Why in News?

Just as global trade was stabilizing with shipping returning to the Red Sea, the Iran-Israel conflict has reignited fears of oil price surges and trade disruptions.

The Sensex dropped 573 points amid global market jitters. Experts caution that Iran could block the Strait of Hormuz — a vital route for 20–25% of global oil and key LNG exports from Qatar and the UAE, both crucial to India's energy needs.

What’s in Today’s Article?

• Impact of Iran-Israel Crisis on Indian Economy
• Red Sea Relief Short-Lived as Conflict Escalates

Impact of Iran-Israel Crisis on Indian Economy

• The escalating Israel-Iran conflict adds another layer of uncertainty, potentially affecting India's economic outlook in the coming months.
• Growth and Inflation at Risk
  • The escalating Iran-Israel conflict may create macroeconomic challenges for India, particularly due to its heavy reliance on oil imports.
  • A $10/bbl increase could lower India’s real GDP growth by 0.3 percentage points and raise consumer inflation by 0.4 points.
  • This threatens to reverse India’s recent inflation relief — retail inflation had eased to a 75-month low of 2.82% in May 2025, prompting a 50 basis point repo rate cut by the RBI.
  • As oil prices climb, Indian refiners require more dollars to purchase crude, increasing dollar demand, weakening the rupee, and inflating import costs — creating a feedback loop that worsens India’s current account deficit.
• Energy Supply Disruption Concerns Grow
  • Although energy infrastructure has not yet been directly targeted, risks remain high.
    • Iran reported no immediate damage to its refineries, which have a capacity of 2.8 million b/d (barrels/day).
  • Still, its crude exports may drop below 1.5 million b/d this month, as per S&P Global, adding further uncertainty to global energy markets.
• Broader Energy Price Spike Beyond Crude Oil
  • The ongoing Middle East conflict has triggered a surge not only in crude oil prices but also in other critical energy imports for India — including LPG, natural gas, petrochemicals, and fertilisers.
  • Any disruption could significantly impact India's rural economy and food inflation due to increased fertiliser costs.
• Rural and Agricultural Impact
  • Higher fertiliser and LPG prices threaten to burden rural households and reduce farm productivity.
  • This could reverse recent gains in food price stability and drive overall inflation upward.
• Manufacturing and Industrial Sectors Face Margin Pressures
  • Key sectors like aviation, chemicals, paints, tyres, cement, and logistics — all heavily reliant on petroleum-based inputs — are likely to see reduced profit margins due to rising raw material costs.
  • Crisil Ratings warns that the impact may differ across sectors depending on their oil dependency.
• Sectoral Divide: Winners and Losers
  • While upstream oil companies may benefit from higher crude prices, downstream refiners could see their margins squeezed.
  • Industries indirectly linked to crude oil — including packaging, plastic products, paints, and specialty chemicals — may pass on the cost to consumers or absorb it, affecting demand or profits respectively.
• Rising Costs for MSMEs and Consumers
  • If tensions escalate, transport fares and logistics costs may rise, hitting grocery supply chains and increasing costs for MSMEs.
  • These businesses may struggle with higher input costs and stagnant demand, leading to tighter margins.
• Gold Prices Soar Amid Uncertainty
  • Gold futures in India crossed ₹1 lakh per 10 grams, driven by a weak rupee and investor flight to safe assets.
  • Retail jewellery demand remains subdued due to high prices, though investment demand is expected to stay strong.

Red Sea Relief Short-Lived as Conflict Escalates

• In May, exporters were optimistic as conditions in the Red Sea improved and normal shipping resumed.
• However, with that confrontation now a reality, traders’ fears have materialised.
• For India — which imports over 80% of its crude — this poses significant macroeconomic risks.
• Freight Rates and Insurance Costs Set to Surge
  • With vessels likely reverting to the longer Cape of Good Hope route, shipping costs are expected to stay high.
  • The detour adds 10–14 days per voyage, straining vessel availability and driving up freight rates and insurance premiums.
• LNG Shipping Severely Impacted
  • LNG flows through the Suez Canal plummeted from 34.94 million tonnes in 2022 to just 4.15 million tonnes in 2024.
  • Meanwhile, LNG volumes via the Cape route surged over five-fold — from 11.76 million tonnes in 2022 to 59.37 million tonnes in 2024.
  • This shift underscores the growing logistical burden and potential energy supply risks for countries like India.