India Braces for Energy and Remittance Disruptions as US-Israel Conflict with Iran Escalates

Latest Delhi is taking precautionary measures to mitigate the economic fallout from the escalating conflict between the US, Israel, and Iran, with potential disruptions to energy supplies and remittance flows posing significant challenges. The crisis is prompting the Indian government to invoke emergency powers and seek alternative sources for crucial commodities like liquefied petroleum gas (LPG).

Energy Security Concerns

India, which imports approximately 90% of its crude oil needs, is particularly vulnerable to disruptions in global supply, especially as nearly half of its crude oil and a substantial portion of its liquefied natural gas (LNG) and LPG shipments typically transit the Strait of Hormuz. The conflict has effectively closed this vital chokepoint, raising concerns about potential shortages and price increases.

In response, the government has activated emergency provisions, directing domestic refiners to maximize LPG production. This includes utilizing available propane and butane for cooking gas production, potentially reducing output of alkylates, a gasoline component, particularly impacting Reliance Industries Ltd. Refiners have as well been instructed to refrain from using propane and butane for petrochemical manufacturing.

India consumed 33.15 million metric tonnes of LPG in the last year, with roughly two-thirds of its demand met through imports, primarily from the Middle East (85-90% of those imports). The government is also negotiating with suppliers such as Sonatrach and Abu Dhabi National Oil Company, along with global trading houses like TotalEnergies, Vitol, and Trafigura, to secure additional oil and gas shipments.

India has approached the United States to arrange maritime insurance protection for vessels transporting oil from the Middle East, seeking to maintain stable energy supplies. The US has indicated willingness to extend political risk insurance through the International Development Finance Corporation, but a fund worth several hundred million dollars needs to be established first to support the insurance mechanism.

Remittance Flows and Economic Links

Beyond energy, India has significant economic ties to the Middle East. Approximately 10 million Indians live and work across the Gulf, sending home remittances that support millions of families and contribute substantially to India’s external accounts. The region accounts for 17% of India’s exports, supplies 55% of its crude oil, and generates 38% of its remittances. A widening war could therefore disrupt these crucial remittance flows.

Diplomatic Balancing Act

The crisis presents a delicate diplomatic challenge for India, requiring a balancing act between its relationships with Washington, Tehran, and the Arab Gulf states. While maintaining ties with Iran, India has expressed greater concern regarding the situation in the Arab Gulf states, given its deeper equities in the region – including its diaspora, remittances, energy supplies, trade, and institutional ties. India is currently adopting a “wait and watch” approach, according to Harsh V Pant of the Observer Research Foundation.

Looking Ahead

The long-term impact of the conflict on India’s engagement with the region remains uncertain. A prolonged crisis could prove “more damaging” to India’s regional relationships. The government’s proactive measures to secure energy supplies and insurance coverage demonstrate its commitment to mitigating the immediate economic risks, but the evolving geopolitical landscape will require continued vigilance and strategic adaptation.