The impact of Israel-US Vs Iran war on India

By Dr. M.N. Manik, Professor and Dean Academic, Chetan Business School MBA, Hubli

The escalating conflict between the US-Israel and Iran, which intensified in early 2026, has placed India in a high-stakes balancing act. Given India's strategic, economic, and demographic stakes in West Asia, the fallout is multi-dimensional.

1. Economic Impact: Energy and Inflation

India is the world's third-largest oil consumer, importing over 85% of its crude oil and nearly 50% of its natural gas.

a)      Energy Security & Price Shocks: Brent crude has already seen spikes toward $100/barrel. A sustained conflict threatens the Strait of Hormuz, a "choke point" through which approximately 40% of India’s crude imports and 85% of its LPG transit.

b)      Fiscal Deficit: Every $10 increase in oil prices typically widens India’s Current Account Deficit (CAD) by about 0.5% of GDP. This puts immense pressure on the Indian Rupee, which has faced depreciation against the USD.

c)      Inflationary Pressure: Beyond fuel, higher energy costs drive up the price of fertilizers and logistics. This trickles down to food inflation, particularly for staples like pulses and vegetables, which are sensitive to transport costs.

2. International Relations: The Gulf and "Strategic Silence"

India has traditionally maintained a "Think West" policy, balancing ties between Israel, Iran, and the Arab Gulf states (GCC).

a)      The Balancing Act: India has moved closer to Israel for defense and technology while relying on the GCC for energy and labor exports. The war forces India into a "Strategic Silence" to avoid alienating any side, though this neutrality is increasingly tested by US-led sanctions on Iran.

b)      Gulf Partnerships: The UAE and Saudi Arabia are India’s 3rd and 4th largest trading partners. Any regional instability risks stalling major projects like the India-Middle East-Europe Economic Corridor (IMEC), designed as a counter to China’s Belt and Road Initiative.

c)      Connectivity Projects: India’s investment in the Chabahar Port (Iran) and the International North-South Transport Corridor (INSTC) is now at high risk of being stalled or targeted by sanctions, limiting India’s land-access to Central Asia.

3. Geopolitical and Strategic Impact

a.      The Diaspora Factor: Over 8 to 9 million Indians live and work in the Gulf region. Their safety is a primary concern for New Delhi. Evacuation operations (similar to Operation Vande Bharat) would be a massive logistical and financial burden.

b.      Maritime Security: The Indian Navy has increased its presence in the Arabian Sea to protect merchant vessels from collateral damage or targeted attacks (e.g., drone strikes), raising India's defense expenditure.

4. Internal Political and Financial Fallout

a.      Remittance Decline: India is the world’s top remittance recipient (~$135 billion in 2024-25). The Gulf accounts for nearly 38% of this. A prolonged war could lead to job losses for Indian expats, directly impacting household consumption in states like Kerala, Tamil Nadu, and Uttar Pradesh.

b.      Financial Markets: Domestic stock markets have seen high volatility as Foreign Institutional Investors (FIIs) pull capital toward "safe havens" like Gold and US Treasury bonds.

c.       Agricultural Sector: Increased fertilizer prices and disrupted exports of Basmati rice and tea (major markets in Iran and the Gulf) are hurting the rural economy.