Six Ways the West Asia Conflict Is Showing in India’s Economy
New Delhi: Prime Minister Narendra Modi’s recent comparison of the US and Israel-initiated West Asia conflict with COVID-19 pandemic, saying “we will overcome this too”, has put a spotlight on the scale of economic stress building up even as the government continues to urge calm.
Despite its reassurances that all is well, the government has not been able to respond to the on-ground realities of the ordinary Indian. As a result, the West Asia crisis is testing India’s ability to handle the economic stress – on the oil shock, the fiscal hit, a possible migrant crisis, and the macroeconomic stress of it all.
Half a million day labourers have lost their jobs, say textile associations in Gujarat. All, as a result of the downstream impact of the West Asian war.
NHK World reports today that the textile industry has taken a big hit, with the South Gujarat Textile Processors Association saying that nearly half of all factories in Surat have halted operations because of the LPG shortage. "Even if this conflict stops tomorrow, it will take around six to 12 months to get back to normal," said Jitendra Vakharia, president of the association. "In the future, there will still be a shortage of raw materials and textiles. Owners will have to accept it."
Here are six ways the global crisis is impacting the Indian economy.
Manufacturing slowdown
Manufacturing sector activity in India slowed to a 45-month low in March, and a survey of private sector companies has attributed this to the impact of the conflict on costs, demand and new order levels, The Hindu has reported.
The HSBC India Manufacturing Purchasing Managers’ Index fell sharply from 56.9 in February to 53.9 in March 2026. This was the lowest reading since June 2022.
“Growth in India’s manufacturing industry took a step back in March as cost pressures, fierce competition, heightened market uncertainty, and the war in the Middle East all contributed to softer increases in new orders and output,” the report stated. “Firms also faced an intensification of cost pressures, the steepest since August 2022.”
A falling rupee
The conflict, which began on February 28 following the US-Israeli strikes on Iran, has caused the Indian rupee to fall to a record low of 95.21 per dollar (March 31), becoming Asia’s worst performer against the US dollar.
Meanwhile, India’s crude oil basket has hit $156.29 per barrel, the Reserve Bank of India has reportedly deployed more than $10 billion to stabilise the falling currency, GDP growth is projected to erode, and inflation has been projected to rise.
The rupee has been under strain for a while. And as if that was not enough, a Bloomberg report also warned that it could weaken to 100 per US dollar or beyond if the ongoing crisis persists for another fiscal year. A report by the Japanese bank MUFG also noted that the “vulnerable” rupee will continue to fall whether or not there is a de-escalation in West Asia.
Business analyst Andy Mukherjee has written today, that “Asia’s worst-performing currency over the past year weakened through a key psychological barrier of 95” vs the dollar. He writes that “the conflict in the Persian Gulf is the trigger for the unusual weakness, but the fragility [of the Rupee] is domestic”. The direct impact of this is on the average Indian household reliant on fuel, groceries, travel and other commodities.
GDP and inflation
On March 31, EY Economy Watch released an economic assessment which showed that India's real Gross Domestic Product (GDP) growth for the next fiscal could erode by around 1 percentage point, while retail inflation could rise by about 1.5 percentage points from their baseline estimates if the West Asia conflict persists.
According to the government’s own monthly economic review, India has warned that its growth forecast of about 7.4% for the year ending March 2027 faces “considerable downside” risk in light of these rising energy costs and supply‑chain disruptions.
Professor Deepanshu Mohan, writing for The Hindu, noted that since the conflict began, real wages have remained subdued, household liabilities have risen to roughly 41% of GDP, and private investment lags behind the state’s capex-led expansion.
The Asian Development Bank and Moody’s have pointed to large scale risks compounding India’s “structural” problems.
Forex reserves and revenue
At the same time, foreign exchange reserves have fallen from a peak of $728.49 billion in February to below $700 billion, while foreign portfolio outflows of over $8 billion have added pressure on the rupee.
