A war began under an ill omen on February 28, triggering a tectonic shift in global affairs. A US Tomahawk missile killed scores of school children in Minab in southern Iran; Israeli strikes killed much of the country’s leadership. Two days later, on March 2, the Iranians closed the Strait of Hormuz, the conduit for 20 per cent of the world’s fossil-energy flows, petrochemicals, and other industrial products—fertilizers, sulphur, aluminium, and helium. Ship traffic came to a virtual halt, and the Iranians declared they would collect tolls from transiting ships. 

Political leaders and the media have largely ignored the Iranian perspective. Wishful thinking—fuelled by bluster and apparent rampant market manipulation—has maintained that Iran would capitulate, conceding US-Israeli demands and restoring pre-conflict normalcy. 

There has been no knock-out blow. Instead, the US, Israel, and Iran have been trapped in a war of attrition. The side that endures pain longer will win its goals; the loser will leave empty-handed. The stalemate is rewiring the globe. Thomas Wolfe might have said, “It will not be possible to go back home again.”  

This essay examines the widespread misreading of the standoff, the evolving geopolitics sustaining it, and the implications for India’s external finances and the lived reality of its people.

This war of attrition is not a hammer blow like demonetisation or COVID. Its severity will depend on how long it lasts. The world is already in the IMF’s  “adverse” global scenario. Beyond the summer, the scenario will turn “severe”.

The vise will tighten as more oil, gas, and petrochemicals remain trapped in the Persian Gulf, on loaded tankers or in non-operating processing facilities. In all countries, to different degrees, high prices of energy and industrial inputs will drain financial buffers of consumers, businesses, and governments. Slower world trade will limit the prospects of growth through exports.

India is exceptionally vulnerable to this impasse and the emerging new world order. Its dependence on critical imports through the Strait of Hormuz is matched by its reliance on the region as an export market and on source of remittances underpinning external finances.

In an early preview of the coming months, as global prices of oil, gas, and industrial products jumped in April, so did India’s trade deficit. The exit of portfolio investors and possibly the fall in remittances—as workers returned from the Gulf—strained the overall balance of payments deficit. The rupee has depreciated in anticipation of India needing a weaker currency to narrow its balance of payments deficit. The 100 rupee/dollar marker looms. Pressure on Indian businesses and households will compound, policy space will shrink.

The global rewiring

Each side has irreconcilable red lines. Iran stated its demands plainly as early as April 6: reparations for the loss of Iranian life and property, control of the Strait of Hormuz, and credible guarantee of lasting security—for its people and allies in Lebanon. Trump wants a scaling back of Iran’s nuclear ambitions. With the military conflict going nowhere, he announced a ceasefire on April 7 and began seeking a deal amid a colder war of attrition.

Reiterating their position as they landed in Islamabad on April 10 for talks with the Americans, the Iranians displayed photos and possessions of the girls killed in Minab. On April 12, after the talks failed, a Tehran billboard declared the Strait of Hormuz “forever in Iran’s hands”.

American leaders, markets, and media dismissed Iranian demands as “sticking points” or “not under consideration”. Even on May 9, when the realisation dawned that the Iranians were serious, Trump said the demands were “a piece of garbage”; The New York Times called them “non-starters”. A hope lingered that China would twist Iran’s arms. This had no basis.

On May 13, a day before Trump’s visit to Beijing, a Chinese oil tanker sailed through the passage designated by Iran’s newly constituted Persian Gulf Strait Authority. The tanker received an exemption on the “fee” for navigation and environmental services (the toll), as a “gesture of goodwill”. The Iranians matched Trump’s rhetoric, with the advantage of being tethered in reality.

The Western establishment had also ignored Chinese support for Iran. Unlike the often profane American discourse, China’s words were elliptical. But their messages were direct. Foreign Minister Wang Yi was emphatic in March: Iran had sovereign rights, presumably including the right to pursue nuclear ambitions and toll ships. The Chinese rejected the “abuse of force” and “interference in internal affairs” of Iran and all West Asian nations.

Iranian and Chinese incentives are aligned—and they run exactly counter to those of the Americans. Iranian mothers still gather every night to mourn at their children’s graveyards in Minab. Iran is seeking redress and protection, and is willing to hold out in the spirit of Ho Chi Minh’s: “You kill 10 of ours, we kill 1, you tire first.” They have prepared militarily and economically for this moment.

China sees Iran as a conduit for its rise as global hegemon. Xi Jinping laid out his ambition to Trump on May 14, when he referred to the Thucydides Trap, harking back to when Athens (like China today) sought to supplant Sparta (US today) as the hegemonic power. Xi insinuated that US was a declining nation. The Chinese have established a yuan-based payment system that bypasses the dollar-based system which the US uses to impose sanctions. China’s mechanism is a minor, but a significant step in eroding the dollar’s supremacy.

