ARUN KUMAR
India will be particularly hit hard.
War in West Asia is into its fourth week. In its latest phase, US President Donald Trump has given Iran five days to open the Strait of Hormuz, threatening to otherwise bomb its entire power generation capacity and cripple it. Earlier, he had given 48 hours. Iran has countered by saying it will attack the infrastructure of the Gulf States helping USA, including the desalination plants. Trump has also said that talks are going on but Iran has denied that and said that this is only a ploy to buy time to attack.
Iranian Resilience
So, it is unclear how much longer the war will last. Gulf countries were threatening to attack Iranian assets in retaliation of the attack on their assets. Iran has not backed down in spite of these threats and in spite of the severe beating it has taken. It has clarified that it is attacking those places from where it is being attacked by the US.
Iran seems to have planned well and is continuing to retaliate strategically where it hurts the world economy. It has managed to degrade the defences of the US and Israel so that the few missiles and drones it is launching are getting through. US is sending and/or preparing to send more troops and THAD batteries to the war theatre. The US has accepted that the Iranian regime is resilient and to minimise the global economic impact, it has removed sanctions from Russian oil on high seas. And, recently done the same for Iranian oil. Also, Trump has promised that Israel will not attack Iranian oil assets anymore but there is no guarantee of that.
Israel is acting unilaterally to kill Iranian leaders and attack its oil assets. It started the war suddenly to derail the negotiations between the US and Iran which were almost finalised. It forced the US to join in the war. It wants to keep the war going so as to pummel Iran to dust so that it becomes the predominant and unchallenged power in West Asia. The US President claimed he did not know of the latest attacks on Iran’s South Pars gas field.
President Trump is under pressure from his closest allies to stop the war. He asked them to send ships to the Gulf but they have been reluctant and said this is not their war. But, they do want the war to stop given the severe impact it is having on the world economy. Will President Trump claim victory and retreat, in spite of Israeli pressures? That is what the world leaders not directly involved in the war are hoping for.Certainly, India needs the war to end at the earliest, given its likely impact on the economy.
Why stabilisation fund?
The Indian government, has now changed its stance. Till the prime minister spoke in parliament, officials and spokespersons were saying all is under control. They accused critics of being alarmists. But, worry was evident. It suddenly announced the creation of a Rs 1 lakh crore ‘Economic Stabilization Fund’. This is most unusual. It has not been done before during crisis times – whether during the pandemic or the global financial crisis of 2008 or earlier. Did the government expected the economic situation to worsen, more than even during the pandemic?
Why create such a fund? The government can always spend and get approval via ‘Supplementary Demand for Grants’. For instance, under it, for 2025-26, the current financial year, it has got an approval of additional expenditure of Rs.2.81 lakh crore and earlier it had got Rs.1.32 lakh crore approved. So, for the year as a whole, it has approval for an additional Rs.4.13 lakh crore.
What will this Stabilisation Fund be used for? For the current year, it has got Rs.57,381 crore approved on March 13th. So, is it going to spend this amount in 14 days; and on what? Nothing is mentioned. Additional expenditure on defence or rural employment, etc., are possibilities, but there is no clarity about it.
Is it going to be used to subsidise those industries who are losing due to the war? Like, the exporters whose material is stuck at the ports? Will it subsidise the import of petroleum goods whose prices have been shooting up? If petro prices keep rising, general inflation would aggravate and impact output as well. Is that why petro retail prices have not been raised or it is due to the approaching assembly elections?
Impact
India will be particularly hit hard given that it is importing 85% of its crude oil and 50% of liquified natural gas (LNG). It will not only have to buy more expensive oil and gas from non-Gulf sources at the current high prices, it will not be able to get what it needs given the global shortage of petroleum products.
So, with India getting less than what it currently needs, there will be shortages which will trigger speculative activity and black marketing – as is already seen in the case of LPG. Government claims there is no shortage while consumers are running around to get cylinders filled at exorbitant prices and standing in long queues – reminding everyone of demonetisation. Some are returning to the villages – like during the pandemic – since they are unable to cook or get meals.
At the start of the war, officials said that India has reserves of finished products and crude to last for seven to eight weeks. Already three weeks have passed and supplies have been restricted, so these reserves must be declining. India is a big exporter of petroleum products – exporting 20 to 30% of its annual production. In spite of the brewing crisis, exports have not been restricted. So, the reduced imports must be causing inventories in India to decline even faster. Private refiners are the big exporters and they must be making huge profits, given the price rise.
There will be other impacts also. Crude oil is used for production of many other chemical products and their shortage will lead to impact on many industries, like, Sulphur, synthetics, fertilisers, plastics, pharmaceuticals and lubricants. There will be less of tourism, entertainment, eating out and travel. Shipping costs will rise due to higher insurance and longer travel times. Supply bottlenecks will manifest themselves and imported goods prices will rise. The result will be general price rise and impact on demand which will impact output and employment.
Remittances will decline as the 10 million workers in West Asia are impacted. Their employment and incomes will be affected. India’s exports to West Asia will be hit. So, export earnings will decline while the import bill will rise due to price increase. This will worsen the balance of payments and the rupee will weaken. Foreign capital will go out of the country since its dollar return will decline or even turn negative, that will further weaken the rupee. Indian investment will also slow down given the rising uncertainty. All these factors will further impact output.
So, output and prices will be impacted through multiple channels. Of course, the extent of the impact will depend on how long the war lasts. The attack on oil assets by both sides will mean slow recovery after the war ends. Qatar has already said that it could take several years to repair the damage already inflicted.
What can India do?
The economic implications are arising from supply shock. The result is likely to be global stagflation and even possible recession if the war lasts long. Shortages will aggravate over time. The role of the Central Bank will be limited. The government will have to manage shortages and it will have to give support to the marginalised sections who will lose employment and face inflation.
While initially it was all right to continue exports, the time has come to stop exports of petroleum products and preserve their stocks. Exports to neighbours like Bangladesh and Sri Lanka may have to be permitted given the dire situation there. This will help build relations with neighbours. Belt tightening will have to be practiced with rationing as shortages aggravate. Trade will have to be kept on a tight leash to prevent hoarding and black marketing.
Use of alternative energy sources will have to be encouraged as well. Energy intensive production will have to be reduced to conserve resources. Unnecessary consumption will have to be curtailed through fiscal means. Use of public transport will have to be prioritised over private vehicles. Now that summer months are approaching, the use of air conditioning will rise. Maintaining of higher temperatures will have to be mandated.
Diplomacy will have to play a role. India, along with other G20 countries, will have to work towards ending the war. For that India would have to return to a more neutral global position. It has been moving closer to the US and Israel. While Iran’s actions have been criticised, those of Israel and the US have not been even though they started the war. We need to balance our relations with Russia and the US.
Will President Trump, a transactional person, looking for his gains, modify his stand under pressure from world leaders? He has said that with Venezuela under his wings and possibly Iran also coming under US influence, US would dominate the energy market. Such sentiments have to be tempered. Would the impact of the war on the US itself lead Trump to moderate his stand given the impending mid-term elections in November? What would get him out of the grip of Netanyahu who has his own disruptive agenda? Clearly there are too many moving parts to quickly sort out the crisis facing the world, but one can hope for the best while preparing for the worst.
Arun Kumar is a retired professor of economics at JNU and the author of Black Economy in India, published in 1999, 2002 and 2017.
The article was first published in THE WIRE as What are India’s Limited Options in This War? on February 24, 2026.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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Acknowledgment: This article was posted by R.Tejaswini, a Research and Editorial Intern at IMPRI.
