Cascading effects of the West Asia war: The risks India isn’t pricing in yet

Every time West Asia destabilises, the narrative in India defaults to oil. The usual analysis then is crude rises, inflation risks get discussed, and the rest is treated as spill over. That understanding is too narrow for the current U.S.-Iran war, which is rewriting the global trade.

This war is creating a bigger ripple, moving through exports, remittances, data infrastructure, and eventually into India’s consumption engine. And unlike oil spikes, these effects don’t reverse quickly.

A weaker rupee does not always cheer exporters

While the entire economy gets distressed with inflationary pressure, a weakening rupee is usually seen as a margin of safety for exporters. This is the case when international trade is taking place as usual, without any major disruptions.

Recent data, however, signals stress. India’s exports declined by around 7.4% in March 2026, with trade flows to the Middle East sharply impacted by the shipping route disruptions. Commodities such as basmati rice witnessed freight and insurance costs surge nearly 100% and 1000%, respectively.

Here, one aspect we need to understand clearly is that while the currency benefits are gradual and temporary, the geopolitical disruptions are immediate and long-term. And right now, the latter is dominating.

The issue is not pricing—it is the ability to deliver. Shipping routes around the Strait of Hormuz are facing disruptions. Delivery timelines are uncertain. Marine insurance premiums have risen sharply.

At the same time, input costs are spiralling. Oil-linked inflation is feeding into fertilisers, chemicals, and packaging. For an import-heavy economy, a weaker rupee can raise costs faster than it improves export realisations.

Add to this the demand side. The Middle East is not just a transit route; it is a key export market. Conflict conditions typically lead to demand compression and payment delays.

So even if goods are competitively priced, buyers may defer or reduce purchases.

This is where the rating story becomes more nuanced.

The key shift in this crisis is that the rupee depreciation is no longer a clean tailwind. It is increasingly a reflection of external stress.

The quiet vulnerability: Data flows through Hormuz

There is another risk building outside traditional macro conversations. A significant portion of India’s global data traffic passes through submarine cables routed near West Asia. These are equivalent to the physical chokepoints, much like oil routes.

If disruptions occur around the Hormuz region, the implications are immediate: Higher latency as data reroutes, leading to tighter bandwidth availability, and reduced reliability. For India’s data centre ambitions, such disruptions are big risks. Connectivity and its quality are critical for us. If routing becomes unstable or expensive, hyperscalers could slow down expansion or rebalance toward alternative hubs.

This can lead to higher data costs, pressure on service-level agreements, and margin compression for operators. India’s data demand is domestic and structural, driven by localisation norms, AI workloads, and digital consumption.

It’s high time we diversified our digital infrastructure. This can also open up a strategic window. Bypassing conflict zones and stronger positioning of east coast hubs, such as Chennai, and investment in redundant landing stations and internal routing can prove to be game changers.

This can be core digital infra’s UPI moment, by transitioning from a dependent route into a more central data corridor between Europe and Asia.

Remittances: The slow-burning risk

If exports are the visible stress point, remittances are the understated one. India receives around $135 billion in remittances annually. Nearly 38% or about $50 billion comes from the Gulf. It directly feeds consumption at the household level.

A slowdown in Gulf economies, particularly in construction and services, will reflect in these flows. Even a 10% moderation creates a $5 billion gap. But the real effect is not on the current account alone.

It also impacts housing demand, reduces discretionary spending, and softens rural and semi-urban consumption. This is a gradual erosion that will take longer to return to normalcy.

Where it converges: Consumption pressure

India’s growth has held because consumption has been consistent. This is where the cascading effects are likely to land.

Agriculture first. Fertiliser imports remain a key dependency. Any disruption or price spike affects usage patterns, which in turn impacts yields. The result is a combination of food inflation and weaker rural income.

Real estate follows next. The real estate sector is already operating on tight cost structures. Energy-linked major inputs such as steel, cement, and petrochemicals are witnessing upward pressure. This can lead to a delay in project completion or passing on the cost burden, both of which slow demand.

These are the sectors that feed into employment, credit cycles, and broader consumption.

Inflation persistence

What we are experiencing is a more persistent inflationary cycle—logistics costs feeding into goods, input costs feeding into manufacturing, and fertiliser costs feeding into food.

Currency weakness adds another layer. The risk here is behavioural. Together, these trends delay discretionary consumption, dampen sentiments, and that is where growth starts to moderate.

India’s position: Stable, but not immune

India enters this phase with relative strength.

Domestic consumption remains a large anchor. Policy response has been more calibrated in recent years. Energy sourcing has become more flexible. These are meaningful buffers. But they do not fully offset second-order effects. They only soften the edges.

India’s current situation is a story of external sector stress. As oil imports rise, the current account widens. As capital flows turn cautious, currency weakens, feeding into inflation, softening consumption. The linkages are tighter than they appear.

The way forward

Diversifying trade and data routes, securing raw material supply chains, supporting export balance sheets, and gradually reducing remittance concentration are now strategic priorities.

In the near term, volatility will remain. But the larger takeaway is this: The first-order shock is rarely the most important one. The real impact lies in where it lands next. And for India, this can be an opportunity to transform our trade dynamics. With policy support and stable government, advancements in technologies, a large consumption-led economy, and a demographic dividend, India Inc. can take bolder bets to carve out innovative business models, averting such a crisis in the future.

(The author is MD & CEO, Acuité Ratings & Research Limited. Views are personal.)