The conflict in West Asia is no longer a distant geopolitical flashpoint for India—it is now an economic reality with direct consequences for trade, energy security, inflation, and growth. As exports to the Gulf collapse, oil prices surge, and supply chains face mounting disruptions, India finds itself confronting the risks of deep economic interdependence with one of the world’s most volatile regions. The crisis is revealing how quickly global tensions can reshape the trajectory of an emerging economic powerhouse.
Byline: B SHEKHAR
The author is our Bengaluru-based South India Bureau Chief.
In early 2026, India appeared firmly positioned as one of the world’s most resilient major economies, buoyed by strong domestic demand, a stable macroeconomic framework, and expanding trade linkages across the globe, particularly with the European Union, Australia, the Middle East, and South Asia. Yet the eruption of conflict in West Asia has exposed a critical vulnerability: India’s deep economic interdependence with the Gulf region. What was once considered a strategic advantage is rapidly becoming a source of strain across trade, energy security, and financial flows.
A Sudden Reversal in Trade Momentum
India’s merchandise trade data for March 2026 underscores the severity of the disruption. Goods exports contracted by 7.4 percent year-on-year to $38.9 billion, marking a stark reversal from the modest average growth of 0.3 percent recorded during the preceding three months. Imports also declined by 6.5 percent to $59.6 billion, reflecting both compressed demand and mounting supply-side constraints.
More striking, however, is the regional dimension of the slowdown. According to official estimates, exports to West Asia plunged by nearly 58 percent, while imports from the region declined by more than 50 percent. These figures indicate not merely cyclical weakness, but a structural shock emanating from geopolitical instability.
Dr. Arvind Subramanian, former Chief Economic Adviser to the Government of India, has previously argued in his research on global trade shocks that “geopolitical fragmentation is increasingly becoming a first-order determinant of trade outcomes, especially for economies deeply embedded in regional supply chains.” The current crisis appears to validate this thesis.
Energy Dependence: India’s Strategic Concern
At the heart of India’s vulnerability lies its dependence on imported energy. The Middle East accounts for roughly 40 percent of India’s crude oil imports and nearly 80 percent of its natural gas supplies. With crude prices surging—Brent averaging $95.6 per barrel in March 2026, compared with $70.7 a year earlier—the macroeconomic implications for India have become immediate and far-reaching.
Research by the International Energy Agency (IEA) has consistently identified India as one of the world’s most oil-import-dependent major economies, importing close to 90 percent of its crude oil requirements. This dependence amplifies the transmission of global price shocks into domestic inflation, fiscal balances, and currency stability.
Despite a 35.9 percent decline in crude oil imports in March 2026, largely due to disrupted shipping routes and deferred purchases, India continues to face rising import costs. As economist and academic Rathin Roy recently observed during a policy discussion:
“India will have to watch its balance of payments very carefully. Imports are becoming more expensive even as export earnings weaken.”
Sectoral Stress: Gems, Jewellery, and Beyond
The impact of the conflict has been uneven, though deeply felt across several key export sectors. Nowhere is this more evident than in the gems and jewellery industry, where exports plunged 29.3 percent year-on-year in March. The United Arab Emirates—until recently India’s largest destination for such exports—witnessed a collapse in shipments amid logistical disruptions and weakening regional demand.
This trend aligns with findings from World Bank trade elasticity studies, which demonstrate that luxury and discretionary goods are disproportionately affected during geopolitical crises because of heightened demand sensitivity and fragile supply chains.
Core exports, excluding volatile components, also declined by 7.5 percent, indicating that the slowdown is broad-based rather than confined to a few sectors. Engineering goods, electronics, and rice exports have all reported disruptions linked to shipping delays, rising freight costs, and payment uncertainties.
Petroleum Products: A Rare Bright Spot
Amid the broader gloom, petroleum exports have demonstrated notable resilience, rising 5.7 percent year-on-year. Higher global prices, coupled with the strategic rerouting of shipments to alternative Asian markets, have supported this growth.
Exports to Singapore surged by 158.6 percent, while shipments to Malaysia rose by 84.5 percent, suggesting a significant reconfiguration of trade flows. According to analysts at ANZ Research, “trade diversion is acting as a temporary buffer, but it cannot fully offset the loss of core markets in West Asia.”
This shift also contributed to a narrowing of India’s oil trade deficit to $7 billion in March, compared with $14.1 billion during the same period a year earlier.
Import Compression and Supply Chain Disruptions
On the import side, the contraction reflects both weakened domestic demand and severe supply bottlenecks. Gems and jewellery imports fell by 17.8 percent, while gold imports declined by 31.6 percent, signalling subdued consumption as well as weaker investment demand.
Fertiliser imports—an essential input for India’s agricultural sector—also slowed sharply, with growth easing to 2.2 percent from over 26 percent in previous months. Given that West Asia remains a major supplier, this raises fresh concerns regarding input-cost inflation and food security in the months ahead.
The Remittance Channel: A Silent Risk
Beyond trade, the conflict threatens another crucial pillar of India’s external sector: remittances. With nearly 10 million Indians employed across the Gulf region and more than 40 percent of India’s remittance inflows originating there, any prolonged economic slowdown or labour-market disruption in West Asia could generate significant spillover effects for the Indian economy.
Research conducted by the Reserve Bank of India (RBI) has shown that remittances play a stabilising role in India’s current account, often offsetting persistent trade deficits. A decline in these flows could therefore intensify India’s external vulnerabilities.
Macroeconomic Outlook: Growth Under Pressure
For the full fiscal year 2025–26, India’s goods exports grew by a modest 0.9 percent to $441.8 billion, while imports increased by 7.4 percent to $774.9 billion, widening the trade deficit to $333.1 billion.
Goldman Sachs, in a recent note, warned that India could face a combination of slower growth, higher inflation, and a weaker currency if the conflict persists. The report described the situation as a “new broadside” against India’s otherwise strong growth narrative.
Similarly, a study by the Asian Development Bank (ADB) on external shocks suggests that sustained spikes in energy prices could reduce India’s GDP growth by 0.3–0.5 percentage points, depending on the duration and intensity of the shock.
Strategic Reorientation: Diversification and Resilience
The unfolding crisis is likely to accelerate India’s efforts to diversify both its energy sources and export markets. Increased imports of discounted Russian crude, expanding trade with Southeast Asia, and ongoing negotiations with the United States all signal a broader strategic pivot.
Exports to the United States, for instance, improved sequentially to $8 billion in March, aided by tariff reductions under bilateral trade discussions. However, uncertainty regarding the final trade framework continues to persist.
As Talmiz Ahmad, former Indian ambassador to several Gulf nations, observed:
“The economic relationship between India and the Gulf is so deeply intertwined that disentangling it will take time. But diversification is no longer optional—it is imperative.”
Meanwhile, Dr. Jagat Shah, Founder of the Global Network Institute and Global Export Mentor on Wheels, noted:
“The ongoing Iran conflict has significantly disrupted India’s trade dynamics with West Asia, a region critical for both exports and energy imports. Shipping routes through the Strait of Hormuz—one of the world’s busiest energy corridors—have faced growing uncertainty, leading to sharp increases in freight, insurance, and oil prices. At the same time, supply-chain disruptions and volatile fuel costs are affecting sectors ranging from textiles to steel, making the region temporarily less predictable for exporters.”
Conclusion: A Stress Test for India’s Economic Model
The conflict in West Asia has emerged as a real-time stress test for India’s external-sector resilience. It has exposed structural dependencies—on energy imports, regional trade hubs, and remittance flows—that appeared manageable during stable periods but are now evolving into sources of systemic risk.
While India’s strong macroeconomic fundamentals continue to provide an important buffer, the road ahead will require careful calibration of trade policy, energy strategy, and fiscal management. The crisis may ultimately serve as a catalyst for structural reform and diversification. In the near term, however, it stands as a powerful reminder that in an interconnected global economy, geopolitical shocks can swiftly reshape economic realities.
Blurb-1
India’s exports to West Asia have collapsed by nearly 58 percent, exposing the risks of overdependence on a geopolitically volatile region.
Blurb-2
Surging crude oil prices and disrupted shipping routes are putting fresh pressure on India’s inflation, fiscal balance, and currency stability.
Blurb-3
Key sectors including gems, jewellery, engineering goods, and electronics are facing severe trade disruptions amid growing uncertainty in Gulf markets.
Blurb-4
With over 40 percent of India’s remittances coming from the Gulf, any prolonged slowdown in West Asia could trigger wider economic spillover effects.
Blurb-5
Trade diversion toward Southeast Asia and increased Russian oil imports may offer temporary relief, but cannot fully offset the strategic risks.
Blurb-6
The crisis is forcing India to accelerate diversification of energy sources, export markets, and supply chains to strengthen long-term economic resilience.
