Why India should be concerned: Rising Israel-Iran tensions threaten energy security and trade, warns GTRI

The Global Trade Research Initiative (GTRI), in a recent report, advised the Indian government to review its energy risk scenarios, diversify crude oil sourcing, and ensure adequate strategic oil reserves amid the escalating tensions between Israel and Iran.

Although India is not directly involved in the Israel-Iran conflict, the think tank has warned that the country cannot afford complacency given the country's high dependence on energy imports and West Asia trade routes. It has further urged the government to ensure the country has sufficient oil reserves, "India, though not a party to the conflict, cannot afford complacency. The government must urgently review energy risk scenarios, diversify crude sourcing, and ensure strategic reserves are sufficient", it stated.

India’s Energy Dependence

India imports over 80 per cent of its energy needs. Additionally, two-thirds of its crude oil and half of its liquefied natural gas (LNG) imports go through the Strait of Hormuz. This critical chokepoint, which has the width of only 21 miles at its narrowest, is responsible for nearly one-fifth of the world’s oil trade. With Iran now threatening to block the Strait, India's energy security is under serious threat.

GTRI has also highlighted that about 30 per cent of India’s westbound exports to Europe, North Africa, and the U.S. East Coast also pass through the Bab el-Mandeb Strait, which is now at risk following the ongoing conflict. Any disruption on this route, would result in ships rerouting around the Cape of Good Hope, adding at least two extra weeks to transit times and potentially increasing freight costs. This could also affect the exports of engineering goods, textiles, and chemicals, and raise costs of vital imports.

Economic Impacts: Inflation and Fiscal Strain

Disruptions in the oil supply routes could potentially result in a sharp rise in oil prices, insurance premiums, and shipping charges. GTRI warned that this rise may lead to fuel inflation, further weakening the rupee, and additionally putting straining on government’s financial planning.

The situation is concerning for India since it has significant trade links with both of the two nations. In FY25, India exported goods worth about $1.24 billion to Iran and imported $441.9 million. As far as trade with Israel is concerned, it included about $2.15 billion in exports and $1.61 billion in imports. While these figures are significant, the broader concern lies in India's reliance on West Asia for energy.

On June 13, Israel launched it's offensive 'Operation Rising Lion,' which involved over 200 aircraft and drones targeting the Iranian military and nuclear facilities. In retaliation, Iran fired more than 150 ballistic missiles and drones at Israeli cities, including capital Tel Aviv and Jerusalem. Diplomatic talks between the U.S. and Iran have since collapsed, putting additional pressure on the regional financial markets