While the Russia-Ukraine war shows no sign of abatement, another major crisis in West Asia has hit the global economy. This war has disrupted production, storage, and transport of various energy products including crude oil, natural gas and fertilisers, and has led to supply disruptions and increase in sectoral prices. There is a serious, although partial, blockade of the Strait of Hormuz thereby restricting the passage of crude oil, gas and other petroleum products as well as other goods. Even if matters get resolved in the near future, it may take considerable time for the normalisation of the supply chain. However, even the temporary ceasefire that has been agreed to has brought down the Brent crude oil price from $109.3 per barrel as on April 7 and 8, to about $95.

India has been diversifying its sources of imported crude oil, gas and fertilisers. At present, India is importing crude oil from 41 source countries. In fact, India’s dependence on imported crude has been increasing in recent years and it is presently close to 90%.

The relevant crude price index for India is the Indian crude basket comprising Sweet grade (Brent) and Sour grade (Oman and Dubai average), which remains linked to the global crude oil price (average of Brent, WTI and Dubai). Considering the average of March 2026, the Indian crude basket was about 19% higher than the global crude price. The rise in the price of the Indian crude basket in March 2026 was over 64.5% that of February 2026 on average, even though the price increase for end-users were moderated.

With the temporary ceasefire, the Indian basket has come down to $120.28 per barrel on April 9, 2026 from the peak of $157 per barrel on March 23, 2026 — that is by a margin of $37/bbl.

Multiple stressors

The impact on the Indian economy will come through several channels. First is supply disruptions. Supply bottlenecks will affect production processes primarily in energy intensive sectors. However, any disruptions in these sectors would cascade into other sections of the economy, with the affected industries likely being textiles, paints, chemicals, fertilizers, cement and tyres among others. The non-availability of fertilizers and other chemicals particularly would affect the agricultural output in the Kharif season which will start from June.

Secondly, logistics. Storage and transport are highly energy intensive. Increased logistics costs will lead to the increase in the prices of all final products through cascading.

Third, Indian exports will take a hit from both demand and supply sides. The demand side will be affected not only due to disruptions in West Asia but also due to a slowdown in other countries, including the U.S. and Europe. The share of India’s merchandise exports to West Asian countries was 16.4% of total merchandise exports in 2024-25. The depreciation of the rupee, that is already underway, may partially help Indian exporters.

Fourth, exchange rate and remittances will be affected. The Indian rupee has been depreciating in recent months. The rate of depreciation has accelerated after the start of the West Asian crisis. As global crude prices, and the prices of fertilizers and other energy products also increase, there would be an additional demand for the dollar and other hard currencies; the exchange rate will be under pressure. Moreover, India receives a considerable number of remittances from Indians employed in the Gulf countries. These remittances are bound to go down, adding further pressure on the exchange rate. However, any improvement in the overall environment may lift the rupee.

In fact, the sharp decline in the value of the rupee has been caused mainly by the substantial capital outflows triggered by uncertainty and fear. When the war ends, the value of the rupee will also rise. The net Foreign Portfolio Investment (FPI) outflows in March 2026 amounted to $13.6 billion, which is huge.

Fifth, is the current account deficit. The fall in the volume of Indian exports is expected to be accompanied by an increase in the value of Indian imports leading to an increase in the current account deficit, if the war continues. Sixth is rising inflation. Cost push inflation would affect relative prices in sectors that are directly affected such as petroleum products, fertilizers etc. However, if liquidity also increases, there would be pressure on overall inflation. The country needs to avoid any large liquidity increases.

And finally is the fiscal deficit problem. The Government of India may have to provide additional subsidies to Oil Marketing Companies (OMCs) as it insists on keeping retail prices at present levels. While to some extent, the reduction in excise duty on petrol and diesel would reduce losses for the OMCs, it would be a direct revenue loss to the Indian government. If real GDP growth goes down and profit margins fall for major producers, there will be an adverse impact on the government’s tax revenues. State finances will also be affected due to lower economic activity. Their share in tax devolution would be adversely affected if the Central government’s tax revenues go down. States may also face pressure to reduce sales tax/VAT on petroleum products. In fact, the government must rethink the reduction in excise duty on petroleum products. The present move is due to the ongoing State elections. After that, the retail prices should go up, if the war resumes. In that situation, the higher price may constrain demand which is desirable.

Myriad policy responses

As per information shared by the Central Board of Indirect Taxes and Customs (CBIC) chairman on March 27, the fortnightly loss on account of lower excise duties on petrol and diesel will be ₹7,000 crore whereas there would be a gain of ₹1,500 crore per fortnight on account of export tax on Aviation Turbine Fuel. This implies a net loss of ₹5,500 crore per fortnight, translating into an annual loss in tax revenue of about ₹1,32,000 crore for the government, should the crisis continue for the full year.

In all likelihood, food, fertilizers and petroleum subsidies would be higher than their budget estimates for 2026-27. As already mentioned, retail prices must be allowed to go up so long as crude prices remain high.

Although it is difficult to estimate the quantitative impact of the current crisis, some impacts were given by the RBI in its October 2025 Monetary Policy Report. In their estimates, for every 10% increase in the price of the Indian crude basket from a baseline of $70 per barrel, that is an increase of $7 per barrel, real GDP growth may fall by around 15 basis points. Further, assuming full pass-through to domestic product prices, inflation would be higher by 30 basis points.

As on April 9, 2026, the price of the Indian crude basket at $120.28 per barrel has exceeded the baseline by about $50 per barrel. If this margin of increase becomes applicable for the whole year, real GDP growth may fall from baseline estimates by 1 percentage point and inflation may increase by more than 2 percentage points. While these effects would be lower if the crisis gets resolved quickly, much depends upon when true peace will dawn.

C. Rangarajan is Former Chairman, Prime Minister’s Economic Advisory Council and Former Governor, Reserve Bank of India; D. K. Srivastava is Former Director, Madras School of Economics. Views expressed are personal.