Iran War’s Economic Fallout May Be Worse Than Ukraine, Why India’s Vulnerability Goes Beyond Oil
On February 24, 2022, when Russia launched its full-scale invasion of Ukraine, the international prices of all three Fs—fuel, food, and fertilisers—skyrocketed. Brent crude prices soared above $100 per barrel and remained at those elevated levels until early August, with a peak monthly average of $117.9 in June 2022. The United Nations Food and Agriculture Organisation’s (FAO) food price index, having a base period value of 100 for 2014-16, averaged 144.5 points in 2022 and scaled an all-time high of 160.2 points in March of that year. Landed prices of imported di-ammonium phosphate (DAP) and muriate of potash fertilisers in India crossed $950 and $590 per tonne by July 2022, while intermediates and raw materials like phosphoric acid, ammonia, and rock phosphate hit $1,715, $1,575, and over $300 per tonne respectively during that year. The world was plunged into a new era of economic instability.
The Russia-Ukraine war’s impact on India was felt primarily on the merchandise trade account of the country’s external Balance of Payments (BoP). The trade deficit—the excess of imports over exports of goods—soared from $102.2 billion in 2020-21 to $189.5 billion in 2021-22 and $265.3 billion in 2022-23. This was a massive, immediate shock. However, the BoP’s other components proved remarkably resilient. The widening of the merchandise trade deficit was considerably offset by an increased surplus on the so-called “invisibles” account. The latter pertains to the global flows of services, people, data, and ideas, as opposed to the “visible” trade in goods across national borders.
India’s net invisibles surplus went from $126.1 billion in 2020-21 to $150.7 billion in 2021-22 and $198.2 billion in 2022-23. This surge was largely courtesy of two items: software exports and private remittance transfers by Indians living and working abroad. Together, these two constituted over 55% of the gross invisibles receipts of $465.8 billion in 2022-23—a figure that, for the first time, even exceeded India’s exports of goods valued at $456.1 billion. The higher invisibles surplus resulted in the country’s overall current account deficit being contained at just above $67 billion in 2022-23. India, moreover, attracted capital inflows—basically foreign investment and external commercial borrowing—to the tune of $57.9 billion that year, further softening the blow from the war. By 2023-24, as global prices of the three Fs eased, the merchandise trade deficit fell to $244.9 billion, accompanied by an even higher invisibles surplus of $218.8 billion, shrinking the current account deficit to a manageable $26.1 billion.
This resilience was India’s saving grace during the Ukraine war. But the current US-Israel war against Iran is different. It is unfolding in a region far closer to home, and its ramifications for India may extend far beyond the merchandise trade account, potentially reaching into the very invisibles account that provided such crucial ballast during the last crisis.
In the current conflict, it is fuel that has borne the brunt of the price surge. Iran’s effective closure of the Strait of Hormuz—the narrow maritime waterway through which a fifth of the world’s total petroleum liquids consumption equivalent and liquefied natural gas (LNG) trade passes—has propelled Brent crude prices past the $100 per barrel mark this month. The effect on fertilisers has been less severe, at least for now. India’s comfortable stocks of urea, DAP, and complex fertilisers, besides the next kharif (monsoon) crop planting season being 2.5-3 months away, means no immediate crisis. But with more than 60% of India’s imports of LNG (the basic feedstock for urea) and 80% of inputs such as sulphur and ammonia coming from West Asia, a prolonged war can have serious implications for India’s agriculture and food security. If the war stretches to the point where farmers struggle to access sufficient nutrients for their ensuing crops, the food security implications could be dire.
For the third F, food, the situation is currently more favourable than it was in 2022. The FAO’s food price index averaged 125.3 points in February 2026—down from 126.6 points in February 2025 and well below the 2022 peaks. India has also entered the present war with government stocks of rice and wheat at an all-time high of 99.7 million tonnes on February 1, as against 83.8 million tonnes a year ago. This was not the case in 2022, when India harvested a poor wheat crop due to a sudden temperature spike in March just at the stage of grain-filling, compounding the supply disruptions from Russia-Ukraine. Globally, too, the US Department of Agriculture has projected record production of wheat, rice, corn, sorghum, soybean, rapeseed, and palm oil for 2025-26. The immediate food crisis may be averted, but the underlying vulnerability remains.
