Arun Kumar
The war in West Asia has produced a supply shock, the impact of which on the economy, and especially the unorganised sector, is not getting captured. The official data and reality are diverging.
An economic shock due to the war in West Asia has again hit India after the Covid shock in 2020. And, the marginalised sections are once again the worst affected. Due to their precarious situation, some of them are migrating back to their villages.
The hope of an early end to the war is fading with the failure of the ceasefire talks in Pakistan. The key demands made by the two sides on each other were irreconcilable. This gap between the 15 points put forward by the US and the 10 point demand from Iran was substantial – a result of the fundamental differences in the objectives sought to be achieved by the two sides. The demands made by the US were aimed at a permanent subjugation of Iran while Iran was asserting the preservation of its sovereignty.
The US thought that its pummeling of Iran since February 28 would bring the Iranian rulers to their knees. However, despite being militarily much weaker, Iran retaliated against attacks on its infrastructure by attacking US and Israeli targets across West Asia. The USA’s expectation of an early end of the war was also belied by the unexpected resilience shown by the Iranians.
Now that the negotiations have broken down, will the fighting resume or will the ceasefire hold for 2 weeks? Trump has announced blockade the Strait of Hormuz. But, it is already largely blockaded by Iran. The US believes, Iran would not be able to sell its crude oil and therefore lose revenue that it needs to fight the war. But, 90% of Iranian crude went to China and that can continue through the land route and so can the supplies to Iran from China.
Trump has also threatened 50% tariff on China if it helps Iran. But China has not bothered about US threats of tariffs till now and too much is at stake for it to listen to Trump’s threats now.
It is clear that the Strait of Hormuz will remain blocked for now even if the war between Iran and US and Israel does not restart. There is a strong possibility of war restarting given Israel’s continuing attack on Hezbollah in Lebanon. Iran cannot be seen to be abandoning its ally and may have to resume its attacks on Israel. That would bring the ceasefire to an end.
All pointers are towards the persistence of energy shortage for India. As stocks of crude and petroleum products get exhausted, the situation would worsen and it is the marginalised in India who would face the worst impact given that they hardly have any savings to weather a crisis.
The precarious situation of the marginalised is illustrated by the plight of my masseur. He and some of his neighbours went back to their villages because they were neither able to prepare meals at home nor buy it from the market. The gas cylinder they used to buy for Rs 1,200 shot up to Rs.3,000 (if available) in black.
The price of the 5 kg cylinder they used to fill at Rs.100 per kg increased to Rs.500 per kg. The landlord does not allow them to use an electric heater. The price of tea and dal and chapatti at the local dhaba, increased by 50%, when available. So, five of them returned to their village, spending Rs 3,000 for bus fare.
His children couldn’t attend school. And, there is little work for him in the village. But he thinks he will be able to get wood to burn and vegetables from the fields so as to have cooked food. But, the family has slipped below the poverty line for now and data does not capture that.
The price rise he faces, the loss of work and income and children’s education disrupted will not be captured in the national statistics. As the war persists, energy shortage will aggravate and agriculture will take a hit, worsening his plight as rural wages decline. Even if the war ends soon, given the damage to the oil and gas fields in West Asia, shortage of energy will persist for a while. Oman has said, it may take up to 5 years to repair the damaged gas fields.
Supply shock
The energy shortage can be partly mitigated by resort to alternative sources. The non-West Asian sources – USA, Venezuela, Russia, Norway, etc. – could increase production of crude oil and gas. Strategic reserves will be released by nations that maintain such a reserve. The price rise will lead to a drop in demand for oil and gas. People will travel less and use more electricity, coal, wood, etc. But all this will not make up for the loss of 20% crude and gas that comes from West Asia. The longer the war continues and infrastructure gets attacked, the longer it will take for supplies to recover and worse the situation will become.
So, the world faces a major supply shock due to shortage of energy. It also happened in 1973, during the 20 days Yom Kippur war. But, compared to then, oil and gas have become far more important energy sources so the shock is greater.
Shortage of energy impacts production, distribution and consumption. For instance, hotels and restaurants were immediately hit because they could not cook their full menu. That also impacted entertainment. Gas shortage hit production of ceramic tiles and paint shops of car manufacturers. So, finishing of cars got impacted. In short, shortages spread from one industry to another, resulting in a general price rise and reduction in production which impacts employment and incomes, thereby affecting livelihood and living standards.
Crude oil is not just energy. When it is refined, many chemicals are obtained that are used in the production of other items, like, fertilisers, synthetics, pharmaceuticals and plastics. Decline in fertiliser production impacts agriculture. Shortage of synthetics impacts textiles. And, so on. Helium is a byproduct and its shortage will hit production of chips. It is also used in propulsion of space crafts. So, specific sectors are getting impacted more than general production due to shortage of energy.
