Lessons for India from the Disruption in Energy Supply due to the Iran War

Nazir Ahmad Mir

In the financial year 2026-27, India’s economy was seen as a promising one that would show consistent and fastest growth in the next financial year. Calling it the growth engine of South Asia, the World Bank said that India’s economy was the fastest growing in emerging markets. Speaking on the Economic Survey 2025-26, Chief Economic Advisor V.A. Anantha Nageswaran had said in January that “India has potential to reach a 7.5% growth rate on account of improved manufacturing and land reforms.”

No sooner was this positive projection of India’s growth being presented than it was punctured by the United States-Israel aggression against Iran on 28 February. As the World Bank report came after the war on Iran, it underscored that due to the impact of the war and closure of Strait of Hormuz, which would impact on India’s supply chain, the economy would likely grow by 6.6% in 2026-27, a decrease by .4%. The impact of a possible prolonged war can be detrimental to India’s economic growth.

The upshot is that India’s growth rate and prosperity are dependent on imported energy. India in the past used to import a lion’s share of its oil from Russia, Iraq, Saudi Arabia and the United Arab Emirates (UAE); all these options are impacted by the ongoing Russia-Ukraine war and the now the war in Iran. As the peace deal appears distant, the impact on global economy is likely to be severe.

Iran war and closure of the Strait of Hormuz

Whatever may have been the reasons for the US-Israel war on Iran, its first direct impact has been disruption in the global energy supply chain. It is a matter of fact that Iran had been warning that if attacked by the US and Israel, it would close the Strait of Hormuz, the waterways between the Persian Gulf and the Gulf of Oman through which over 20% of global seaborne oil trade and significant volumes of liquefied natural gas and fertilisers take place. Most of the energy supply via the strait goes to the Asian economies; about 80% oil imports pass through the Strait of Hormuz. Likewise, the Asian countries import a significant percentage of Liquefied Petroleum Gas (LPG), Liquefied Natural Gas (LNG) and fertilisers via the strait. Iran has made it clear that unless US removes blockade that it has imposed on Iranian ports. Few of Indian ships carrying oil has come under attack.

India is heavily dependent on energy imports for its growth, mainly in the manufacturing sector and domestic consumption. It is the third-largest consumer of energy, after the US and China. India imports 90% of LPG via the Strait of Hormuz to meet 60% of its LPG consumption. Furthermore, India imported 55-60% of the LNG supplies and over 40% of crude oil through the strait. Recently, Rs 37,500 crore coal gasification mission to strengthen India’s energy security has been approved, while the government has emphasised people to reduce consumption of fuel through online office and schools and not making unnecessary travel.

The closure of the Strait of Hormuz has disrupted India’s energy supply chain, hitting the consumers as the government is forcing the country to take measures to address the challenge. The prices of LPG cylinders have already been increased. As mentioned, not only is the growth rate going to be adversely impacted, but also meeting domestic demand and controlling inflation are going to be issues in the coming days, if the war is prolonged. With no clear signs when the war is going to end and the supply chain restored, uncertainty will impact the growth and inflation across the world, including India. When the war against Iran started to expand and last longer, India, for example, had to divert fuel from the manufacturing sector to meet the household demands. This will directly have an impact on exports, and thus on the country’s current account. Prime Minister Modi, speaking in the Parliament, said India has expanded its energy import sources from 27 countries to 41 countries over the past 11 years, thereby reducing dependence on any single region.

Adapting to Energy Crisis: India’s Options

There is a possibility that energy supply crises may keep recurring, impacting the global supply chain. Geopolitical conflicts, trade wars and attempts by oil-producing countries to control prices can disrupt energy supply chains from time to time. While deciding to launch the war against Iran, the US paid least attention to the possible economic fallout of its decision on the countries that depended on the region for energy supplies.

The war is affecting India’s energy supply chain and forcing the country to take measures like directing fuel from the industry sector to meet household demands, and to keep its impact on distribution and pricing of domestic LPG minimal. The government said in March, “We are committed to safeguarding our citizens from the impact of the conflict". Also, 13% of India’s total exports go to West Asia, and India received 38% of its total remittances from the region. Both have been affected by the war in the region.

Even within the US, voices are being raised about the war’s recklessness and the economic fallout. Now the priority has shifted from changing Iran’s behaviour and the government in the country to opening the Strait of Hormuz to restore the global energy supply chain. Not to mention that the likely impact of the strait's closure is uneven, with the US economy so far less impacted. The impact of the war on the US economy will shape Washington’s policy towards Iran. It is not concerned about the global impact of this crisis but it may be about its own.

For India, the impact has been double. In February, the US had asked New Delhi to phase out its oil imports from Russia which has been the cheapest source of import. Given India’s demands and its availability at a lower price, its oil imports from Russia had peaked in Fiscal Year 2025 with 38%, a manifold increase from 2% in 2021. Consequently, India’s oil imports from Russia fell to 20% in February. However, the US waived the restriction to allow countries to buy Russian oil from already loaded Russian tankers that were at sea to cushion the energy shortage that would have a spiralling effect on the global economy. This waiver was applicable till 16^th of May. According to media reports in May, India was importing at a record 2.3 million barrels a day of Russian oil, which may drop to 1.9 million barrels if no Russian oil is headed towards India. Though Moscow is eager to supply LNG and fertiliser to India, due to the US sanctions, Indian companies are not interested in striking a deal.

Even now, there are no clear signs whether the Iran war is going to end. And if yes, when? To deal with the crisis, it is important to come up with measures, like fuel saving, to manage the immediate shortage of oil and other energy sources.

Uncertainty in the energy supply chains not only leads to disruptions, like the ongoing shortage in oil and LPG supplies, but also impairs confidence in the long-term sustainability of economic growth. Sustainable growth and economy remain preferable and give more confidence to investors than growth bursts that are short-lived.

In the long term, to immunise the economy to external disruptions and uncertainty in global politics that affect the energy supply chain, India needs to work on measures that would help in reducing dependency on energy imports. A more viable and sustainable option is to invest in renewable energy, like solar energy and wind energy. Both these sources are abundant in nature and sustainable. India ranks third globally in Renewable Energy Installed Capacity India and has achieved a total non-fossil capacity addition of 55.3 GW during FY 2025–26. Utilising these sources may make India resilient to future shocks.  Also, overreliance on import of critical minerals like lithium, cobalt, and nickel may be subject to supply chain disruption. In an era when weaponising trade is becoming a hallmark of international politics, India needs to be careful while exploring new options. 

A better shield, therefore, will be a mix of various available options, rather than a complete switch to solar or wind energy, for example: using each possible option to the optimum, with the least dependence on their imports. That is utilising the domestic energy resources efficiently while not overusing them when there is availability of external sources. And whenever there is a disruption in the external energy supply chain, utilise diverse domestic sources efficiently in a more sustainable way by deploying measures to save fuel.