Currently, India’s revenue structure is more dependent on transaction-based taxes such as GST, rather than income taxes, which become volatile in an unstable global environment, where inflation risks rise and consumption slows.
The pattern is reminiscent of pandemic years, he said, when falling GST collections forced the Union government to borrow over Rs 2.69 lakh crore between 2020 and 2022 to compensate states.
Further, the conflict has also disrupted a region central to India’s remittance flows, a vital and stable source of foreign exchange.
As of FY 2024-25, around 38% of India’s remittances came from Gulf countries, where lakhs of Indian workers are employed in sectors sensitive to economic disruptions, financing a significant portion of the country’s trade deficit.
If the situation persists, it would disrupt jobs and reduce incomes in the region, and directly affect the money sent back home. Any further shock to the economy, thus, is bound to push the Indian middle class, the world’s most indebted group, into more debt.
Oil shock
The conflict blocked India’s access to shipping routes passing through the Strait of Hormuz with the government taking two weeks to even acknowledge that it was a "matter of some concern".
Disruptions to oil and gas flows have already shown up in India’s import data and domestic shortages, even as the government has maintained that it has rerouted to alternate import channels.
Praising government efforts, oil and petroleum minister Hardeep Singh Puri, in a post, said that while other countries were taking drastic fuel conservation measures such as odd-even rule, four-day work weeks, school and office closures and increasing fuel prices by 20-30%, “India remains an oasis of energy security, availability and affordability”.
Yet, queues have been getting longer at petrol pumps across the country, and the scarcity of Liquefied Petroleum Gas (LPG) cylinders has affected restaurants, hotels, colleges, forcing them to shut shops, use diesel burners and induction cooktops, shift to online mode, and rely on food delivery platforms.
Farmers, particularly those exporting rice and banana, mainly in Gujarat and Maharashtra, have also been affected, while the rising raw material costs, driven by high crude prices and shortages, have caused production cuts in sectors like textiles, paints, building materials and others that depend on petrochemical supply.
On the other hand, while the government maintains that domestic supplies are adequate, it has reintroduced kerosene under the public distribution system as an ad hoc measure, relaxing storage and licensing in the 21 “kerosene-free” states and Union territories.
The move reverses, even if temporarily, the Pradhan Mantri Ujjwala Yojana (PMUY) which was specifically designed to replace traditional, polluting cooking fuels like firewood, coal and kerosene with clean LPG.
While it cut central excise duties on petrol and diesel for domestic consumption to contain inflation, the government decided to increase the price of APM gas – from what is known as legacy fields – from USD 6.75 to USD 7 per MMBtu.
This will raise the costs of services such as CNG for vehicles, popular in taxis; piped gas for homes, fertiliser production and power generation. The government was also set to raise ATF prices, which would impact airfares, but it rolled back the decision keeping consumer interests in mind.
Migrant crisis, Covid redux?
Finally, the human impact of the war on Iran is also becoming visible, with migrant workers beginning to leave cities amid fuel shortages – reminding of the exodus seen during the Covid-19 lockdowns.
Deepal Trivedie has reported for The Wire on how many factory owners in Gujarat have asked migrant workers to pack up and leave for their hometowns. Some workers are also leaving on their own as they are unable to procure cooking gas cylinders. The impact is most visible in sectors needing industrial gas supply.
If left unaddressed, analysts have warned, the situation could lead to an exodus, posing challenges for Surat’s textiles, diamond and other industries reliant on migrant labour.
The Indian Express reported that migrant workers in Mumbai, too, were returning home amid the LPG crisis. Lacking KYC documents, they relied on black-market cylinders whose prices spiked amid the crisis. With food expenses rising and savings depleting, many were left with little choice.
Whether it is the paucity of crude or gas for industries or the LPG crisis in homes, both point to rising cost-of-living pressures as the West Asia conflict continues. The question then returns to the government and its ability to absorb shocks keeping its spending and borrowing in control. However, if the pattern persists, wider economic disruptions remain a possibility.
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