How the Israel-Iran Conflict Impacts India's Trade: Rising Oil Prices and Export Challenges

The rising conflict between Israel and Iran is not just a regional crisis, but it’s a global economic shockwave. India is not directly involved, but the country faces serious economic risks, especially in terms of energy security, rising oil prices, and disrupted exports. From sharp increases in oil prices to shipping delays and costlier trade routes, the consequences of this West Asian conflict could deeply affect India’s economy.

Oil Price Surge: A Direct Hit to India’s Economy

One of the immediate effects of the conflict has been the rise in global oil prices. In early June 2025, oil prices jumped by 8% in a single day after Israel launched military strikes against Iran. Currently, oil prices are hovering around $75 per barrel, with predictions that they could rise to nearly $90 if tensions continue.

This price hike is largely driven by fear that the Strait of Hormuz, a narrow sea passage crucial for oil shipments, could be blocked or affected. The Strait handles nearly one-fifth of the world’s oil supply, and its disruption could cause global oil prices to skyrocket.

India is particularly vulnerable because it imports over 84% of its crude oil, and a large share comes from the Middle East, including Iraq and Saudi Arabia. Although Iran used to be a major supplier, sanctions have reduced its role in recent years.

If oil prices keep rising:

• Import bills will increase, putting pressure on India's trade balance.
• Inflation will rise, making everyday goods more expensive.
• The rupee may weaken, making imports costlier.
• Government financial planning could face difficulties due to higher subsidies and costs.

Experts warn that a $10 increase in oil prices could reduce India’s GDP growth by 0.3 percentage points and raise inflation by 0.4 percentage points. This could hurt household budgets and slow down the economic recovery.

GTRI Warns: India Must Not Be Complacent

The Global Trade Research Initiative (GTRI) has strongly warned that India cannot afford to stay relaxed in this situation. Though not part of the conflict, India is at serious risk due to its trade exposure and energy dependence.

GTRI’s Key Recommendations:

• Review Energy Risks: India must regularly assess potential disruptions to the energy supply.
• Diversify Oil Sources: To reduce overdependence on the Middle East, India should import oil from more regions like Africa, the U.S., or Latin America.
• Strengthen Strategic Oil Reserves: These reserves can help stabilize the economy if oil supply is disrupted.
• Boost Naval Security: India should strengthen its naval presence in the Arabian Sea, especially near the Strait of Hormuz and the Bab el-Mandeb Strait, which are key routes for Indian imports and exports.
• Use Global Platforms: India should push for peace and the protection of trade routes through organizations like the G20 and the United Nations.

Trade and Export Disruptions

Besides oil, the conflict is affecting India’s trade in other ways.

India’s Trade Exposure to Iran and Israel:

• India-Iran Trade (FY2025):
• Exports: USD 1.24 billion
• Imports: USD 441.9 million
• India-Israel Trade:
• Exports: USD 2.15 billion
• Imports: USD 1.61 billion

Trade with these countries is significant, but the bigger worry is how regional instability disrupts India’s trade with the rest of the world.

Red Sea and Shipping Routes at Risk

Nearly 30% of India’s westbound exports (to Europe, North Africa, and the U.S. East Coast) pass through the Bab el-Mandeb Strait, another narrow sea route near Yemen. If ships are forced to avoid this route and instead go around the Cape of Good Hope at the southern tip of Africa, shipping time could increase by up to two weeks, and freight costs could rise by 15–20%.

This hits:

• Engineering goods
• Textiles
• Chemicals
• Garments

These products already have thin profit margins, and higher freight costs can make them uncompetitive.

Government Response So Far

The Indian government is taking steps to manage the crisis:

• Travel Advisories have been issued, asking citizens to avoid non-essential travel to Iran and Israel.
• Diplomatic Engagement is ongoing, with External Affairs Minister S. Jaishankar stating India is ready to support peace efforts.
• Trade Impact Assessments are being done, with Trade Secretary Sunil Barthwal promising policy responses based on inputs from exporters.
• Monetary Policy Watch: The Reserve Bank of India (RBI) may delay cutting interest rates if inflation continues to rise due to oil prices.

Stock Market and Inflation Worries

The economic uncertainty is also shaking investor confidence:

• On June 13, 2025, the Sensex dropped over 860 points, showing how sensitive markets are to Middle East tensions.
• Inflation, which had recently fallen to a 75-month low of 2.82%, is expected to rise again if oil prices continue climbing.

Long-Term Lessons for India

This conflict is a wake-up call. India must:

• Diversify its energy sources and reduce dependency on any single region.
• Invest in cleaner and renewable energy to cut long-term oil dependence.
• Protect critical trade routes through a stronger maritime presence and international cooperation.
• Enhance strategic reserves for oil and other critical supplies.

The conflict also threatens large projects like the India-Middle East-Europe Economic Corridor (IMEC), a proposed trade route that could now face delays or reevaluation.

Conclusion

The Israel-Iran conflict is a reminder that geopolitical tensions have real economic costs, even for countries not directly involved. For India, the stakes are high. From rising fuel prices to export disruptions, the impact could affect everything from household budgets to national economic planning. Being prepared, proactive, and globally engaged is not just wise, but it’s necessary.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates