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India’s economy could face fresh risks from rising geopolitical tensions in West Asia after the escalation of the United States (US)-Israel strike on Iran since February 28, which threatens global energy supply chains and could push up inflation and the country’s import bill, according to the finance ministry’s latest Monthly Economic Review for February released on March 6, 2026.
Prepared by the Department of Economic Affairs (DEA), the review cautioned that a prolonged conflict could undermine India’s energy security, worsen the inflation outlook, and strain the external sector if disruptions to global oil and gas supplies continue.
The escalation follows military strikes by the US and Israel on Iranian sites, which triggered retaliatory threats and raised fears of a broader regional confrontation. The conflict has heightened concerns about disruptions to oil production and shipping routes in the Gulf, particularly through the Strait of Hormuz, a critical chokepoint that carries about 20 per cent of global oil trade.
The DEA noted that the conflict has already pushed up global energy prices.
“This conflict has already driven Brent crude up around 9% to near $80 per barrel and LNG prices by around 50%. Despite the country’s high import dependency on crude oil, it has sufficient foreign exchange reserves, a low current account deficit (0.8% of GDP in the first half of FY26) and low inflation rates, which collectively allow it to effectively mitigate the impacts of rising global crude oil prices and ensure domestic energy security,” the review said.
However, it warned that if the crisis persists, it could have material implications for the exchange rate and the current account deficit while also stoking inflationary pressures.
India remains heavily dependent on imported crude oil. During April-January in the ongoing financial year ending March (FY26), the country imported 88.6 per cent of its crude oil requirement, with nearly 46.9 per cent sourced from West Asia.
India imported 206.3 million tonnes (mt) of crude oil during the period, and the share of imports from OPEC countries rose to 50.1 per cent, highlighting the continued importance of the region for India’s energy security.
Higher oil prices could quickly feed into domestic inflation. According to the review, if crude oil prices rise 10 per cent above baseline assumptions, inflation could increase by around 30 basis points, assuming full pass-through to domestic prices.
India’s consumer price inflation was 2.75 per cent in January 2026, but sustained increases in energy prices could complicate the outlook.
Beyond inflation, the government warned that a prolonged conflict could widen India’s current account deficit, increase pressure on the rupee and force policymakers to allocate additional fiscal resources to manage energy risks.
The ministry said fiscal reprioritisation may become necessary in the coming years for both the Centre and states. It also emphasised the importance of maintaining certainty and stability in tax policies to continue attracting foreign direct investment amid rising global uncertainty.
The DEA further called for periodic stress-testing of the balance of payments under different global shock scenarios, warning that risks to India’s external sector may have become elevated.
“Even if only latent for now, the risks to India’s balance of payments may have become elevated due to this conflict,” the review said.
According to scenario analyses cited in the report, crude oil prices would likely need to remain above $100 per barrel for a sustained period for India’s macroeconomic aggregates to experience significant strain.
The finance ministry noted that the conflict echoes one of the risk scenarios outlined in the Economic Survey 2025-26, which had identified the possibility of a systemic global shock triggered by overlapping geopolitical, financial and technological disruptions.
The survey had outlined three possible global scenarios:
• “Business as in 2025”
• A disorderly multipolar breakdown
• A systemic shock cascade in which multiple crises reinforce one another.
While the probability of such a systemic shock was assessed as relatively low, the survey warned that its economic impact could be more severe than the 2008 global financial crisis.
Global energy markets have reacted sharply to the escalating conflict in West Asia. As of March 7, Brent crude prices have risen by about 11–15 per cent since the hostilities began, approaching $90 per barrel, while liquefied natural gas (LNG) prices have surged amid growing concerns over supply disruptions.
The instability has been particularly evident in gas markets. Disruptions to Qatar’s LNG exports have pushed Asian LNG prices higher as buyers scramble for alternative supplies, while gas prices in Europe have also climbed on fears that the conflict could become prolonged.
Energy markets remain especially sensitive to developments around the Strait of Hormuz, one of the world’s most critical oil and gas transit routes. Analysts warn that if the waterway faces extended disruption, oil prices could rise above $100 per barrel and potentially approach $150. Iranian officials have threatened to close the passage, warning that vessels attempting to transit the strait could be targeted. Shipping risks have already intensified, with more than 150 oil and LNG tankers anchored in nearby waters as companies avoid the route.
The potential disruption is significant because the strait handles a major share of global energy trade. According to analysts at S&P Global, roughly 17 per cent of global LNG deliveries in 2026 normally transit the waterway, with over 90 per cent of those cargoes destined for Asian markets. Spot LNG prices have already surged, with the Platts JKM benchmark jumping to around $25 per million British thermal units, marking one of the sharpest increases since the 2022 global energy crisis.
Amid mounting volatility, the OPEC+ alliance has scheduled emergency discussions to consider deploying around 3.5 million barrels per day of spare production capacity to stabilise global oil markets. Countries heavily dependent on Gulf LNG supplies are particularly exposed to the disruption. For instance, Pakistan imports about 99 per cent of its LNG from Qatar, while India sources roughly 59 per cent of its LNG from Qatar and the United Arab Emirates, leaving both economies vulnerable to prolonged supply constraints.
The impact of global energy volatility is already being felt domestically. On March 7, domestic liquefied petroleum gas (LPG) cylinder prices in Delhi rose by Rs 60 to Rs 913, while commercial LPG cylinders increased by Rs 114.5 to Rs 1,883, according to Indian Oil Corporation website.
Retail petrol and diesel prices have not yet been revised, with Indian oil marketing companies closely monitoring global crude price movements before taking a decision.
India has already invoked emergency powers and directed refiners to maximise production of LPG to prevent a shortage of the cooking fuel after supply disruptions caused by the West Asia crisis.
A senior official in the Union Ministry of Petroleum and Natural Gas (MoPNG) earlier told Down To Earth that any blockade or sustained disruption could delay cargoes, raise freight and insurance costs and tighten global LPG availability as a significant share of India’s LPG imports passes through Hormuz.
Because LPG contract prices are closely linked to crude benchmarks, a price surge could inflate India’s import bill and increase pressure on subsidy outlays. India sources LPG from a diversified basket across West Asia and beyond, but prolonged instability could strain supply chains and complicate fiscal management.
The official added that there is no concern for at least a week and the Indian government will attempt to shield domestic consumers from immediate price transmission.
The world’s second-biggest importer of LPG last year consumed 33.15 mt of cooking gas, which is a mixture of propane and butane. Imports account for about two-thirds of LPG consumption, with West Asia making up about 85-90 per cent of that supply.
Despite the risks, the government said India’s macroeconomic fundamentals remain strong. The economy is estimated to grow 7.6 per cent in FY26, with real gross value added (GVA) expanding 7.7 per cent, according to the review. The government expects growth in FY27 to be in the range of 7.0-7.4 per cent, supported by reforms and strong domestic demand.
The report also noted that India’s economic size in nominal terms under the revised GDP series is about 3 per cent lower than earlier estimates for FY26, which could slightly raise the fiscal deficit and public debt ratios.
Even so, the government expects India to become the world’s fourth-largest economy by FY28, supported by sustained growth momentum.
At the same time, the ministry said India’s external sector remains stable despite global trade uncertainty, aided by active trade diplomacy and ongoing negotiations such as the India-EU Free Trade Agreement negotiations, the India-US Interim Trade Arrangement, and the India-Oman Comprehensive Economic Partnership Agreement.
These initiatives, along with improvements in trade logistics and export competitiveness announced in the Union Budget, are expected to help diversify export markets and strengthen external resilience over the medium term.