Why Iran differs from Ukraine in terms of economic fallout for India and the world

Source: The post “Renewable Transition in India: Policy and Institutional Bottlenecks” has been created, based on “Why Iran differs from Ukraine in terms of economic fallout for India and the world” published in “Indian Express” on  16th March 2026.

UPSC Syllabus: GS Paper-2- International Relations

Context: The ongoing conflict in West Asia involving Iran, Israel and the United States has raised concerns about global energy security and economic stability. While the Russia–Ukraine war mainly affected global commodity prices and India’s merchandise trade deficit, the West Asia conflict may impact both merchandise trade and invisibles such as remittances, making its economic consequences potentially more serious.

Impact of the Russia–Ukraine War on India

1. The war began when Russia launched a full-scale invasion of Ukraine in February 2022, leading to major disruptions in global supply chains.
2. The conflict caused a sharp increase in prices of fuel, food and fertilisers, commonly referred to as the “3Fs”.
3. Global crude oil prices crossed 100 dollars per barrel, which significantly increased India’s import bill.
4. Global food prices rose sharply, with the FAO food price index reaching record levels during 2022.
5. Fertiliser prices such as di-ammonium phosphate and potash also surged due to disruptions in global supply.

Effect on India’s Balance of Payments

1. The primary impact of the war was on India’s merchandise trade account, as the value of imports increased significantly.
2. India’s trade deficit rose sharply from about 102 billion dollars in 2020-21 to more than 265 billion dollars in 2022-23.
3. However, the widening trade deficit was partially offset by a strong surplus in the invisibles account.
4. Invisibles include software exports, remittances from Indians abroad, and other services income.
5. Software exports and remittance inflows increased significantly during this period.
6. As a result, India’s current account deficit remained manageable despite rising import costs.
7. Strong capital inflows, including foreign investment and external commercial borrowings, further helped maintain macroeconomic stability.

Why the Iran Conflict Could Have Greater Impact

1. Threat to Global Energy Supply

1. The conflict threatens the strategic maritime route known as the Strait of Hormuz.
2. This waterway carries nearly one-fifth of global petroleum trade and a large share of LNG shipments.
3. Any disruption in this route can sharply increase oil prices and significantly raise India’s energy import bill.

2. Risks to Fertiliser Supply and Agriculture

1. India imports a large share of LNG, sulphur and ammonia from West Asian countries.
2. These inputs are essential for producing fertilisers such as urea and complex fertilisers.
3. A prolonged conflict could disrupt fertiliser supply chains and increase costs for Indian farmers.
4. This may eventually affect agricultural productivity and food security.

3. Vulnerability of Remittances

1. India has a large overseas workforce in Gulf countries such as Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Oman and Bahrain.
2. Nearly 8.9 million Indians live and work in these countries, forming a significant source of remittance income.
3. These Gulf countries contribute around 38 percent of India’s total remittances.
4. If the conflict slows down Gulf economies, employment opportunities for Indian workers may decline.
5. This could reduce remittance inflows and weaken India’s invisible surplus.

4. Weak Capital Inflows

1. India has already experienced a slowdown in capital inflows in recent years.
2. Net capital inflows have fallen significantly compared to earlier years.
3. Foreign portfolio investors have also been selling Indian equities, creating pressure on the rupee.
4. If capital inflows remain weak while the current account deficit increases, India’s external sector stability could be affected.

Way Forward

1. India should diversify its sources of crude oil and natural gas imports to reduce dependence on West Asian energy supplies.
2. The government should accelerate the development of renewable energy and strategic petroleum reserves to enhance energy security.
3. India should strengthen domestic fertiliser production and alternative nutrient sources to reduce reliance on imported inputs.
4. Diplomatic engagement with Gulf countries should be strengthened to protect the interests of the Indian diaspora and ensure stable remittance flows.
5. The government should promote services exports such as IT, fintech and digital services to maintain a strong invisible surplus.
6. Policy reforms should aim to attract stable long-term foreign investment, thereby strengthening capital inflows and reducing vulnerability in the Balance of Payments.

Conclusion: The Russia–Ukraine war primarily affected India through higher commodity prices and a widening trade deficit. In contrast, the West Asia conflict could simultaneously affect energy imports, fertiliser supplies, remittances and capital flows. Therefore, prolonged instability around Iran could pose greater economic risks for India, making proactive economic and diplomatic measures essential.

Question: Why could the ongoing West Asia conflict involving Iran have greater economic consequences for India compared to the Russia–Ukraine War? Discuss in the context of India’s Balance of Payments (BoP).

Source: Indian Express