The Iran war is an ongoing conflict with serious consequences for global security and the economy. Unlike the Ukrainian war, which is somewhat confined to Europe, the war in Iran will affect the whole world. It will disrupt the energy supply as Iran has considerable oil reserves and Tehran controls the sea route, the Strait of Hormuz, which passes 20 per cent of the world’s oil. Due to historical links between India and Iran, mainly on trade, and Iran potentially providing the connection for India to Central Asia, the impact of the war on India is going to be substantial.
The expansion of the war into the other states in the Gulf region will heavily affect India. The supply of energy will be interrupted, as well as India’s exports to the world. India was using countries like the UAE to export to the world. That will be a hit. India imports substantial oil from the Gulf region. If the war continued for a few weeks, India could use its strategic reserves of oil. But if it lasted longer as it did in Iraq and Afghanistan, India’s economy would be badly hit.
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So, the rise in energy prices will have a cascading effect on all other prices. Reportedly, prices are already rising, and shortages are appearing, resulting in a black market. Agriculture, textiles, tiles, glass, plastics, hotels, restaurants, airlines and energy-intensive products are already impacted.
As the air and sea routes are disrupted, trade and travel through and around the Gulf – a critical geographical space that connects the West with the East – have virtually stopped. Difficulties in travel will impact hotels, tourism and the entertainment industry. According to the Government of India, there are about 1 crore Indians working in the Gulf region. Remittances from them into NRI accounts are substantial. These will decline, weakening the capital flows. Many NRIs want to return to India due to the conflict and decline in production in West Asia. This will hurt the employment situation in India.
How is India coping with the impact of the war? First, India is seeking to diversify its energy sources and is exploring alternative suppliers. The government has reportedly held discussions with major oil producers like Russia, Saudi Arabia and the UAE to ensure stable energy supplies. The US seems to have reconciled to the disruption of oil supply and therefore has agreed to waive tariffs if India decides to purchase oil from Russia, which is already in the sea.
Admittedly, India will experience price rise and some temporary inflation, although the GOI is assuring its citizens not to panic. To mitigate the price shocks, the Government is considering temporary relief measures such as LPG subsidies and fuel tax adjustments.
Some observers argue that India’s economy and security will be negatively impacted as New Delhi chooses to stay in the US-Israel camp. But India’s economy would have been hit as it is now, irrespective of which side it was on. The fallout of the war has to be faced in any case.
As I said in this column last week, New Delhi has made a conscious choice of aligning with the democratic world while maintaining friendly relations with other powers. This is the right choice as so-called neutrality in a war has its costs. India was already paying some of it because of its non-committal approach to the war in Ukraine.
Prime Minister Modi made quick corrections in the case of Iran, which has been a bigger friend than even Ukraine.
The writer is Professor of Practice, NIIS Group of Institutions