Aluminum and fertilisers are major exports from West Asia. Not only their production is hit due to bombing but they cannot come out due to freeze in shipping in the Gulf. India’s export to other countries via UAE has been impacted. Also, there are almost 10 million Indians working in West Asia. They are being adversely impacted and that will impact their remittances to India.
Other macro aspects
As global crude and gas prices have risen, India’s import bill has increased. For every one dollar rise in crude price, a billion dollar more will be paid annually. Exports to West Asia (about 16% of India’s exports) will decline with transportation to the region frozen. As general prices rise due to increase in energy prices, global demand will fall and impact India’s exports. The benefit of cheaper rupee will be overwhelmed by this. Thus, India’s trade balance will deteriorate. The beneficiaries will be energy exporters like the US and Russia.
As the trade balance deteriorates, the rupee will further weaken making imported goods more expensive, fueling further inflation. And, foreign capital will find its earnings in dollar terms declining. So, more of it will flow out, further hitting India’s balance of payment. Non-resident Indians will also pull out their deposits. Exporters will delay bringing back their receipts and importers will increase their purchases. All these factors and the decline in remittances will further impact the balance of payment and in a vicious cycle lead to depreciation of rupee.
Effectively, the impact on prices, output, employment and income will come from multiple channels. The rise in prices and decline in output is pushing the world towards a stagflationary situation. If the war persists for a few more months, uncertainty would increase and recovery would be more difficult. That would hit the financial markets even harder and investment would be impacted even though production of military hardware would go up substantially. That would herald recessionary conditions.
The marginalised
Stagflationary conditions further marginalise the marginalised. They face a double loss of incomes, a) due to reduced employment and b) their income being eroded by inflation. Even when the inflation rate declines, the prices continue to rise and the purchasing power of the rupee keeps declining. Their condition deteriorates since they have little bargaining power to obtain higher wages, especially when unemployment is rising and more people are looking for work.
The official price and inflation data will not capture the actual price being paid by consumers facing black marketing. The official data will take the price of a gas cylinder to be Rs 950 and not Rs 3000. The higher price the poor are paying at the dhaba or to the street vendor is not captured in the Consumer Price Index. Further, as the price of essentials rises, the marginalised are forced to cut back on other consumption. Thus, their consumption basket narrows and the inflation they face becomes higher than what the official data suggests.
The recent Special Intensive Revision (SIR) has forced people to rush to their villages and home towns spending a lot of money not only on travel but also on bribing to obtain the relevant papers.
The marginalised also do not get their Aadhar easily and being illiterate they get cheated by agents. My masseur had to spend Rs 6,000 to get his son’s Aadhar card made, 6 years back. Now for his daughter’s admission to a government school he needs an Aadhar card. He has been running around for this for the last 6 months and has already spent over Rs.3,000. The private school costs a lot and he cannot afford that. Clearly, digitisation is proving to be expensive to the marginalised and this is not captured in any monthly consumption expenditure survey.
The unorganised sector producers are at the tail end of the production structures. Shortages of inputs are hitting them more than the organised sector which has deep pockets. They are paying higher price and cannot afford to buy enough so that their production is either declining or even stopping. They are retrenching workers who are anyway poorly paid and can ill afford higher food costs. So, they are forced to migrate to their villages. Both producers and workers are hit by the ongoing supply shock.
The organised sector is better placed to provide their workers food from their canteens. They can also pay higher price for their raw material since they can pass on the higher cost to the consumers. Further, the small sector that supplies inputs to the large and medium sector is facing delays in getting payments. That adds to their crisis of shortage of working capital and inability to continue production. And, that will also make it difficult to restart production when the situation normalises.
This decline in output of the unorganised sector will not get captured in official data. Because the quarterly output of the economy is largely estimated using data from the organised sector. This is illustrated by the data for 2016-17, the demonetisation year. The economy had visibly tanked but the official Gross Domestic Product (GDP) recorded its fastest growth of the 2010s. Similarly, during the sudden lockdown due to the Covid pandemic, the decline in output was estimated to be far less than it actually was.
Now too, while the public is facing shortage of cooking gas, government claims the situation is normal. When industry after industry is reporting slowdown, the government claims that the situation is under control. No doubt, the methodology of estimation of GDP has recently undergone changes, but the structural problem of estimation of the output of the unorganised sector remains.
In brief, during an economic shock, the impact on the marginalised sections is masked by how output and prices are estimated. This is again happening when the war in West Asia has produced a supply shock, the impact of which on the economy and especially the unorganised sector is not getting captured. The official data and reality are diverging.
About the Contributor
Arun Kumar is a retired professor of economics at JNU and was the Malcolm S. Adiseshiah chair professor at the Institute of Social Sciences, New Delhi. He is the author of Demonetization and the Black Economy, Penguin (India).
This article was first published in The Wire as West Asia Crisis: How the Poor Fare in an Economic Shock Remains Masked, on April 15, 2026.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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Acknowledgement: This article was posted by Pallavi Lad, a Research and Editorial Intern at IMPRI.
