A war began under an ill omen on February 28, triggering a tectonic shift in global affairs. A US Tomahawk missile killed scores of schoolchildren 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.This was not an oil shock; it was a blow to the global industrial system. Making the shock harder to resolve, a new front opened up between Hezbollah in Lebanon and Israel.

A global hegemon’s decline hastened; new power centres began emerging. The powerful hegemon—until recently seen as a bastion of liberal democracy—has continued behaving with boorish arrogance. Its leaders have apparently often indulged in gross market manipulation, and its media have spun the actions and words of the leadership. On the other side, a repressive, authoritarian regime, with a third-rate economy and military—but supported by a rising China—has maintained focus. Its media, despite inflammatory rhetoric, have proven more credible than fabled Western peers.

Instead of Iran capitulating, as many expected, the US and Iran were trapped in a war of attrition. In such a war, the side that endures pain longer wins all its goals; the loser leaves empty-handed. Iran waited. And, as of this writing, it appears to be the overwhelming winner.

For India, the immediate effect was not principally about oil, it was more about LPG and LNG. But no matter how oil and gas price movements eventually play out, the war has spotlighted India’s geopolitical and economic weaknesses, tarnishing its triumphalist narrative.

Indeed, the crisis has placed India at an inflection point. With key regional partners (Israel and the UAE) severely weakened, a declining and transactional US, and China staking claim as global hegemon, India’s geopolitical anchors are being upended. In this frictional transition, the notion of strategic autonomy will be ever harder to sustain.

Economically, this is India’s third heart attack in a decade. Each has exposed deep-rooted fragilities. Demonetisation revealed how brittle the vast informal economy was. COVID-19 laid bare the insecurity of migrant workers and public health systems. The West Asia crisis is on a different scale: it hurts every facet of economic life. Seen alongside India’s lag in frontier technologies, especially AI, could the recent investor flight be signalling that the sheen is finally wearing off on the India story?

The global rewiring

The war has created new political facts. Central to the story, and to its implications for India, is the ongoing once-in-a-century shift in global relationships. Old alliances could prove liabilities; India may no longer be able to choose friends opportunistically in its national interest—with consequences for its economic future.

Irreconcilable red lines triggered the global reconfiguration. Iran stated its demands as early as April 6. These included reparations for the loss of Iranian life and property, control of the Strait of Hormuz, a right to nuclear enrichment, lifting of all sanctions, and a credible guarantee of lasting security—for its people and Lebanese allies. US President Donald Trump, above all, wanted Iran to scale back its nuclear programme. Amid the impasse, a new global order took shape.

Iranian guerrilla warfare—inexpensive drones to target the US’ regional allies; a “mosquito fleet” to patrol the strait—countered US and Israeli bombing. With US munitions depleting at an alarming rate, Trump announced a ceasefire on April 7 to seek a deal. The Iranians reiterated their position. As they landed in Islamabad on April 10 for talks with the US, they displayed photographs and possessions of girls killed in Minab. On April 12, after the talks failed, and the US imposed a blockade on the strait to cut off Iranian export revenues, a Tehran billboard declared the Strait of Hormuz “forever in Iran’s hands”.

US leaders, markets, and the media dismissed Iran’s demands as “sticking points” or “not under consideration”. Even on May 9, when realisation dawned that the Iranians were serious, Trump said the demands were “garbage”; The New York Times—comically, in retrospect—called them “non-starters”. The hope was that China would twist Iran’s arms.

But on May 13, a day before Trump began his state 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 from 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 misread China. Unlike the often profane US discourse, Chinese words were elliptical. But the 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 also rejected the “abuse of force” and “interference in internal affairs” of Iran and other West Asian nations.

Iranian and Chinese incentives are aligned—and they run counter to those of the US. Iranian mothers still gather every night to mourn at their children’s graveyards in Minab. In seeking redress and protection, Iran has adopted the revolutionary Vietnamese Ho Chi Minh’s spirit: “You kill 10 of ours, we kill 1, you tire first.” Iranian leaders likely remember the Afghani resistance mantra: “You have the clock, we have the time”. They had prepared militarily and economically for the moment.

China sees Iran as a conduit to global primacy. President 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 (the US today) as the hegemonic power. Xi insinuated, not so subtly, that the 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 significant step in eroding the dollar’s supremacy.

The post-war order has gone. The transatlantic alliance is 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. US citizens groaned. The economic and political pressure on Trump increased.

Other countries though were “suffering big time”, US Secretary of State Marco Rubio said without any sensibility of his nation’s culpability. Was he speaking of India?

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 the crisis, portfolio investors have fled.

True, this was not a moment for structural reform, and India did well to source oil and gas from the US and Africa, although these came with higher prices. But the rest was a scramble. Unable to halt the rupee’s fall, the RBI scaled back direct support and pushed unorthodox initiatives along with incentives to attract foreign inflows. The Central government allowed token price increases for oil, gas, and petrochemical derivatives (it even rolled back the increase in jet fuel prices for international routes), imposing losses on public sector oil companies. Lying just ahead, though, is a new, higher energy price equilibrium, reflecting global structural uncertainty, that will strain Indian prices and the rupee.

