The West Asian Conflict: India’s Energy and Economic Vulnerabilities

As the conflict in West Asia enters its sixth month, its consequences are increasingly evident in India, as disrupted supply lines put growing pressure on the country’s energy security and economy. India’s dependence on imported energy has wider ramifications for fertiliser and food security, the trade and current-account deficits, the rupee and inflation.

The Energy Dependence

India imports nearly 90 per cent of its crude oil. During April-August 2026, its crude import bill rose by nearly 48 per cent, from $50.4 billion to $74.8 billion, even as import volumes declined marginally. Refinery configurations also constrain diversification. Many Indian refineries are configured to process particular crude grades, including heavier, higher-sulphur varieties traditionally sourced from West Asia. Although several refineries can process Russian Urals, supplies are not fully interchangeable: crude quality, refinery configuration and freight costs limit substitution.

Similarly, liquefied petroleum gas (LPG)—the principal cooking fuel for nearly 300 million households—meets around 60 per cent of demand through imports, largely from West Asia. The disruption in the Strait of Hormuz has accelerated diversification towards more distant suppliers, particularly the US, maintaining supplies but at a higher cost. LPG benchmark prices rose about 46 per cent between February and June 2026, pushing the supply cost of a domestic 14.2-kg cylinder above Rs 1,600, although consumers were shielded from the full increase.

India also imports around 26 million tonnes of liquefied natural gas (LNG) annually, more than half its requirement. Disruptions have encouraged diversification towards more distant suppliers, including the US, helping maintain availability but at a higher cost. Asian spot LNG prices rose from around $520 per tonne to nearly $1,560 per tonne—almost a three-fold increase. Unlike LPG, which directly affects households, higher LNG prices raise industrial and fertiliser costs, eventually feeding into agriculture and food prices.

From Energy To Food Security

India requires about 68 million tonnes of fertilisers annually. But the actual external dependence is greater because domestic production relies heavily on imported feedstocks such as natural gas, ammonia, phosphoric acid, rock phosphate and potash.

Broadly, India’s fertiliser vulnerability takes two forms. Nitrogenous fertilisers, principally urea, are largely produced domestically but remain vulnerable to imported natural gas, the principal feedstock for urea production. Phosphatic and potassic fertilisers—principally diammonium phosphate (DAP), muriate of potash and nitrogen, and phosphorus and potassium complexes—are considerably more import-dependent. Imported urea reportedly rose from about $500 per tonne before the conflict to nearly $950, before falling to around $450 as supplies improved. DAP is of particular concern because of India’s high import dependence. Its international price reportedly rose from roughly $670-700 to around $930 per tonne, substantially raising import costs. Since the government continues to make DAP available to farmers at Rs 1,350 per 50-kg bag, much of this external price increase is ultimately absorbed through higher government support.

Energy disruption can thus become both a fiscal and food-security challenge.

Energy Shock Becomes An Economic Shock

At present, import volumes—a sustained $1-a-barrel increase in crude prices—could add roughly $1.7-1.8 billion to India’s annual crude import bill. India earns around $442 billion from goods exports and $421 billion from services exports, while receiving substantial remittances. These foreign-exchange earnings help absorb its large import bill.

India imports about $775 billion worth of goods annually, against goods exports of around $442 billion, leaving a trade deficit exceeding $330 billion. Strong net services earnings and remittances offset much of this gap, bringing the current-account deficit to about $25 billion, or 0.6 per cent of GDP, in FY2025-26. Higher energy prices can therefore widen the goods trade deficit and potentially the current-account deficit.

Capital flows add another vulnerability. Foreign portfolio investment recorded a net outflow of $9.6 billion in Q1 FY2026-27, and continuing uncertainty could trigger further outflows. Since the current-account deficit must ultimately be financed through foreign direct investment, portfolio investment, external borrowing and other flows, a higher energy bill combined with weaker capital inflows increases demand for dollars, pressuring the rupee and the balance of payments.

This can become self-reinforcing. A weaker rupee raises the domestic cost of dollar-denominated energy, fertilisers and other imports, increasing imported inflation; expectations of further depreciation can encourage portfolio outflows. Forex reserves can moderate volatility, but provide a buffer rather than remove the underlying imbalance.

West Asia is also an important shock absorber for India’s external economy, with nearly 10 million Indians working in the region and contributing around 38 per cent of India’s remittances. A prolonged West Asia slowdown could therefore create double pressure—a higher energy bill alongside weaker employment and remittance flows.

The Double-chokepoint Risk

With Hormuz already disrupted, Saudi-Houthi tensions raise the prospect of a double-chokepoint shock, as the Houthis could further threaten shipping through Bab al-Mandab Strait. Shipping costs have already risen sharply, while war-risk insurance premiums have multiplied from pre-conflict levels. Further disruption at Bab al-Mandeb could force more shipping around the Cape of Good Hope, adding time, fuel, freight and insurance costs while reducing the competitiveness of Indian exports to Europe. The economic consequences would therefore extend far beyond oil prices.

Building Domestic Resilience

India’s domestic oil and gas sector remains a concern. Production rests heavily on ageing fields such as the Mumbai High Field and exploration in areas, including the Krishna Godavari Basin. Despite successive reforms, output has largely stagnated, while investment remains constrained by geological risks, regulatory uncertainty, pricing issues and the absence of a sufficiently stable long-term framework.

Gas nevertheless offers one of the clearest opportunities to strengthen energy and fertiliser resilience. India needs greater domestic exploration and production alongside alternative feedstocks. Coal gasification can convert India’s coal into syngas and subsequently ammonia and urea, reducing dependence on imported natural gas. The government’s Rs 37,500-crore coal-gasification programme provides an important policy push, but to succeed, commercially viable technologies suited to India’s high-ash coal require indigenous R&D, financing and policy stability.

Dependence can also be reduced through biofertilisers derived from agricultural residue and biowaste rather than food crops, alongside balanced nutrient use, thereby strengthening fertiliser resilience without compromising food security.

India’s energy strategy must therefore move from supply security to system resilience. Diversification must be reinforced by domestic production, indigenous technology, alternative energy and feedstocks, and resilient infrastructure and fertiliser supply chains. The real test of energy security is no longer merely whether India can secure adequate supplies, but whether its economy can absorb a prolonged external energy shock without letting it become a trade, currency, inflation, and food-security shock.

(The author is a former diplomat and economist)

(Views expressed are personal)