A convergence of global shocks is placing the Indian economy under unusual strain. Renewed trade protectionism, tightening global liquidity, and a deepening energy crisis in West Asia are together pushing India towards a prolonged period of macroeconomic stress.
The first shock stems from the protectionist turn initiated by President Trump. Elevated tariffs and persistent trade tensions have disrupted global supply chains and dampened export demand. For India, the effects are already visible across key sectors—food processing, textiles, pharmaceuticals, engineering goods and industrial intermediates—where exports are stagnating even as costs rise. Prolonged uncertainty has weakened investment sentiment and constrained firms integrated into global value chains. As these employment-intensive sectors slow, the impact is feeding into weaker job creation and rising labour market stress.
The second shock is financial, marking the end of an era of ultra-low interest rates in Japan that long channelled cheap capital into emerging markets, including India. For decades, near-zero Japanese rates underpinned abundant global liquidity, enabling investors to borrow cheaply in yen and deploy funds in higher-yielding assets across emerging economies and equity markets.
Also Read |Indian economy at risk if Gulf conflict continues: Moody's Analytics
That cycle is now reversing. As the Bank of Japan has raised interest rates to around 0.75 per cent, the economics of the “yen carry trade” have shifted. Higher borrowing costs and rising currency risks are prompting investors to unwind leveraged positions and repatriate capital. India has felt this acutely, with foreign portfolio investors turning sustained sellers and withdrawing roughly $5–6 billion in the first half of March alone—one of the sharpest episodes of outflows in recent periods.
Equity markets, further pressured by developments in West Asia, have responded accordingly: the Sensex has fallen from its late-2025 peak of around 86,056 to nearly 74,207, while the Nifty has declined from about 26,310 to just above 23,002 as of 19 March 2026, reportedly wiping the wealth of ?34 lakh crore. These corrections are not merely cyclical fluctuations; they reflect a deeper reassessment of risk amid tightening global liquidity. For some time, equity markets have been driven more by liquidity and speculative positioning than by underlying economic fundamentals. The recent correction reflects a partial unwinding of these excesses, alongside a broader tightening of financial conditions.
The third—and most immediate—shock is the surge in energy prices triggered by the war on Iran and the resulting instability across the Gulf, with immediate and far-reaching consequences. India imports roughly 88 per cent of its crude oil needs—around 5.5 million barrels per day—with an annual import bill of $137 billion at pre-crisis prices in FY 25. Nearly 40% of these imports transit through Hormuz. Oil prices spiked to $120 per barrel, and the risk of further escalation rose, with Iran warning that prices could rise towards $200 per barrel if disruptions in the Gulf deepen.
Also Read |India’s limited oil buffers, reliance on subsidies heighten risks from Middle East conflict, Moody’s warns
India imports over 25 million tonnes of liquefied natural gas (LNG) annually, used for power generation, fertiliser production, and as an industrial feedstock, with around 40–45 per cent sourced from Qatar and other Gulf suppliers via the Strait of Hormuz. Dependence is even more pronounced in household energy. Nearly 90 per cent of liquefied petroleum gas (LPG)—widely used for cooking and small-scale industry—is imported from the Gulf region. This makes household energy costs highly sensitive to supply disruptions and price volatility in West Asia, with immediate implications for inflation and soaring household budgets.
Beyond crude, India also imports refined petroleum products—about 1.1 million barrels per day—from Gulf suppliers, including diesel, petrol, jet fuel, and naphtha.
These dependencies amplify the shock across households, industry and transport. Agriculture is equally exposed: India imports 8–9 million tonnes of urea and 6–7 million tonnes of DAP (around 60 per cent of its requirement), leaving farm output vulnerable to supply disruptions, rising costs and food inflation.
