Analysis of the 2026 West Asia crisis: How the Iran-Israel conflict impacts India’s GDP, oil prices, and the global energy supply chain
Suresh Chandra Sarangi
The entire social media has been spreading the post-truth about the Iran-Israel and America war for 24 hours. The fact is that most of them are rumour-mongering machines, and nobody catches them. The truth lies elsewhere. The fact is that the world today may be richer, more democratic, with a rising middle class and less poverty, though unequal and uncertain. Rather, the risk concept has been more focused in today’s world because of the escalation of the Iran-Israel war. It seems a new global lockdown is at the doorstep of the world.
As per newspaper and electronic media reports, power is being rationed, gas and oil are the most scarce commodities, because of supply chain disruption and an energy crisis looming large on the horizon. The Philippines has grounded its Airplanes. South Korea has put a QR code system for the rationing of gas and petrol. Airlines have curtailed 5 percent of aviation. All these systems have been put in place to have control over energy expenditure and limits .Governments are interested in having work from home, and the International Energy Agency is proposing to curtail travel. The realities are more grave and threatening than the Covid 19 lockdown. Perhaps. The energy crisis is fully blown out of control, and the world is at the doorstep of a greater crisis.
The oil price shock has myriad implications. It is estimated that the global economic growth may decelerate as a result of high energy prices, with every use involving a 10 percent increase per barrel, which may impact global growth by .3percent and the impact on the consumer-based economy may be more intense than the producer-based economy. If the conflict further escalates for a longer period, the magnitude of its effect on global growth may be more serious. The effect has short-term, medium-term, medium term and long-term effects, and the long-term may ensure a total disruption. The immediate short-term effect in the last quarter of FY 26_27 may be limited, but going ahead, the stress would be more significant.
The situation is worrisome. Total chaos prevailing. The impact on the global economy is total. There is a loss of human lives and property, with casualties multiplying each day. Civilian areas are targeted, and the war’s impact has spilled over to Dubai, UAE, Qatar, Lebanon, and has become widespread in the Gulf region. The expenses in terms of military arms and ammunition are huge. The loss of energy infrastructure, airports, and ports infrastructure is profound, and it makes not only the entire West Asia region unstable but the entire world as well. In geopolitics, for the first time, the NATO forces have declined to partner with America. Trump’s bewilderment grows. Trump, as per newspaper reports, decided to shift its allegiance to NATO, and that will be split in the capitalist world’s arms race.
In effect, the Russia-Ukraine war appears to be in cold storage, for the time being. Russia and China seem to be maintaining equidistance from the military conflagration yet, but the Americans are of the opinion that Russia and China are clandestinely supporting Iran with military agents, arms, and ammunition that keep the war going. A hidden cold war in that sense. International Security is at risk. While the US’s intention is to play a pivotal role in the Middle East, to have control over the oil, energy , markets, and international security. There is a humanitarian crisis of epic proportions, and the greatest fear is possible escalation into a nuclear war. The power dynamics are shifting, the balance of power is taking a new shape, and the tenor and tone of the book are getting aggressive. There is a media warfare, and the social and psychological impact of the war is monumental. The world’s cheap oil has been just down for five years, and this is not collateral damage. This is real. Missiles are destroying the energy infrastructure and will take years to rebuild. The refugee number is increasing, and rehabilitation of the economy, infrastructure, and schools, etc., will take significant time to reconstruct and rehabilitate with a huge cost thereof, which is unmanageable.
With each day, both the conflicting parties are becoming more stubborn, and Trump’s olive branch is being discarded by Iran. This war is turning very fast consequential, for the time being a huge burden on the US exchequer, which is bleeding under the impact of unmanageable debt. One positive impact for the US economy has been the ascent of the US dollar index, hovering around 100 above. But around the world, the energy crisis is clearly palpable, which may lead to imported inflation in many countries. There is depreciation of the currencies in other countries with respect to the dollar. The US final condition is to clear the Strait of Hormuz, which will ease the energy pressure. Financial markets are falling like 9 pins, the indexes are nose-diving, instability has crept into the system, which is a new reality, and across the world, the retail investor is feeling the blow and a pinch. Expatriates are facing the worst crisis of their lives.
While the macroeconomy of the nations of the world is in jeopardy, India cannot be an island. The fastest-growing tag is facing a hard time. Though oil prices remain the greatest lag, the government kept its price, as is where it is . But the gas prices have gone up due to irregular and limited supply, and the consequent effect on the Indian economy. The immediate fiscal cost is enormous, and CPI inflation is expected to be at 4.5 percent. The capital account is under stress, and the forex deficit will eat into the Reserve. The current Account deficit will balloon, and inflation will remain stubborn. Asia is the world’s food basket, contributing around 60 percent, and with the energy crisis, food prices will surge.
The dynamics of war and the financial crisis are significant. This supplies 30percent of the world’s supply, and the Strait of Hormuz is responsible for the passage of 20 percent of the world’s requirements. This is an external shock that cannot be obliterated but has to be managed. The oil supply disruption brings price volatility reflected in everything we purchase, and our import dependence again grows. The price shocks are Genuine and have come to stay, throwing energy security in India into the wind. Our import bill will be higher, the rupee is in a depreciation spree, the stock market has already gone down, manufacturing is at a loss, and cost-push inflation is on the rise. The remittances of the Indian diaspora are at stake.
Our foreign policy is under stress, whether to align or remain unaligned. The government has reduced the excise duty to keep manufacturing online. The country has to go for an energy diversification system and negotiate with multiple sources. India has to first track its energy push by diversifying into new and renewable energy sources and also take policy decisions to build a strategic energy resources reserve for the future. Subtle diplomacy may help India pass through by effectively manoeuvring its strategic autonomy.
(The writer is a former General Manager of Bank of India. Views expressed are personal.)
