesel positions globally. This contrasts with countries such as the Philippines, which depends heavily on imported diesel — nearly 30% of which previously came from China, a country that has now halted exports of refined petroleum products. These two factors have helped insulate India’s two critical economic fulcrums — power supply and mobility — from immediate pressure, reducing the likelihood of a sudden domestic growth shock.
Even so, three supply-side channels may still transmit the global shock into the Indian economy — the rationalisation of LNG and LPG supplies, disruptions in petrochemical inputs, and the wider “butterfly effect” arising from congestion in maritime routes. Quantifying the precise GDP impact of these channels is extremely difficult at this stage, as the ultimate effect will depend on the duration of the conflict and the inventory positions across industries. Among these, the petrochemical channel bears close watching. The chemical and petrochemical sector accounts for nearly 7% of India’s GDP and supports industries ranging from fertilisers and paints to plastics, packaging, and pharmaceuticals. With about one-fourth of petrochemical inputs imported, any sustained disruption could create meaningful downstream stress.
If the conflict and its supply disruptions persist in a severe form, demand-side pressures may also emerge. Global growth could fall by as much as one percentage point if oil prices remain above $100 per barrel for a prolonged period. That would weigh on demand for India’s exports. Moreover, West Asia accounts for 14% of India’s exports and 38% of remittances, adding a layer of idiosyncratic risk from the region.
On the inflation front, roughly 14% of India’s consumer price index (CPI) basket is significantly influenced by global prices, half of it through energy. Since the government has opted to keep retail fuel prices unchanged — absorbing the shock through excise duty reductions — the inflationary impact is expected to be delayed. Should oil prices remain above $100 per barrel for three consecutive months, our estimates suggest an upside risk of 50-75 basis points to the FY27 average CPI forecast of 4%. Even in such a scenario, headline CPI is unlikely to breach the RBI’s upper tolerance limit of 6%. This relatively contained inflation trajectory offers the central bank the space to pause and observe, particularly since monetary policy is seldom the most effective tool to address transient supply shocks.
The government’s immediate response has focused on easing supply bottlenecks and reallocating scarce energy resources to priority sectors. India has been able to avoid demand-curtailment measures thanks to its relative comfort in electricity generation and transport fuels. Nonetheless, insulating the economy from imported inflation will likely carry a fiscal cost — especially in fuel and fertiliser subsidies — an issue that bond markets have already begun to reflect. We believe that it is too early to quantify this cost as the government might have some levers to offset the impact too.
The external sector remains the most immediate source of macroeconomic stress. India has recorded balance-of-payments deficits in both FY25 and FY26. Every $10/bbl rise in crude oil prices widens the current account deficit by $12–15 billion, with additional pressures from higher coal and fertiliser prices. With global capital flows likely to remain cautious, a third consecutive balance-of-payments (BoP) deficit in FY27 cannot be ruled out. The rupee’s roughly 2% post-conflict depreciation is better than most other emerging markets, but further policy intervention may be needed to place a stable floor under the currency if external pressures persist. Managing excessive market volatility — and preventing domestic markets from amplifying global shocks — will likely remain the policy priority for now.
As the world waits for the geopolitical dust to settle, India’s policy challenge is twofold: Safeguard macroeconomic stability in the near term and continue building deeper structural resilience for a more fragmented global geopolitical landscape. The next step, inevitably, will be strengthening buffers that allow India to navigate an increasingly uncertain external environment with confidence.
Samiran Chakraborty is managing director and chief economist, India, Citigroup.The views expressed are personal