The real and perhaps more significant vulnerability for India lies elsewhere. The Russia-Ukraine war’s damage to India was primarily on the merchandise trade account of the BoP. The West Asia conflict’s ramifications could extend beyond that, to even the invisibles account. This war is being fought far closer to home, and the stakes are qualitatively different.
According to the Ministry of External Affairs, there are nearly 8.9 million overseas Indians in the Gulf Cooperation Council (GCC) countries alone: Bahrain (3.28 lakh), Kuwait (9.96 lakh), Oman (6.87 lakh), Qatar (8.37 lakh), Saudi Arabia (24.64 lakh), and the UAE (35.69 lakh). Reserve Bank of India data shows that these six countries have a combined 37.9% share in the gross remittances of $118.7 billion received by India in 2023-24. These remittances are not a minor detail; they are a cornerstone of India’s external economic stability.
If the war drags on, pushing the West Asian economies into contraction and forcing a large-scale return of Indian workers, it would significantly dent India’s invisibles account surpluses. A prolonged conflict would disrupt economic activity across the Gulf, threatening the jobs and livelihoods of millions of Indian workers. A mass exodus of workers, forced to return home, would cause remittances to plummet. This would, in turn, cause a ballooning of the current account deficit. And all this would come amid a slowdown in capital flows, which was already putting pressure on the rupee even before the war began.
The accompanying table from the RBI tells a sobering story. Net capital inflows to India plunged from $89.8 billion in 2023-24 to a mere $18 million in 2024-25, and turned negative for the first nine months of the current fiscal year. The drying up of capital flows is also borne out by foreign portfolio investors making net sales of $18.9 billion in Indian equity markets last year and another $9.4 billion so far in 2026. The cushion that once protected India is thinning.
The world, and India, have adjusted to the Russia-Ukraine conflict that continues to rage for four years and counting. The shock has been absorbed, the supply chains have been rerouted, and the global economy has learned to live with the new reality. But the West Asia conflict is different. It strikes at the heart of India’s most critical economic vulnerabilities: not just its dependence on imported oil, but its reliance on the remittances of its workers and the stability of its closest regional partners. Neither India nor the world can afford the consequences of a similarly lengthy war in West Asia. The stakes are too high, and the potential damage is far too great.
Questions and Answers
Q1: How did India’s “invisibles account” help cushion the economic impact of the Russia-Ukraine war?
A1: India’s invisibles account—comprising software exports and remittances from Indians abroad—surged during the Russia-Ukraine war. Net invisibles surplus rose from $126.1 billion in 2020-21 to $198.2 billion in 2022-23. This surplus offset the widening merchandise trade deficit, helping contain the current account deficit and providing crucial ballast to the Balance of Payments.
Q2: Why is the current Iran war potentially more damaging for India than the Russia-Ukraine conflict?
A2: The Iran war is being fought far closer to India and threatens the country’s invisibles account directly. Nearly 8.9 million Indians work in the Gulf Cooperation Council (GCC) countries, which account for almost 38% of India’s remittances. A prolonged war could cause a mass return of workers and a sharp decline in remittances, severely denting the invisibles surplus and widening the current account deficit.
Q3: What is the current status of India’s food and fertiliser stocks compared to the start of the Russia-Ukraine war?
A3: India is in a much stronger position on food and fertilisers than in 2022. Government stocks of rice and wheat are at an all-time high of 99.7 million tonnes. The next kharif planting season is months away, and global food production is projected to be record high. However, a prolonged war could threaten fertiliser supplies, as over 60% of India’s LNG imports and 80% of inputs like sulphur and ammonia come from West Asia.
A4: What has happened to capital flows into India during the current war?
A4: Capital flows have slowed dramatically. Net capital inflows plunged from $89.8 billion in 2023-24 to just $18 million in 2024-25, turning negative for the first nine months of the current fiscal year. Foreign portfolio investors have made net sales of $18.9 billion in Indian equity markets last year and another $9.4 billion so far in 2026, adding to the pressure on the rupee.
Q5: According to the article, what is India’s “real vulnerability” in the current West Asia conflict?
A5: India’s real vulnerability is its heavy dependence on the Gulf region for remittances and its ability to sustain its invisibles account surplus. A prolonged war could force a large-scale return of Indian workers from Gulf countries, causing remittances to plummet. This would balloon the current account deficit at a time when capital flows have already slowed, creating a perfect storm for India’s external finances.
