Since the outbreak of the US-Israel war with Iran on February 28 this year, millions of people across the globe have spent their time on search engines to either initiate or enhance their awareness about the Strait of Hormuz, a 33 to 39 km wide waterway between Iran and Oman, linking the Persian Gulf and the Gulf of Oman.
The sudden deep curiosity about what is happening in or around the Strait of Hormuz is understandable, as the war has brought this tiny area on Earth into the limelight due to one of the biggest disruptions of energy trade routes ever since. The Strait of Hormuz is responsible for supplying significant volumes of global crude oil, Liquefied Natural Gas ( LNG ) and lubricants to fulfil the demands of different countries.
It is not that the Hormuz was away from people’s attention prior to the war. However, the interest in monitoring activities in the area was mainly limited to the direct stakeholders such as the oil companies, maritime and insurance sector and big tech companies whose undersea international internet network of cables is passing through this waterway.
The major difference then and now is that the war has brought curiosity about the Hormuz to the doorstep of the common masses, owing to volatile and high oil prices causing inflation and affordability crises in several countries across the globe, especially in Asia.
To put it concisely, soaring oil and gas prices may inflate the cost of living, squeezing the livelihoods of the most vulnerable in countries like India. As per some informed estimates, it could also slow global merchandise trade growth to 1.5 per cent, with adverse implications for developing countries like India.
This crisis, if prolonged, could worsen the financial condition of developing countries (including India) in the form of falling stock prices, weakening currencies, and rising cost of external debt, with domestic currencies in the developing parts of the Asia Oceania region expected to depreciate, on average, by 1 per cent. In addition, yields on sovereign bonds could increase by 0.70 percentage points for the developing parts of the Asia-Oceania region.
Key macroeconomic effects on India
India’s economy is expected to be affected due to the ongoing crisis in the vital Strait, as of May. First, an energy crisis and concomitant inflation loom large on the horizon. With nearly 40 per cent of its oil imports previously traversing the Strait, little movement of oil tankers since the beginning of the War caused an immediate surge in global oil prices.
The same would expectably have an impact on domestic inflation as well, as this drives up input costs for industries and forces higher consumer prices, with Consumer Price Index (CPI) inflation expected to be high. Second, exports/imports would be disrupted. Key export sectors—specifically pharmaceuticals, electronics, and textiles—are facing higher freight costs and shipping delays due to altered routes.
Third, despite intermittent arrivals of vessels laden with LPG/LNG, India could still be vulnerable on the front of LPG/LNG (in the form of supply- demand mismatches), owing to the country’s heavy reliance on Middle Eastern LPG/LNG. Fourth, India-flagged vessels could face high operational risks, leading to a sharp decrease in transit and higher insurance costs; thereby, having long-term implications for shipping and maritime industries.
Fifth, small-scale industries are likely to be affected as exports to conflict regions could be stalled. This is especially true for sectors like spices and ceramics. Sixth, elevated oil prices (with prices hovering around US$ 100 bpd, including frequent spikes) have caused the Rupee to fall vis -a -vis the US Dollar (US$).
Seventh, ever-increasing oil prices could widen the Current Account Deficit (CAD) to nearly 2.5 per cent of GDP, as per some estimates. Eighth, refining and manufacturing are likely to be affected as airlines face higher fuel costs, while manufacturing sectors (chemicals and plastics) face input cost hikes.
Ninth, the Strait of Hormuz houses critical undersea fibre-optic cables (like AAE-1 and FALCON) that carry $10 trillion in daily financial transactions and up to 30 per cent of Europe-Asia internet traffic. Hence, this narrow strait is an invisible artery for data passage between Europe, West Asia and the rest of Asia. These subsea lines are the backbone powering regional tech hubs, cloud services, and major AI infrastructure in the Gulf.
Hence, severely restricting access to these submarine networks could cause massive, multibillion-dollar disruptions to global banking networks and cloud computing, with ramifications for India too.
Last but not least, agriculture and fertilisers are to face shortages of fertiliser imports from the Gulf, and this threatens agricultural output. The same could imperil India’s food security if the crisis persists and alternative sources of these essentials are not secured in the near future.
Ongoing and possible response strategies
First, the government is making earnest efforts to increase imports from non-Gulf sources, away from the Strait of Hormuz, such as Russia, Nigeria and Angola, to stabilise supply, despite logistical challenges. Second, India is tapping into its strategic petroleum reserves to mitigate immediate shortages.
Recently, during the Prime Minister’s visit to the UAE, an MoU on Strategic Collaboration between Indian Strategic Petroleum Reserves Limited (ISPRL) and Abu Dhabi National Oil Company (ADNOC) was inked. It would lead to crude oil storage in India’s Strategic Petroleum Reserves of up to 30 million barrels, including through its participation in facilities in Vishakhapatnam, Andhra Pradesh, and the development of reserve facilities in Chandikol, Odisha. Such initiatives could shield India from energy uncertainties as seen during the ongoing crisis.
Third, New Delhi has time and again emphasised the need for free passage through the Hormuz and is actively involved in international discussions on the same. Fourth, domestic production of edible oils derived from groundnuts and mustard should be encouraged rather than imported palm and soybean oils. The same would encourage self-reliance and also save on the forex reserves.
Fifth, enabling infrastructure needs to be built to encourage farmers to adopt natural farming practices on a large scale. This could involve making organic farming financially viable through some kind of price/income support systems. The same would decrease dependence on imported chemical fertilisers and save on forex.
In addition, a more lasting solution would involve the need to accelerate the pivot towards renewable energy and secure long-term non-Gulf energy contracts. In this reference, Government policies on the use of solar energy, electric vehicles (EVs) and biofuels may provide further fillip to the trend of less dependence on fossil fuels.
All in all, this crisis should serve as a harbinger of welcome change in India’s energy policy, given the precariousness of such geopolitical events with widespread economic ramifications. Years ago, the American historian and writer, Barbara Tuchman, once said, “War is the unfolding of miscalculations”. The Israel-US war with Iran is a living example of how a violent battle can move into the economic realm, which no one in the world anticipated.
The author is Assistant Professor (Economics and Trade Policy), Indian Institute of Foreign Trade, New Delhi.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.