Human distress has been widespread. Dhabas, small businesses, transport workers, and urban migrants were victims of commercial LPG price hikes and high LPG costs in “black” markets. Hundreds of thousands of urban workers returned to their villages, driven out by higher cooking-fuel costs or job losses in gas-dependent industries. With slowing global trade, job losses engulfed even the leather export workers of Kanpur. Urban workers seeking refuge in agriculture face unusually high temperatures alongside fertilizer and diesel shortages ahead of kharif planting.

By late April, over 1.3 million migrant workers in the Gulf—one in seven of the 9 million workers there—returned to the bleak Indian job market. The Ministry of External Affairs has stopped updates, but surveys show a slow but steady reverse flow.

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 tarred.

Making matters worse, AI has placed India at a double disadvantage. It is threatening Indian jobs, and the lack of domestic human capital is limiting growth and foreign interest in the country.

A dark winter looms

By mid-May, West Asia was an untethered theatre of war and stage play. Trump and his associates repeatedly cried: “Deal!” Each time, the media swooned, markets celebrated, oil prices fell. Unlike the boy who cried wolf, the US’ cries of a “deal” never lost credibility. On June 1, the Iranians quit talking because Israeli strikes continued killing Lebanese civilians. Oil prices spiked. “Deal!” Markets calmed.

But danger was looming. By early June, the world was losing at least 10 million barrels of oil each day the Strait of Hormuz stayed closed. Global reserves ran precariously low, the US supply was reaching its limit, and Ukraine kept degrading Russia’s oil and petrochemical capacity. The likelihood of acute shortages of oil and derivative products threatened to push prices sharply higher by September, pulling up edible oil prices.

LNG presented an even greater problem for India. Virtually no reserves existed to fall back on; the Japan/Korea Marker (JKM) Platts LNG benchmark had risen about 80 per cent since the strait closed. Rising LNG prices threatened jobs, fertilizer and food production, and India’s gas-based energy transition.

Although the US suffered the least from the crisis, its high gas (petrol) and diesel prices and rising inflation indices heaped political pressure on Trump. On June 14, the US conceded all demands the Iranians had made consistently since April 6. A memorandum of understanding (MoU) codifying them became, in effect, the US’ surrender document. The Strait of Hormuz began to open, the Americans pulled back their blockade. Oil prices fell sharply, the rupee and stock market benefitted. But foreign investors continued to leave India.

Structural uncertainty in the global system became clear at this point. The Iranians refused to start negotiations on June 19 to turn the MoU into a work plan unless Israel stopped bombing Lebanon and withdrew its forces from southern Lebanon, as specified in the MoU.

Israel was and remains the wild card. Under its Orwellian conception of a ceasefire, it keeps killing Lebanese civilians relentlessly. Even Trump has criticised Israeli targeting of apartment buildings; “Too many people have been killed,” he said. His Vice President, J.D. Vance, has scolded Israel: “You can’t just kill your way out of solving every problem.” But Israel has disregarded US calls for disengaging. Indeed, Israeli Prime Minister Benjamin Netanyahu has threatened to “re-engage Iran militarily”. The US could of course, in a mother of political rewirings, halt critical military and financial support to Israel.

On June 20, Iran closed the Strait of Hormuz again, allowing passage mainly of its own tankers and Chinese-flagged ships. Iran is operating with the confidence that China is in its corner. The Chinese Foreign Ministry has reiterated: “China and Iran are comprehensive strategic partners.”

In the US view, the strait is open and oil is flowing, but commercial sources show that, after a brief increase, flows declined sharply. The US claims that Iranians have agreed to nuclear inspections; the Iranians deny it. Markets still place greater faith in US statements.

Meanwhile, to ease the energy crunch, countries are building new pipelines to bypass the Strait of Hormuz and are stepping up installation of renewable energy sources. Iranians have an incentive to accelerate their oil sales, more so with the US having lifted sanctions. Iran will also want to open the strait for toll revenues.

But renewed stability, however tenuous, will take months. About 1,000 ships stranded in the Persian Gulf must move; the nearly 9 per cent of oil refining capacity currently shuttered must reopen—and restarting badly damaged processing facilities could take years. Structural uncertainty, tolls, and higher freight and insurance costs will keep energy and petrochemical prices elevated. The LNG price is, even now, 50 per cent above its pre-war level. India’s balance of payments, its capital flows, and the rupee face daunting risks—and so do its people. Failure to rethink its approach to human capital, social justice, and energy and currency policy will undermine the country’s future.

An ill-fated war drags on. Thousands of Iranians and Lebanese civilians have been killed. Dozens of citizens of other nations, including several Indians, have died. Mothers in Minab will mourn and Indian workers will struggle this very hot summer. If the Lebanon-Israel impasse continues—and it is hard to see how it will be resolved—global recession, inflation, and high interest rates will wreak havoc in India. It could yet be a dark winter.

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

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