External vulnerabilities extend beyond energy. The Gulf—home to nearly 10 million Indians—accounts for about 38 per cent of remittances, roughly $45 billion annually. Any slowdown there could weaken inflows and household consumption. Trade linkages amplify the risk: India exports around $50 billion to the region, with sectors such as gems, food and engineering goods particularly exposed. Disruptions are further amplified by the vulnerability inherent in the United Arab Emirates’ role as a regional re-export hub. The danger lies not in any single shock, but in their interaction. Trade disruptions weaken exports just as capital outflows tighten financial conditions. Energy price spikes raise inflation while depressing consumption.
External demand softens even as domestic costs rise. Each pressure reinforces the others, creating a feedback loop that could prolong economic stress. Irrespective of the war's duration or outcome, its impact is structural and protracted. This is underscored by statements from Qatar’s energy minister that rebuilding gas infrastructure—roughly 17 per cent of which has been damaged—could cost about $26 billion and take up to five years. Similar timelines are likely to apply to other affected energy assets across the region. More broadly, irrespective of the war’s outcome, the security and economic architecture of Gulf Cooperation Council states is likely to come under renewed scrutiny. Such a scenario will introduce further uncertainty into regional energy markets.
Together, these shocks risk stagflation—where rising prices coincide with slowing growth and weakening employment—leaving policymakers caught between inflation control and supporting demand. For policymakers, the task is to prevent these shocks from crystallising into a sustained downturn. This calls for a recalibration of economic, monetary and fiscal strategy. The challenges are manifold: managing inflation without stifling growth, safeguarding external balances through stable trade and capital flows, ensuring energy and fertiliser security, and maintaining adequate liquidity in financial markets. Strengthening supply chain resilience, diversifying energy and trade linkages, accelerating time-bound capital expenditure, and renewing the focus on research and development should be central to the response. For businesses, the imperative is to adapt to a world of higher volatility, fragmented trade and costlier capital. Leveraging FTAs, strengthening intellectual property (IP) capabilities, and upgrading quality and standards will be key to capturing shifting market opportunities. In this new era of overlapping shocks, resilience—not just growth—will define economic success.
( Dr. Bhaskar is a former Ambassador and Economist. He is a specialist in West Asia and the author of the book “ India’s Energy Security and Economic Development: A Holistic Approach,” published by TERI)
The first shock stems from the protectionist turn initiated by President Trump. Elevated tariffs and persistent trade tensions have disrupted global supply chains and dampened export demand. For India, the effects are already visible across key sectors—food processing, textiles, pharmaceuticals, engineering goods and industrial intermediates—where exports are stagnating even as costs rise. Prolonged uncertainty has weakened investment sentiment and constrained firms integrated into global value chains. As these employment-intensive sectors slow, the impact is feeding into weaker job creation and rising labour market stress.
The second shock is financial, marking the end of an era of ultra-low interest rates in Japan that long channelled cheap capital into emerging markets, including India. For decades, near-zero Japanese rates underpinned abundant global liquidity, enabling investors to borrow cheaply in yen and deploy funds in higher-yielding assets across emerging economies and equity markets.
Also Read |Indian economy at risk if Gulf conflict continues: Moody's Analytics
That cycle is now reversing. As the Bank of Japan has raised interest rates to around 0.75 per cent, the economics of the “yen carry trade” have shifted. Higher borrowing costs and rising currency risks are prompting investors to unwind leveraged positions and repatriate capital. India has felt this acutely, with foreign portfolio investors turning sustained sellers and withdrawing roughly $5–6 billion in the first half of March alone—one of the sharpest episodes of outflows in recent periods.
Equity markets, further pressured by developments in West Asia, have responded accordingly: the Sensex has fallen from its late-2025 peak of around 86,056 to nearly 74,207, while the Nifty has declined from about 26,310 to just above 23,002 as of 19 March 2026, reportedly wiping the wealth of ?34 lakh crore. These corrections are not merely cyclical fluctuations; they reflect a deeper reassessment of risk amid tightening global liquidity. For some time, equity markets have been driven more by liquidity and speculative positioning than by underlying economic fundamentals. The recent correction reflects a partial unwinding of these excesses, alongside a broader tightening of financial conditions.
