The Iran War Is Bleeding India’s Economy
Anisha DuttaWorld Politics Review, May 6, 2026
The main industry group representing India’s aviation sector, once among the fastest-growing in the world, issued an extraordinary warning last week: It may be forced to shut down operations due to higher fuel costs stemming from the Iran war.
The Federation of Indian Airlines has warned the government that recent price increases could lead to “insurmountable losses,” resulting in grounded aircraft and flight cancellations. The Air India group, the country’s flagship carrier, has revised its fuel surcharge on both domestic and international routes following a sharp rise in
global jet fuel prices.
The war in the Middle East has disrupted global energy flows, driven up oil prices and triggered cascading effects across South Asia’s largest economy, from airlines and pharmaceuticals to household cooking gas and food costs.
The shock has begun to drive inflation, causing the rupee to weaken and weighing on India’s growth outlook, while also heightening political tensions around energy security and foreign policy.
A Multisector Crisis
The most immediate pressure point is jet fuel, the price of which has nearly doubled since the start of the war in late February and now accounts for between 40 percent and 45 percent of operating costs for Indian carriers.
Airlines are also grappling with airspace restrictions across the Middle East, a critical corridor connecting India to Europe and North America. Flights are being rerouted along longer, more costly paths to avoid Iranian airspace, resulting in increased fuel consumption and operational strain.
That pressure on the sector adds to earlier disruptions from Pakistan’s airspace closures for Indian airlines since last May, following the brief war between the two countries.
The aviation sector is not the only one that has been hit as a result of the Iran war; India’s pharmaceutical industry, often described as the backbone of the global generic drug supply, is also under mounting stress due to the disruption in energy markets and critical supply routes.
India produces roughly 20 percent of the world’s generic medicines, including nearly half of all prescriptions filled in the United States. Yet its manufacturing base is heavily dependent on imported inputs, with between 60 percent and 70 percent of active pharmaceutical ingredients coming from China. Rising oil prices are now pushing up the cost of chemical solvents, freight and packaging needed for these inputs, while logistics disruptions and higher insurance costs due to the war in the Middle East have doubled freight costs and delayed the delivery of crucial raw materials needed for drug production. While companies still have some inventory buffers, executives warn that sustained disruptions could begin to affect supply chains within months.
The Dependence Trap
At the center of this crisis lies a familiar vulnerability: India’s heavy reliance on imported energy, which means any disruption in the Middle East can have immediate consequences.
The de facto closure of the Strait of Hormuz, through which one-fifth of the world’s oil and natural gas normally flows, has exposed how deeply India relies on Middle Eastern energy. The region accounts for roughly 40 percent of India’s oil imports and up to 80 percent of its gas supply.
When it comes to crude oil, there are alternative suppliers to tap, including Russia and the United States. But gas presents a deeper structural concern. India imports roughly half its liquefied natural gas (LNG), with much of it coming from Qatar, where war-related damage has caused supply disruptions.
At the center of this crisis lies a familiar vulnerability: India’s heavy reliance on imported energy.
The situation is even more dire for liquefied petroleum gas (LPG), which is a basic necessity for millions of Indian households that rely on it for cooking. Nearly two-thirds of India’s LPG supply is imported, 90 percent of which has historically been sourced from the Gulf. In March, India faced its worst LPG shortage in decades, forcing the government to divert supplies to households and leaving commercial users scrambling.
Debashish Mishra, of Deloitte South Asia, said India’s primary vulnerability amid the ongoing conflict is not price volatility, but supply disruption, especially of cooking gas. While domestic refineries have ramped up output by as much as 40 percent, they cannot fully offset a prolonged disruption.
In the short term, Mishra said, “the system is holding, panic buying has eased and incoming LPG shipments, combined with higher refinery output, have stabilized supply,” he said. “But the margins are thin.”
Even with immediate supply concerns mitigated, the margin for error is thin: A single tanker meets barely half a day’s demand. Any sustained disruption could quickly tip the balance back into shortage.
A Combustible Situation
The economic impact is also being felt on the ground. Rising fuel costs are feeding into inflation, pushing up transport and food prices. In industrial hubs like Noida, one of Asia’s largest industrial townships just outside New Delhi, protests erupted earlier this month, with workers demanding higher wages to cope with surging living costs. Police responded with tear gas, highlighting the growing social tensions tied to the crisis.
Remittances are also at risk. Indians form the largest expatriate community in the Middle East, sending home over $50 billion annually. Since the outbreak of the war, nearly 1 million Indian nationals have returned, including workers, students and other vulnerable groups, raising concerns about income losses and domestic unemployment pressures. The government has done little in response, save for arranging repatriation flights for foreign workers.
Beyond the headline numbers, the microeconomic consequences will be dire, especially for the poor. A recent report by the United Nations Development Program warns that up to 8.8 million people across 14 countries could fall into poverty under current conflict scenarios, including more than 2.5 million in India alone. The report
describes a widening “human development crisis” across Asia and the Pacific, driven by energy shocks and rising living costs.
The political fallout is already being felt at the highest levels. India’s opposition leaders have framed the situation as a foreign policy failure by Prime Minister Narendra Modi, pointing to his visit to Israel just days before the war, as evidence of a drift away from India’s long-standing strategic balance in the region, particularly its ties with Iran.
New Delhi has since moved to recalibrate, quietly rebuilding channels of communication with Tehran through diplomatic outreach and sustained engagement with Iranian officials. An outpouring of solidarity with Iran among the Indian public, particularly in Muslim-majority Kashmir, has helped those efforts. At the same time, the emergence of Pakistan as a key intermediary between the United States and Iran has sharpened opposition attacks and exposed the limits of the Modi government’s influence to resolve a crisis unfolding in its neighborhood.
Even as its foreign policy choices become increasingly entangled with economic strain, the domestic political fallout seems contained for now, as evidenced by the BJP’s strong showing in recently concluded state elections in West Bengal and Assam. However, if the war continues, Modi’s government could come under further economic and political pressures.
Anisha Dutta is an award-winning journalist based in New York with over a decade of experience reporting on politics and foreign policy. She holds a master’s degree in political journalism from Columbia University and was a 2024 Chevening
fellow.
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