Middle East Crisis: Long-Term Policy Changes India Needs

Radiating from the Red Sea to the Strait of Hormuz, the conflict is unnerving global oil markets and snarling shipping lanes. Oil prices surged by 9 per cent on Friday, before Sunday’s news that Israel has targeted Iran’s South Pars Gas fields, and can be expected to climb to new heights in the week ahead.

With Brent Crude edging up from US$ 62.61 a fortnight back, to US$ 74.23 on Friday, the tremors are being felt far beyond the region. For India — the world’s third-largest oil importer and an export-driven economy — the turbulence poses both immediate shocks and strategic challenges, and it needs to recalibrate its strategies to continue navigating its rise as an economic powerhouse.

Higher Energy Prices & Battered Exporters

In a scenario involving blockades in the Strait of Hormuz, which handles a fifth of the world’s oil supplies, prices could go above US$ 100 per barrel, Goldman Sachs said. “With the Houthis in the picture and Iran sure to retaliate to hits on its nuclear and oil facilities, this is looking dangerously more likely,” said Petroleum Ministry officials who monitor global prices.

However, the most visible impact of the war in the Middle East has been, and will be, on shipping. Rising risks in the Red Sea and Persian Gulf have already driven up freight charges and marine insurance premiums, especially for tankers and cargo vessels navigating the Suez Canal and the Strait of Hormuz — arteries through which much of India’s trade flows.

The recent tit-for-tat attacks by Israel and Iran are expected to raise already elevated shipping costs by another 20-25 per cent over the next few weeks, according to shipping analysts.

Missile strikes and maritime stand-offs have prompted major shipping firms to divert vessels around the Cape of Good Hope, adding time and cost to delivery schedules.

The resulting delays are battering Indian exporters. Sectors that rely on lean margins and rapid transit — like textiles, perishables, and light manufacturing — are especially exposed. While large corporations may hedge their risks, smaller firms are left adrift.

Said Saibal Ghosh, CEO of SSP Pvt Ltd, a medium-sized machinery manufacturer, “Our costs for shipping have been going up since November 2023, and we have to factor in even higher costs for the current year given the renewed conflict.”

Plugging the Barrel

For India, energy security is now a front-burner issue. The country’s oil basket cost, on average, was US$ 66.11 a barrel for June, but this is likely to edge up with the war in the Middle East.

“The government’s immediate priority must be to secure long-term oil supply agreements with countries less entangled in the current fray. Diversification — geographically and contractually — is vital,” said senior analysts working with the Petroleum Planning & Analysis Cell of the Government of India. Deals with Brazil, Russia, and African producers like Nigeria and Angola could provide some insulation from the Middle Eastern volatility.

In a troubling new turn for the Middle East, Iran has partially suspended production at South Pars, the world’s largest gas field, after a fire broke out at the site on Saturday.

Tasnim, a semi-official Iranian news agency, attributed the blaze to an Israeli strike — marking what appears to be the first direct attack on Iran’s energy infrastructure since hostilities between the two countries escalated.

South Pars, situated offshore in Iran’s southern Bushehr province, is vital to the country’s energy economy, supplying the majority of its natural gas. The interruption in production comes amid mounting fears that the conflict could expand into a broader regional confrontation — with serious implications for global energy markets.

Officials tasked with India’s crude procurement said that India, which has diversified its oil sources by increasing imports from the United States, “will also look to larger procurement from there and perhaps even from Canada too, as that country has changed its policy stance towards us.”

However, they point out that these arrangements should not be limited to mere procurement. “Equity investments in upstream assets, joint ventures in refining, and pricing agreements pegged to less volatile benchmarks would offer additional ballast,” officials said.

India’s strategic petroleum reserves, long touted but rarely optimised, could also be revisited. Currently, the existing underground strategic storage facilities have a combined capacity of 5.33 million metric tonnes (MMT) of crude oil, and this is expected to be raised to nearly 13 MMT.

Buying low and storing for a rainy day has never looked more prudent than now.

Trade Winds Shift

India’s export machine, already battling weak global demand, now faces higher transport costs and insurance hurdles. The cumulative value of merchandise exports during FY 2024-25 (April-March) was US$ 437.42 billion, representing an increase of less than 0.1 per cent.

The government would do well to offer targeted support — perhaps in the form of a temporary freight equalisation scheme or subsidised insurance pools for small and medium exporters, who have been the main engines of growth, say trade experts like Professor Biswajit Dhar, Council for Social Development, New Delhi. 

Such measures may help firms stay afloat without distorting the market too heavily. However, in the longer term, India should nurture its maritime insurance capacity, reducing reliance on jittery foreign underwriters who tend to hike premiums at the first sign of trouble.

Opportunity in Disarray

Not all sectors are suffering. Demand for pharmaceuticals, processed foods, and consumer electronics tends to remain stable — or even rise — during times of global disruption caused by events such as wars.

These are key sectors where Indian exporters have comparative strength. India’s electronic exports have been on an upswing, rising by 32 per cent to US$ 38.58 billion in 2024-25, while pharmaceuticals have done well once again, increasing by 9.4 per cent to over US$ 30 billion. Redirecting trade flows toward relatively stable markets in Africa, Southeast Asia, and Latin America could help buffer the blow.

Officials say “information is the key in these sectors”. A centralised export intelligence unit to track shifting demand and flag emerging opportunities with hand-holding by Indian embassies and consulates in these countries could help firms pivot more quickly.

Trade diplomacy, particularly with Gulf states like the UAE and Saudi Arabia, should also be intensified. These countries are not just energy suppliers; they are vital logistics hubs in an increasingly fragmented world and could be India’s conduits for greater market access.

Rerouting the Map

India must also think beyond its traditional trade routes. The International North-South Transport Corridor (INSTC) — a long-discussed but underutilised route linking India to Central Asia and Europe via Iran and Russia — deserves fresh investment. So do eastward maritime corridors linking India to Southeast Asia and the Pacific.

Domestically, India would benefit from accelerating its inland logistics strategy. More efficient railways, expanded inland waterways, and resilient hinterland ports could reduce the country’s exposure to global maritime choke points.

Forecast: Continued Instability

Geopolitical shocks are no longer an abnormal, one-off occurrence. In the days to come, they will be the norm as the world’s power structure fragments and the dominance of the US weakens over markets.

For India, whose economic rise is built not only on the strength of its domestic market but also on global trade and imported energy, the new normal may well be one of persistent uncertainty. Ad hoc fixes will no longer suffice.

What is needed is a durable, strategic recalibration of India’s trade, foreign, and military policies — one that treats war not as a deviation but as part of the operating environment in a tougher world order.