The ongoing conflict between Iran and Israel has emerged as a potential threat to India, primarily due to Iran's desire to close the strategically vital Strait of Hormuz. This critical maritime passage is essential for transporting crude oil and natural gas from Gulf nations to global markets. A blockade would negatively impact India's economy, affecting both exports and imports.
Despite considerable efforts by India to mitigate its vulnerability, a prolonged closure of the Strait could pose significant challenges to the nation’s energy security and economic stability. Experts indicate that such an event would likely lead to soaring energy prices and logistical challenges, exerting inflationary pressures across multiple sectors.
Oil Burden Could Weaken Rupee
India's heavy reliance on crude oil and natural gas imports—approximately 85-90% of its crude oil and around 50% of its natural gas needs—makes it particularly vulnerable. The Strait of Hormuz is a crucial artery for these imports, with 36% to 50% of India’s total crude oil shipments transiting through this passage, primarily from Middle Eastern exporters such as Iraq, Saudi Arabia, the UAE, and Kuwait. Should the Strait be closed or significantly disrupted, global crude oil prices could surge dramatically.
Experts estimate that a $10 per barrel increase could inflate India’s net oil import bill by $13-14 billion, impacting the current account deficit (CAD) by 0.3% of GDP, with prices potentially exceeding $100 per barrel in dire scenarios. Even if oil shipments are redirected—via routes like the Cape of Good Hope—the longer transit times would lead to higher freight charges (an additional $1.50-$3.00 per barrel) and increased insurance premiums. This would hurt the bottom lines of Indian oil marketing companies (IOCL, BPCL, HPCL) and may create pressure for government intervention on pricing or subsidies.
Additionally, a higher demand for oil payments in dollars could weaken the Indian Rupee, contributing to inflation across various sectors, particularly in transportation and manufacturing.
Costs Inflation On Essential Imports
India also relies heavily on liquefied natural gas (LNG), with over 50% to 60% of its imports—mainly from Qatar—transported through the Strait of Hormuz. A disruption in this passage would precipitate a sharp rise in natural gas prices, affecting critical sectors such as electricity generation, fertilizer manufacturing, and city gas distribution. Increased reliance on costlier spot cargoes would further strain resources, with LNG freight rates and tanker availability coming under pressure.
The Strait also serves as a vital corridor for various other essential imports from the Gulf, including chemicals, metals, fertilizers, and some food products. Disruptions could inflate costs and delay shipments, adversely impacting India's industries, agriculture, and manufacturing sectors.
Additionally, a significant proportion of India’s gold imports are from Dubai and the UAE traverse this waterway, making them vulnerable to disruptions. While India's dependence on the Strait of Hormuz for petroleum product exports is limited, a closure or sustained tension in the region could still disrupt India’s overall export performance.
Alternative Routes For India
Key redistribution hubs like the UAE and Singapore are essential for moving Indian refined products to end-users in Asia and Africa. Any instability in the Gulf would have immediate ramifications on these routes. Geopolitical tensions will likely lead to heightened shipping charges and insurance premiums for all cargo navigating the area, even if the Strait does not fully close. This erosion of profitability would affect Indian exporters across various sectors. Challenges such as rerouting shipments, longer transit times, and potential port congestion would compromise the competitiveness of Indian exports. Low-value or freight-sensitive goods, such as food grains and petroleum products, would particularly suffer due to rising costs and delays.
Notably, the Strait of Hormuz and the Red Sea account for approximately one-third of India’s total exports. Any prolonged disruption in this region could significantly impact India's overall trade balance, affecting exports of petroleum products, basmati rice, pharmaceuticals, and engineering goods. India has proactively taken measures to reduce risks associated with its dependence on the Strait of Hormuz. One key strategy is the diversification of oil suppliers.
Buffer Stocks To Face Crises
Under the Narendra Modi government, the number of oil supplier countries has increased from 27 in 2006-07 to 39 in 2021-22. Notably, Russian oil now constitutes over 40% of India’s total crude imports—an increase from less than 1% before 2022. This oil frequently reaches India via routes that skirt the Strait, including the Suez Canal and the Cape of Good Hope. Additionally, imports from the United States, Brazil, West Africa, and Latin America follow alternative paths that bypass Hormuz entirely. India has also established strategic and commercial oil reserves, offering 9-15 days of import coverage to absorb short-term disruptions. Though temporary, these stocks provide a buffer during crises.
Economic partnerships, such as the UAE-India Comprehensive Economic Partnership Agreement (CEPA) and the rupee-dirham settlement mechanism, allow India to make oil payments in rupees, facilitating trade even in scenarios where dollar access is restricted. To further diminish its import dependency, India is enhancing domestic oil and gas exploration, boosting ethanol blending targets to 20% by 2025, and investing in alternative energy sources like CNG, green hydrogen, and electric vehicles. Oil marketing companies are prepared to shift supply lines and explore multiple sourcing channels. In a worst-case scenario, India is ready to halt exports of petroleum products and increase imports from non-Hormuz routes. Additionally, the central government continues to engage diplomatically to foster regional stability and ensure free trade through critical maritime routes.