The third—and most immediate—shock is the surge in energy prices triggered by the war on Iran and the resulting instability across the Gulf, with immediate and far-reaching consequences. India imports roughly 88 per cent of its crude oil needs—around 5.5 million barrels per day—with an annual import bill of $137 billion at pre-crisis prices in FY 25. Nearly 40% of these imports transit through Hormuz. Oil prices spiked to $120 per barrel, and the risk of further escalation rose, with Iran warning that prices could rise towards $200 per barrel if disruptions in the Gulf deepen.
Also Read |India’s limited oil buffers, reliance on subsidies heighten risks from Middle East conflict, Moody’s warns
India imports over 25 million tonnes of liquefied natural gas (LNG) annually, used for power generation, fertiliser production, and as an industrial feedstock, with around 40–45 per cent sourced from Qatar and other Gulf suppliers via the Strait of Hormuz. Dependence is even more pronounced in household energy. Nearly 90 per cent of liquefied petroleum gas (LPG)—widely used for cooking and small-scale industry—is imported from the Gulf region. This makes household energy costs highly sensitive to supply disruptions and price volatility in West Asia, with immediate implications for inflation and soaring household budgets.
Beyond crude, India also imports refined petroleum products—about 1.1 million barrels per day—from Gulf suppliers, including diesel, petrol, jet fuel, and naphtha.
These dependencies amplify the shock across households, industry and transport. Agriculture is equally exposed: India imports 8–9 million tonnes of urea and 6–7 million tonnes of DAP (around 60 per cent of its requirement), leaving farm output vulnerable to supply disruptions, rising costs and food inflation.
External vulnerabilities extend beyond energy. The Gulf—home to nearly 10 million Indians—accounts for about 38 per cent of remittances, roughly $45 billion annually. Any slowdown there could weaken inflows and household consumption. Trade linkages amplify the risk: India exports around $50 billion to the region, with sectors such as gems, food and engineering goods particularly exposed. Disruptions are further amplified by the vulnerability inherent in the United Arab Emirates’ role as a regional re-export hub. The danger lies not in any single shock, but in their interaction. Trade disruptions weaken exports just as capital outflows tighten financial conditions. Energy price spikes raise inflation while depressing consumption.
External demand softens even as domestic costs rise. Each pressure reinforces the others, creating a feedback loop that could prolong economic stress. Irrespective of the war's duration or outcome, its impact is structural and protracted. This is underscored by statements from Qatar’s energy minister that rebuilding gas infrastructure—roughly 17 per cent of which has been damaged—could cost about $26 billion and take up to five years. Similar timelines are likely to apply to other affected energy assets across the region. More broadly, irrespective of the war’s outcome, the security and economic architecture of Gulf Cooperation Council states is likely to come under renewed scrutiny. Such a scenario will introduce further uncertainty into regional energy markets.
Together, these shocks risk stagflation—where rising prices coincide with slowing growth and weakening employment—leaving policymakers caught between inflation control and supporting demand. For policymakers, the task is to prevent these shocks from crystallising into a sustained downturn. This calls for a recalibration of economic, monetary and fiscal strategy. The challenges are manifold: managing inflation without stifling growth, safeguarding external balances through stable trade and capital flows, ensuring energy and fertiliser security, and maintaining adequate liquidity in financial markets. Strengthening supply chain resilience, diversifying energy and trade linkages, accelerating time-bound capital expenditure, and renewing the focus on research and development should be central to the response. For businesses, the imperative is to adapt to a world of higher volatility, fragmented trade and costlier capital. Leveraging FTAs, strengthening intellectual property (IP) capabilities, and upgrading quality and standards will be key to capturing shifting market opportunities. In this new era of overlapping shocks, resilience—not just growth—will define economic success.
( Dr. Bhaskar is a former Ambassador and Economist. He is a specialist in West Asia and the author of the book “ India’s Energy Security and Economic Development: A Holistic Approach,” published by TERI)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
