Article 3: West Asia Conflict & Economy
Why in News: Escalation of the West Asia conflict involving Iran has raised concerns about a potentially deeper economic impact on India than the Russia–Ukraine war, especially through energy, remittances, and Balance of Payments.
Key Details
- The Russia–Ukraine war (2022) caused a sharp rise in fuel, food, and fertiliser (3Fs) prices globally.
- Current West Asia tensions have pushed Brent crude above $100/barrel, indicating energy shocks.
- India’s vulnerability lies in remittances from Gulf countries (≈37.9% share) and energy imports.
- A prolonged conflict may impact both trade account and invisibles (services + remittances), worsening the Current Account Deficit (CAD).
Global Economic Impact of Conflicts (3Fs Framework)
- Fuel Price Shock: During the Russia–Ukraine war, Brent crude peaked at ~$117/barrel (June 2022). Similarly, current Iran tensions have again pushed oil prices above $100, affecting import-dependent economies like India.
- Food Inflation: The FAO Food Price Index reached 160.2 (March 2022), reflecting global food insecurity. However, currently it is relatively stable (~125 in 2026), indicating better preparedness.
- Fertiliser Crisis: Prices of DAP crossed $950/tonne in 2022 due to supply disruptions. West Asia remains a major supplier of inputs like ammonia and sulphur, making India vulnerable again.
- Interlinkages: Fuel, food, and fertilisers are interdependent; higher fuel costs raise transportation and input costs, thereby triggering inflationary spirals globally.
Impact of Russia–Ukraine War on India
- Rising Trade Deficit: India’s merchandise trade deficit increased from $102 billion (2020-21) to $265 billion (2022-23) due to higher import bills.
- Strong Invisibles Cushion: Net invisibles surplus rose to $198 billion (2022-23), mainly due to software exports and remittances, offsetting trade imbalance.
- Stable Current Account: Despite trade shocks, CAD remained manageable due to robust service sector performance, showcasing India’s structural strength.
- Capital Inflows Support: India attracted significant capital inflows (~$89.8 billion in 2023-24), stabilising the rupee and external sector.
West Asia Conflict: A More Severe Threat
- Geographical Proximity: West Asia is closer to India than Europe, increasing risks to trade routes, energy supply chains, and diaspora safety.
- Strait of Hormuz Risk: Nearly 20% of global oil trade passes through this route. Any disruption can severely impact global energy markets.
- Energy Dependence: India imports over 60% of LNG and 80% of fertiliser inputs from West Asia, making supply disruptions critical.
- Multi-Dimensional Impact: Unlike Ukraine war (mainly trade impact), this conflict threatens both goods trade and services/remittances, making it structurally more dangerous.
Remittances & Indian Diaspora Vulnerability
- Large Indian Workforce: Around 8.9 million Indians live in Gulf countries, forming a critical economic link.
- High Remittance Contribution: Gulf countries account for 37.9% of India’s total remittances (~$118 billion in 2023-24).
- Risk of Reverse Migration: Economic slowdown or conflict may force return of workers, reducing remittance inflows and increasing domestic unemployment pressure.
- Impact on Invisibles: A fall in remittances directly reduces the invisibles surplus, worsening the Balance of Payments.
Balance of Payments (BoP) & Macroeconomic Risks
- Widening Current Account Deficit: Reduced remittances + higher oil import bill can significantly increase CAD, putting pressure on external stability.
- Declining Capital Flows: Net capital inflows declined sharply from $89.8 billion (2023-24) to near-zero/negative levels in 2025-26.
- Currency Depreciation Risk: Lower inflows and higher imports may weaken the Indian Rupee, increasing inflationary pressures.
- Investor Sentiment: Foreign Portfolio Investors (FPIs) have already shown net outflows (~$18.9 billion), indicating risk aversion.
Food & Fertiliser Security: Relative Stability but Emerging Risks
- Strong Domestic Stocks: India currently has ~99.7 million tonnes of foodgrain stocks, ensuring short-term food security.
- Global Production Outlook: Record global output of wheat, rice, and oilseeds (2025-26) provides some buffer against price spikes.
- Fertiliser Dependence Risk: Long-term disruption in West Asia can affect fertiliser supply, impacting agricultural productivity.
- Delayed Impact: Unlike fuel, food and fertiliser impacts may emerge gradually, affecting future cropping cycles.
Conclusion
India must adopt a multi-pronged strategy to mitigate risks from West Asia conflicts. Diversification of energy sources, strengthening strategic reserves, promoting renewable energy, and enhancing domestic fertiliser production are essential. Additionally, policies to support returning migrants and stabilise capital flows are crucial. The West Asia crisis highlights the need for resilient external sector management and reduced overdependence on volatile regions.
EXPECTED QUESTIONS FOR UPSC CSE
Prelims MCQ
Q. Which of the following factors are commonly referred to as the “3Fs” in global economic shocks?
(a) Finance, Fiscal, Forex
(b) Fuel, Food, Fertilisers
(c) Farming, Fisheries, Forestry
(d) Funds, Flows, FDI
Answer: (b)
Descriptive Question
Q. Discuss the role of remittances and invisibles in stabilising India’s external sector. How can geopolitical conflicts disrupt this balance? (150 Words, 10 Marks)