A prolonged disruption in the Strait of Hormuz could eventually crowd out private investment in India by stoking inflation, widening the current account deficit and weakening the rupee, according to a report by geopolitical consulting firm The Asia Group. The report, titled No Safe Harbor: Asia's Continued Exposure to the Strait of Hormuz, warns that while such disruption would not derail India's long-term growth ambitions, it could significantly impact the country's economic trajectory. The report comes even as hostilities in West Asia have eased following a memorandum of understanding signed by the US and Iran on June 17, though the agreement remains fragile with the two sides yet to resolve differences over the Strait of Hormuz. The UN Conference on Trade and Development (UNCTAD) has now reinforced these concerns, warning that vulnerable economies could continue to face elevated food, fuel and transport costs even after energy markets stabilise following the reopening of the Strait of Hormuz.
The biggest risk lies in prolonged rather than temporary disruptions, as any crowding out of private investment would weaken the government's post-pandemic growth strategy. As reported by The Asia Group, India's growth strategy relies on higher public capital expenditure to catalyse private investment and generate a multiplier effect across the economy. The Centre has tripled its capital expenditure over the past five years following the Covid-19 pandemic, making sustained disruptions particularly concerning for long-term economic planning. According to Nisha Biswal, partner at The Asia Group, "The key risk for India is the duration of the crisis. India can manage a short disruption and has done so quite well, but a crisis extending into late 2026 would really force harder trade-offs on inflation control and fiscal discipline."
The government has already implemented higher subsidies, fuel tax cuts and targeted welfare measures to cushion the immediate impact of the West Asia crisis. However, according to The Asia Group, sustained intervention would strain public finances and complicate efforts to maintain budget discipline. The fiscal measures are already showing impact, with the fiscal deficit rising more than 12-fold year-on-year in April-May as revenue collections weakened by nearly 2 per cent and expenditure jumped 18 per cent. Looking ahead, the report identifies liquefied petroleum gas availability, fertiliser prices, freight costs and monsoon performance as key indicators to watch to determine whether disruptions are compounding to create a wider inflationary challenge. UNCTAD notes that higher fuel, gas and fertiliser costs could continue to feed through into agricultural production, transport costs and household budgets even after energy markets stabilise.
India faces significant exposure to Strait of Hormuz disruptions, with over 40 per cent of India's crude imports and more than half of its LPG and LNG imports passing through the Strait before its closure. As reported by The Asia Group, India's export industries depend on inputs shipped through the Strait, including feedstock for refined petroleum products, petrochemicals, pharmaceuticals and medicines. The India Meteorological Department has forecast a below-normal monsoon in 2026, projecting rainfall at 90 per cent of the long-period average due to El Niño conditions, potentially adding to inflationary pressures if energy prices remain elevated. The UNCTAD report identifies 61 vulnerable economies exposed to oil and cereal import shocks linked to the Strait of Hormuz disruption, including countries like Cape Verde, which relies heavily on imported fuel and has experienced rising electricity, transport and food costs that could continue even after energy markets stabilise.
The impact has been uneven across businesses, with larger firms better positioned to absorb the shock while India's SMEs face much tighter margins, working capital constraints and less ability to hedge. According to Nisha Biswal, "That matters because MSMEs account for roughly one-third of India's GDP." The report suggests that while a prolonged crisis would test India's macroeconomic resilience, it could also accelerate structural shifts in the country's energy strategy, potentially hastening efforts to diversify crude and gas imports beyond the Gulf and spurring faster investment in domestic clean energy, even as supply chain constraints could limit the pace of the transition. UNCTAD warns that staple food-importing countries such as Yemen remain highly vulnerable because their fragile economies are ill-equipped to absorb higher grain prices and transport costs, with a 5 per cent increase in food prices can significantly raise the risk of childhood wasting.
