The Iran-Israel-US conflict is hitting India hard on these fronts: Supply disruptions to oil, gas and fertilisers; higher import prices; surging freight and insurance costs; and a potential decline in remittances from the Gulf
Iran war tests India's macroeconomic resilience, government data shows
FinMin data shows India's economy was on solid ground until February; West Asia conflict sent crude past $149 a barrel, pushing rupee to around 94 to the dollar
The Indian economy entered March 2026 in reasonably good health, but the US-Israel war on Iran may have hit the economy hard, government data shows.
The Union Finance Ministry's Monthly Economic Review for March 2026, prepared by the department of economic affairs, presents a two-speed picture: a domestic economy that was performing solidly until February, and an external environment that has since deteriorated sharply, driven almost entirely by the conflict in West Asia.
Before the war
Prior to the escalation, India's macroeconomic fundamentals were holding firm. The manufacturing PMI hit a four-month high of 56.9 in February, while the services PMI stood at 58.1. Retail automobile sales expanded 25.2 per cent year-on-year, digital payment volumes surged 26.6 per cent, and bank credit grew 14.5 per cent, well above the previous year's 11.1 per cent.
The government had upgraded its FY27 growth estimate to a range of 7.0-7.4 per cent.
Retail inflation, at 3.21 per cent in February, was at a 10-month high but still within manageable bounds. Critically, it had not yet absorbed the crude oil price shock. That was about to change.
Four channels
The review identifies four channels through which the conflict is hitting India: supply disruptions to oil, gas and fertilisers; higher import prices; surging freight and insurance costs; and a potential decline in remittances from the Gulf, where 9.2 million Indians live and work, remitting an estimated $40 billion annually — around 35 per cent of India's total remittance receipts.
The numbers are stark. Ship transits through the Strait of Hormuz have collapsed from 200-300 a week to just one. Crude prices have more than doubled, rising from $69 per barrel to $149.9 per barrel as of March 20. Iran's missile strikes on Ras Laffan in Qatar wiped out 17 per cent of global LNG capacity in a single blow, with the outage expected to last several years. Saudi Arabia's Ras Tanura refinery, processing 550,000 barrels a day, temporarily shut in early March.
For India, which sources over 80 per cent of its crude and approximately 93 per cent of its LPG from conflict-affected regions, the exposure is severe. LPG faces the sharpest squeeze — refinery yields of only 4-6 per cent leave little room to compensate domestically, the report suggests.
Early damage visible
By mid-March, the impact was registering in high-frequency data. E-way bill generation, a proxy for goods movement, fell 5.3 per cent month-on-month. Flash PMI estimates pointed to softening output. The rupee depreciated to ₹93.88 per dollar by March 24, marking a 3.1 per cent fall since the conflict began, with $12.5 billion in portfolio outflows in March alone.
The MSCI India Index declined 10.65 per cent on a month-to-date basis.
The report said the government has moved on multiple fronts: slashing excise duty on petrol and diesel, ordering refineries to maximise LPG output — achieving a 28 per cent production increase within five days — prioritising gas allocation to fertiliser plants, and launching the ₹497 crore RELIEF scheme to protect exporters from soaring freight costs.
Foreign exchange reserves of $709.8 billion provide over 11 months of import cover, offering a meaningful buffer against external shocks.
Chief Economic Advisor V Anantha Nageswaran, in his preface to the review, is candid about the outlook. The FY27 growth estimate of 7.0-7.4 per cent now faces "considerable downside".
His counsel is unambiguous: plan for a slow, gradual return to normalcy in the Gulf, not a rapid one, and use the disruption as a trigger to structurally fortify India against future supply shocks.
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