The postwar order has gone. The transatlantic alliance lies in tatters. History offers few precedents for a peaceful transition to a new regime. On May 15, when Trump returned empty-handed from China, oil and natural gas prices rose. Expecting higher inflation for longer, global interest rates spiked.

The human cost for India

Reflecting macroeconomic vulnerabilities, and connected by a massive exit of portfolio capital, Indian equities and the rupee have been among the worst-performing global assets since the start of the conflict. Notwithstanding the mysteriously high GDP growth numbers, foreign capital was leaving India before the crisis began. Since then it has fled.

Policymakers have kicked the can down the road. Unable to halt the rupee’s fall, the RBI scaled back direct support and pushed State-run banks to “aggressively” sell dollars, and recently offered incentives to attract foreign inflows. The government has mainly allowedtoken price increases for oil, gas, and petrochemical derivatives—it even rolled back the increase in jet fuel prices for international routes—imposing large losses on public sector oil companies. Prices will need to rise by at least 20-30 per cent, and much more if the crisis persists.

The signs of distress are already clear. Dhabas, small businesses, transport workers, and urban migrants are the victims of commercial LPG price hikes and high LPG costs in informal (“black”) markets. Unavoidable market pricing could crush all such people who are society’s weakest.

The human cost is growing by the day. Hundreds of thousands of urban workers have returned to villages, driven out by higher cooking-fuel costs or job losses in gas-dependent industries. With slowing global trade, job losses have engulfed even the leather export workers of Kanpur. Many of them are seeking safety in an agricultural sector facing unusually high temperatures alongside fertilizer and diesel shortages ahead of kharif planting. Over 1.3 million migrant workers in the Gulf—one in seven of the nine million workers there—have returned to the bleak Indian job market.

As Iran reshapes the region, the UAE-Israel alliance presents a particular worry for India. Iranian animosity—via drone strikes and threats to UAE exports through the Gulf of Oman—has clouded the UAE’s fate. Until recently India’s fastest-growing export market, a major destination for migrant workers, and a tax haven for Indian elite, the UAE may be forever tarnished.

A dark winter

On May 23, “Deal!” cried Trump and his aides. The reality: US and Iranian red lines ran on parallel tracks that could not meet. Yet, the media swooned, markets celebrated, oil prices fell. “Deal!” Unlike the boy who cried wolf, these cries never lost credibility. On June 1, the Iranians quit the talks because Israeli strikes continued killing Lebanese civilians. Israel refused to stop Lebanese military operations. Oil prices spiked. “Deal!” Markets calmed.

But the clock keeps ticking. Every day the Strait of Hormuz is closed, Bloomberg energy analysts estimate that the world loses at least 10 million barrels of oil. With global reserves dangerously low, and Ukraine degrading Russia’s oil and petrochemical capacity, acute shortage of oil will likely push prices sharply higher by September, pulling up edible oil prices. Liquefied natural gas (LNG) shortages are even more problematic. Virtually no reserves exist to fall back on; the Japan/Korea Marker (JKM) Platts LNG benchmark has nearly doubled since the strait closed. For India, rising LNG prices threaten jobs, fertilizer and food prices, and the pace of its gas-based energy transition.

Countries are hedging: land conduits for oil, accelerated solar investments, coal gasification. New leaders and alliances will emerge. Time will reveal the full “adjustment space”. India will need to adapt.

Under mounting public pressure, Trump says he is “bored” and “couldn’t care less” if the negotiations break down. His final off-ramp: cede Iranian demands and focus on Cuba and Greenland. Even so, it will take months to clear about 1,000 ships stranded in the Persian Gulf and bring online the nearly 9 per cent oil refining capacity currently shuttered, and years to restart badly damaged processing facilities. In a new equilibrium, tolls along with higher freight and insurance costs will push up energy and petrochemical prices.

Israel remains the wild card. It must back off from its Orwellian conception of ceasefire and stop killing Lebanese civilians; Prime Minister Benjamin Netanyahu cannot indulge his threat to “reengage Iran militarily”. Israel has shown it will disregard US attempts at disengaging. The US could, in a mother of political rewirings, halt critical military and financial support of Israel.

An ill-fated war drags on. Mothers in Minab will mourn and Indian workers will struggle this very hot summer. The “adverse” scenario will soon turn “severe”: global recession, inflation, and high interest rates will wreak havoc in India. Absent a miracle, it could be a dark winter.

Ashoka Mody recently retired from Princeton University. He previously worked for the World Bank and the International Monetary Fund. He is the author of India is Broken: A People Betrayed, Independence to Today (2023).

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