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Reviewing Energy Risks and Strategic Reserves

The Indian Government is advised to reassess its energy risk strategies, broaden its crude oil sourcing, and bolster its strategic oil reserves in light of the escalating conflict between Israel and Iran, as highlighted in a report by the Global Trade Research Initiative (GTRI). Although India is not directly involved in this conflict, the report emphasizes the importance of vigilance.

The GTRI report stresses that India must ensure its strategic oil reserves are adequate to manage potential crises. It states, "Despite not being a participant in the conflict, India cannot afford to be complacent. The government needs to promptly evaluate energy risk scenarios, diversify crude sourcing, and confirm that strategic reserves are adequate."

Military Preparedness and Diplomatic Efforts

The report also underscores the necessity for enhanced military readiness in the Arabian Sea, particularly around crucial maritime routes and chokepoints. On the diplomatic front, it suggests that India should leverage international forums like the G20 and the United Nations to advocate for peace, de-escalation, and the safeguarding of global trade routes.

Impact of Rising Tensions on India's Economy

As tensions escalate in West Asia, India is confronted with increasing threats to its energy security, trade routes, and economic relationships. The report warns that the intensifying conflict between Israel and Iran could have significant repercussions for India's economy.

India maintains substantial trade ties with both nations, exporting goods worth $1.24 billion to Iran and importing $441.9 million in FY2025. Trade with Israel is even more pronounced, with exports totaling $2.15 billion and imports reaching $1.61 billion.

Energy Dependency and Potential Disruptions

A critical concern for India is its energy dependency. Approximately two-thirds of the country's crude oil and half of its LNG imports transit through the Strait of Hormuz, a narrow passage currently threatened by Iran. This strait, just 21 miles at its narrowest, is vital, handling nearly 20% of the world's oil trade.

Given that India relies on imports for over 80% of its energy requirements, any disruption could lead to a sharp increase in oil prices, shipping costs, and insurance premiums. The GTRI warns that such disruptions could trigger inflation, weaken the rupee, and complicate the government's financial strategies.

Risks to Trade Routes and Export Costs

Moreover, the report indicates that nearly 30% of India's westbound exports to Europe, North Africa, and the US East Coast pass through the Bab el-Mandeb Strait, which is also at risk. Should shipping routes be forced to divert around the Cape of Good Hope, transit times could extend by two weeks, significantly increasing freight costs.

This situation would adversely affect Indian exports, including engineering goods, textiles, and chemicals, while also raising the costs of essential imports. The conflict escalated when Israel initiated "Operation Rising Lion" on June 13, deploying over 200 aircraft and drones to target Iran's military and nuclear facilities.

Escalating Conflict and Market Pressures

In retaliation, Iran launched over 150 ballistic missiles and drone swarms targeting Israeli cities such as Tel Aviv and Jerusalem, resulting in rising casualties. The GTRI notes that with the cancellation of U.S.-Iran nuclear negotiations, diplomatic efforts have stalled, placing additional strain on regional financial markets.

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