Significant dent? How an escalating Iran-Israel conflict can threaten India’s growth story - explained

As the world’s fastest growing major economy, India has a lot of things going right for it - demand is picking up, inflation is down to a 6-year low, and the RBI has reduced repo rate by 1%, which means lower borrowing costs for businesses.

This environment supports higher demand, improved capacity utilisation, and a potential pickup in private investment.Yet this economic strength is threatened by trade tensions and possibility of spiking crude oil prices if the Iran-Israel conflict spirals out of control. Escalating tensions in West Asia, particularly between Israel and Iran, pose a significant risk. A major conflict could spike oil prices, triggering inflation and weakening demand, thereby threatening growth.

Oil price outcomes depend on the conflict’s severity, ranging from $65 to over $120 per barrel. For India Inc, surging oil prices would inflate production costs, shrink consumer spending, and disrupt exports—especially if Red Sea routes are compromised, forcing longer and costlier shipping alternatives.DK Srivastava, Chief Policy Advisor, EY India tells TOI, “The global economy is facing tough times due to ongoing conflicts like Russia-Ukraine and Israel-Hamas.

Israel-Hamas now risks turning into a wider Israel-Iran war. On top of that, the US has hinted at raising tariffs, adding more uncertainty. These global issues are slowing down the world economy. In fact, the World Bank has lowered its global growth forecast for 2025-26 to just 2.3%, down from 2.7%.

”“India could feel the impact of these global developments, through the contribution of net exports which has been, on average, negative in recent years.

From 2022-23 to 2024-25, net exports marginally pulled down our real GDP growth by (-)0.1% points of GDP. If trade-related tensions continue, this could worsen,” he says.Oil Price Spike & India’s Energy SecurityJP Morgan has cautioned that oil prices could rise to $120 per barrel should the situation in the Middle East deteriorate further. According to the bank's analysis, present prices already incorporate a 7% probability of a severe geopolitical scenario, where Iranian oil production faces significant disruption, leading to a dramatic increase in prices rather than a gradual rise.However, despite ongoing regional tensions, JP Morgan maintains a conservative outlook, keeping its primary forecast for Brent crude at the lower to middle $60s range through 2025, followed by $60 in 2026.The bank's projection of $60 per barrel for 2026 is based on the assumption that regional authorities will take necessary steps to avoid an all-encompassing conflict.Also Read | Big win! China companies now exporting ‘Made in India’ smartphones & electronics to US, West Asia; notable shift for Chinese brandsThe cost of benchmark US oil per barrel declined by 3.3% to $70.59 on Monday, reflecting optimism that the conflict might stay limited in scope.

This followed Friday's surge of slightly above 7% after the initial strikes. The downward price movement gained momentum after The Wall Street Journal reported that Iran had indicated its desire to cease hostilities and return to discussions regarding its nuclear programmes.DK Srivastava notes that crude oil is cheaper now — averaging $64.3 per barrel during April-May 2025-26, down from a high of $85.3 per barrel in 2Q of 2023-24, its recent peak.

But if tensions in the Middle East grow, crude prices could rise again, which would hurt both growth and inflation in India, he says.“A past RBI study showed that a US$10 per barrel rise in the price of India's crude basket could reduce India’s real GDP growth by 0.3% points and increase its CPI inflation by 0.4% points,” he adds.According to the Global Trade Research Initiative (GTRI), India needs to assess energy security risks, expand its crude oil sources and maintain adequate strategic petroleum reserves.GTRI is of the view that the escalating situation in West Asia poses significant risks to India's energy security, maritime trade routes and business relationships. Its analysis indicates that the growing conflict between Israel and Iran could significantly impact India's economic interests.Also Read | Magnet mayhem! Number of Indian companies awaiting licences from China for rare earths doubles; industry supplies hit hardThe nation's heavy reliance on the Strait of Hormuz for importing approximately two-thirds of its crude oil and half of its LNG has become critical due to Iranian threats.

This crucial maritime passage, spanning merely 21 miles at its most constricted point, facilitates roughly one-fifth of the world's oil trade.With India's dependence on foreign sources exceeding 80% of its energy requirements, any interference in this route would trigger increased oil prices, elevated shipping expenses and higher insurance costs.According to GTRI, these disruptions could potentially drive up inflation rates, cause rupee depreciation and pose significant obstacles to governmental fiscal planning.However, Oil Minister Hardeep Singh Puri has said that India, being the third-largest oil importer and fourth-largest gas purchaser globally, maintains sufficient energy reserves for the coming months."India's energy strategy is shaped by successfully navigating the trilemma of energy availability, affordability and sustainability," he said. "We have adequate energy supplies for the coming months."Adverse Impact on TradeIndia maintains substantial trade relationships with both Israel and Iran.

During FY2025, India's exports to Iran reached $1.24 billion, whilst imports stood at $441.9 million. The trade volume with Israel is higher, with $2.15 billion in exports and $1.61 billion in imports.The ongoing conflict is expected to have adverse effects on trade. While there were signs of recovery, trade activities will now face renewed disruptions. According to Federation of Indian Export Organisations (FIEO) President S C Ralhan, exports to European nations and Russia could be affected, with anticipated increases in freight charges and insurance costs.Although Indian export shipments had resumed their transit through the Red Sea corridor, these operations are likely to face fresh disruptions, as noted by Ralhan.Also Read | ‘No basis to seek…’: US disagrees to India asking for WTO consultations on auto tariffs; calls it ‘essential security exception’The immediate consequences of the conflict include elevated freight and insurance rates, following a period of stability when Red Sea routes were returning to regular operations, according to Mumbai-based exporter and Technocraft Industries Ltd Founder Chairman S K Saraf.GTRI says that approximately 30% of India's exports heading west towards Europe, North Africa, and America's Eastern seaboard use the Bab el-Mandeb Strait.The current situation poses risks to this vital maritime route. Should vessels need to navigate around the Cape of Good Hope, journey durations would increase by a fortnight, which would cause substantial hikes in shipping expenses.Such disruptions would impact Indian export sectors, including engineering products, textile goods, and chemical shipments, whilst simultaneously increasing import expenditure.Should India be worried?Officials from the government are planning to conduct discussions with export sector representatives in the upcoming days to address recent developments.The current tensions between Israel and Iran are not expected to significantly affect India's economy, unless the situation expands into a wider and sustained regional conflict, according to a senior official who said that authorities are monitoring developments closely.The situation could lead to temporary fluctuations in international oil prices, affect capital movements, cause currency variations and increase shipping expenses in the near term, the official acknowledged.The official told ET that whilst it remains premature to determine the exact consequences for India, the finance ministry and regulatory bodies will maintain enhanced surveillance due to market instability.India's robust macroeconomic indicators position it well to weather any such international crisis with minimal adverse effects, the official stated.The official also indicated that the situation is unlikely to cause any significant or lasting effect on global non-energy commodity prices in the medium-term perspective.EY’s DK Srivastava also strikes an optimistic note about India’s strong economic fundamentals.

“On the positive side, India’s central bank has started cutting the policy interest rate, which has been reduced by 1% points since January 2025, to 5.5% in June 2025. This should continue, ideally bringing the rate to 5% or below.”“The government is also spending more on infrastructure, with capital spending growing strongly in March and April 2025. These two steps—lower interest rates and larger public investment—should help mitigate the negative effects of global challenges. We expect India’s economy to grow by 6.3–6.5% in 2025-26, despite these global pressures,” he concludes.