Impact of Escalating Iran-Israel Conflict on Companies and Sectors

As the world’s fastest-growing major economy, India is poised for significant growth, with projections indicating an increase of 6.3% to 6.5% in GDP for the fiscal year 2025-26. This optimism is fueled by rising demand, a six-year low in inflation, and a recent 1% reduction in the repo rate by the Reserve Bank of India, which lowers borrowing costs for businesses. However, this positive outlook faces challenges from escalating global tensions, particularly the conflict between Israel and Iran, which could lead to soaring crude oil prices and threaten India’s economic stability.

Global Tensions and Economic Risks

India’s economic growth is currently supported by favorable domestic conditions, but external factors pose significant risks. The ongoing conflict in West Asia, especially between Israel and Iran, could escalate, leading to a spike in oil prices. Analysts warn that if the situation deteriorates, oil prices could soar to between $65 and over $120 per barrel. Such increases would inflate production costs for Indian companies, reduce consumer spending, and disrupt exports, particularly if shipping routes through the Red Sea are compromised. DK Srivastava, Chief Policy Advisor at EY India, highlighted that the global economy is already under pressure from conflicts like the Russia-Ukraine war, and the potential for a broader Israel-Iran war adds to the uncertainty. The World Bank has revised its global growth forecast for 2025-26 down to 2.3%, indicating a slowdown that could impact India’s growth trajectory.

Impact of Oil Prices on India’s Economy

JP Morgan has issued a warning that oil prices could reach $120 per barrel if geopolitical tensions escalate further. Their analysis suggests that current prices already reflect a 7% chance of severe disruptions in Iranian oil production. Despite this, JP Morgan maintains a conservative outlook, predicting that Brent crude prices will remain in the lower to middle $60s range through 2025. The recent decline in oil prices, averaging $64.3 per barrel, offers some relief, but any resurgence in tensions could reverse this trend. Historical data indicates that a $10 increase in crude prices could reduce India’s GDP growth by 0.3% and raise inflation by 0.4%. The Global Trade Research Initiative (GTRI) emphasizes the need for India to diversify its energy sources and enhance its strategic petroleum reserves to mitigate risks associated with its heavy reliance on oil imports.

Trade Relations and Export Challenges

India’s trade relationships with both Israel and Iran are substantial, with exports to Iran reaching $1.24 billion and imports at $441.9 million in FY2025. Trade with Israel is even more significant, with exports totaling $2.15 billion and imports at $1.61 billion. The ongoing conflict is expected to disrupt these trade activities, which had shown signs of recovery. The Federation of Indian Export Organisations (FIEO) has warned that exports to European nations and Russia may face challenges due to rising freight charges and insurance costs. Although Indian shipments had resumed through the Red Sea corridor, renewed disruptions are anticipated. The GTRI notes that approximately 30% of India’s exports to the west utilize the Bab el-Mandeb Strait, and any threats to this route could lead to increased shipping times and costs, adversely affecting sectors like engineering, textiles, and chemicals.

Government Response and Future Outlook

In light of these developments, Indian government officials are set to engage with representatives from the export sector to address the implications of the current geopolitical situation. While immediate fluctuations in oil prices and shipping costs are expected, officials believe that the Indian economy can withstand these pressures unless the conflict escalates into a broader regional war. The finance ministry and regulatory bodies are closely monitoring the situation to mitigate potential impacts. Despite the challenges, India’s robust macroeconomic indicators suggest resilience. The Reserve Bank of India’s recent interest rate cuts and increased government spending on infrastructure are expected to bolster economic growth. Analysts remain optimistic, projecting that India’s economy will continue to grow by 6.3% to 6.5% in 2025-26, even amid global uncertainties.

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