Introduction

India remains highly reliant on imported crude oil to power its economy. In FY 25 – 26, India has approximately 88% to 89% of imports as a portion of its oil-consumption as domestic crude output (approximately 0.7 million barrels per day in 2023) that barely covers 10% to 13% of demand. This dependence on imports highlights an ongoing problem of energy security: in terms of consumption of about 55 lakh barrels per day, India’s need far outstrips its production.. With such a gap, the economy is exposed to external supply shocks. In nutshell, oil plays the key role in growth, and its foreign sourced supply reveals both centrality and fragility for the Indian economy.

Crude oil has taken a systemic role in the Indian economic structure, and the derivatives of crude oil are used as key inputs in a broad array of industries, thus exposing centrality and vulnerability of the production system in India. Crude oil is not a fuel but it is also a very important feedstock in most industries. In these industries, either a supply crunch of crude or a sudden rise in prices is a type of cost-push shock that is widespread, causing a compression of the margins, an elongation of working capital, and a moderation of demand.

At a macro level, this has the effect of creating inflationary pressures, poor consumption and stressed corporate earnings thus highlighting the importance of crude oil as not only a commodity input but also one of the foundational determinants of India’s industrial and financial stability.

Current Geopolitical Shock Iran-US Conflict and Hormuz Disruptions

The escalation in conflict involving Iran, the US and regional proxies in the Middle East has been rising since late February 2026. The conflict expanded as Houthi militia allied to Iran started assaulting Israel and Gulf shipping, in the wake of the Iranian missile and drone attacks on the US forces. Simultaneously, Iran has intermittently “ tightened the noose” around the Strait of Hormuz- the world’s most important oil choke point of the world and threatening an estimated one-fifth of world oil and gas flows. The markets have responded intensely such that Brent crude has shot up to over $110/bbl trading in the range of $115-$116 at the end of March 2026.

This spike is indicative of the threat of sustained export disruptions as Iran menaces Hormuz and the Houthi attacks continue to grow.

There is a specific exposure of India to this shock. Traditionally Hormuz has passed over two-thirds of its crude imports through the Gulf. Until recently, India had been getting about 40-45 percent of its imports directly as a result of Saudi Arabia, Iraq and the UAE (through Hormuz) but an increasing number is now being obtained through other suppliers. Interestingly, as of 2022, the refiners in India had shifted to Russian oil, with roughly more than 40% of imports being Russian crude by mid-2025, albeit temporarily reduced to about 21% by early 2026 due to the enforcement of U.S. sanctions.

India has responded to the risks in the Gulf by official data showing that the supply routes have been dramatically diversified: approximately 70% of crude imports are currently by routes not in the Strait of Hormuz, versus approximately 55% previously. However, approximately 30% to 45% of the oil in the country remains as Hormuz transits. The recent war has thus put the oil value chain in India in an acute state of vulnerability: even partial blockades or insurance dislocations in the Persian Gulf would spell millions of barrels per day supporting industry and mobility.

Macroeconomic and Sectoral Impacts

The oil shock has extensive macro-economic impacts. Increased prices of oil in the world market increase the import bill of India, increasing the current account deficit and straining the rupee. It has already declined by about 4 percent in early 2026 as the rupee is subjected to the pressure of high oil and gas prices. It is predicted that inflation will increase and a sustained 100% oil price scenario would take inflation to 4.0-4.5% (as compared to 2.8% in Jan 2026) and reduce GDP growth to the 6 percent mid-range. It is on this background that monetary policy will probably become even more stringent to counter imported inflation and currency weakness.

Fiscal balances are in urgent strain. According to government analysts and rating agencies, the increasing oil and gas prices present a threat of increasing subsidy payouts and reducing revenues.

Already, the government has approved ₹30,000 crores to compensate OMCs for LPG under-recoveries. Effectively, the West Asia crisis is a stress test on the Indian fiscal system. The government can use contingency funds, as well as advance payments of subsidies (e.g. through the Economic Stabilisation Fund) to avoid an abrupt violation of fiscal targets, but longer-term shocks may push hard on discretionary spending or the headline deficit objective.

At the sectoral level, impacts vary by industry:

• Transportation and Logistics: Prices of diesel and petrol have gone high. Industrial diesel (generally cheaper than retail diesel) was increased severely (to ₹112 per litre in March, versus ₹92.7 in March), which instantly increased the trucking and rail fuel expenses. This will spread via freight and passenger fares. High inflation in diesel is already seen pushing CPI back to 3.2% by Feb 2026. Jet-fuel prices are high in airlines. In summary, fuel cost-push will probably dampen transport demand growth and increase cost of inputs in almost every industry (cement and steel to FMCG).

• Agriculture: Farmers will be indirectly twice struck. First, machinery and irrigation are based on diesel- higher diesel increases the cost of ploughing, pumping and transporting produce. Second, the production of fertilizers (and in particular nitrogen-based urea) requires the presence of ammonia which is derived in its turn by using natural gas or naphtha. The agricultural markets on fertiliser and input prices are disrupted, endangering their availability. Any deficit would put crop production at risk, which can sabotage food inflation and rural earnings.

• MSMEs and Manufacturing: SMEs and manufacturing firms work on low margins and therefore any increase in the utility or fuel prices is easily eliminated. Large amounts of power are consumed by many MSMEs, such as small-scale logistics which uses diesel, or processes which use LPG. Cash flows will be tightened by higher energy and raw-material bills. Businesses can postpone capital investments and staffing. Extreme case of critical input shortages (e.g. LPG or process gases) might cause partial shutdowns in textiles, chemicals or agro-processing. Increased interest expense is also being experienced in this credit-sensitive sector because RBI increases policy tightening in order to curb inflation.

• Petrochemicals and Plastics: This industry is torn between increasing feedstock prices and regulatory redirection of funds. Crude has soared global naphtha prices, and petrochemical players in India (most of whom use imported naphtha or LPG) are experiencing shrinking margins. Domestically, the government has instructed refiners to divert C3/C4 gas streams to the LPG pool, which has increased consumer LPG production by approximately 25 percent to use domestically. This implies that fewer propane/propylene to petrochemical crackers, which could restrain the manufacture of polymers, solvents and other intermediates.

In short, the margins in the petrochemical industry will tend to be squeezed due to increased input prices, and the renewable substitutes (bio-plastics, recycled feedstock) are too small to cover the loss.

• Export Competitiveness: A weak rupee (at least by 4% to date in 2026) is a relief to goods and services exporters. IT, pharmaceuticals and some manufacturing exports have a price boost. This is however partially compensated by the increased cost to the exporters of energy-consuming goods (steel, cement, chemicals) who import fuel and raw materials. Additionally, the international demand can be weakened in case trading partners themselves are strained in energy. In general, the existing shock is likely to increase the trade deficit (with its costly oil imports) in India more than it increases exports.

All of these impacts strengthen each other: an increased import bill has already pushed the March 2026 trade deficit in India back to multi-year highs, indicative of an energy-induced squeeze. Overall, the crisis shows that spikes in oil prices can have ripple effects across several KPIs in CAD and currency to inflation and growth, putting the macro-financial stability of India to the test on a structural level.

Conclusion

The extreme reliance of India is identified as a strategic weakness, as the key resource of the economy that can be easily shaken by the geopolitical pressures. The recent West Asian crisis highlights an ongoing issue, namely the fact that even with renewables and efficiency, the economy continues to be tied to imported oil. This episode is in effect a structural stress test of the energy security and financial system of India. It shows centrality and vulnerability: oil is a key commodity to grow, and external shock can slow down the growth, inflation and fiscal stability.