India’s robust economic expansion is facing a serious setback as the ongoing conflict in the Middle East disrupts global energy markets, exposing the country’s heavy dependence on imported fuel.
Once described by the Reserve Bank of India (RBI) as a “Goldilocks” phase of high growth and low inflation, India’s economic outlook has turned uncertain. The crisis has triggered a sharp depreciation of the rupee, which has fallen nearly 10% against the US dollar over the past year, hitting record lows.
Analysts warn that if the conflict persists through 2026, the rupee could weaken further, potentially crossing 110 against the dollar. A sustained currency decline could increase import costs, widen fiscal deficits, reduce corporate profits, and discourage foreign investment.
The impact is already visible in financial markets. India’s benchmark stock indices have dropped around 12% this year amid capital outflows, weakening the so-called “wealth effect” that had been supporting consumption among affluent households.
Energy supply disruptions are at the core of the crisis. India imports about 60% of its natural gas and more than 90% of liquefied petroleum gas (LPG) from the Middle East. While some shipments have been allowed through the Strait of Hormuz, shortages have already forced partial closures of restaurants, hotels, and several industries reliant on gas.
The government has so far shielded consumers from rising fuel prices by cutting excise duties and imposing windfall taxes on exports. However, broader inflationary pressures are building, particularly in food prices, as higher logistics and import costs ripple through the economy.
Growth projections are also under threat. India’s GDP was expected to grow at around 7% in the 2026–27 fiscal year, but economists estimate the crisis could shave off up to one percentage point. This could delay India’s ambition to surpass Japan as the world’s fourth-largest economy.
Former chief economic adviser Arvind Subramanian has warned of a potential “stagflationary shock,” where rising inflation coincides with slowing growth. Early signs include reduced industrial activity, declining gas availability, and even migration patterns resembling those seen during the Covid-19 pandemic.
There are also concerns over remittances from nearly 10 million Indians working in Gulf countries, which could decline if the regional crisis deepens, further straining household incomes and domestic demand.
In response, the government has proposed a $6.2 billion economic stabilisation fund and increased spending on food and fertiliser subsidies. However, experts caution that these measures may be insufficient given the scale of the disruption.
Despite the challenges, some economists see limited upside. A weaker rupee could improve export competitiveness, and India’s foreign exchange reserves provide a buffer against immediate shocks.
Still, the crisis has underscored a deeper vulnerability—India’s reliance on Middle Eastern energy. Experts argue this should serve as a wake-up call to diversify energy sources, build strategic reserves, and accelerate the transition to renewable energy.
