Emerging Faultlines

The first month of the Iran conflict has seen limited impact on India. Most businesses have not passed on supply-side cost pressures to consumers, except in sectors like airlines and restaurants. A key factor has been the government's decision to maintain stable retail petrol and diesel prices, insulating consumers despite global fuel price hikes of 10-40%. This is notable as diesel and motor spirit constitute nearly 60% of India's refined petroleum consumption. However, inflation data indicates potential economic pressures.

• If crude prices stay elevated at around $120 per barrel, latent pressures might become more pronounced.
• LPG inflation is rising alongside increased prices for substitute fuels such as firewood, coal, and petcoke, suggesting cost pressures are spreading across the energy chain.
• On the corporate side, the ability of companies to absorb costs is waning, potentially leading to increased consumer prices in sectors like FMCG, personal care, and pharmaceuticals.
• The risk is inflation without corresponding economic growth, where rising prices are not supported by higher wages or profitability.

Second-Order Effects

Concerns over crude shortages focus on downstream industrial linkages like naphtha, petcoke, hydrocarbons, and petrochemicals, which represent a small share of crude use. Therefore, disruptions may emerge with a delay.

• Naphtha, accounting for about 7% of India's crude imports, is a feedstock for plastics, tyres, and key industries like steel and cement.
• Naphtha consumption dropped by approximately 8% Y-o-Y in March 2026, reflecting structural declines due to shifts to cheaper alternatives, global demand slowdowns, and high inventory levels.
• Near-term stress is visible in export-oriented sectors like perishables, FMCG, and textiles due to shipment disruptions, alongside fuel-intensive sectors like restaurants.

A Coordinated Policy Response

The broader policy response has been calibrated and defensive, focusing on stability. Fiscal and administrative measures have been timely, with held retail fuel prices and relief for exporters facing shipment disruptions.

• Regulated LPG supply easing and prioritization helps avoid panic and ensures efficient allocation during constraints.
• Financial policy remains steady to avoid overreacting to the supply-side shock.
• This results in stable financing conditions, measured rate expectations, and currency stability.

Conclusion

India's economic resilience appears intact, with the real test lying ahead. If energy disruptions are temporary, current measures can successfully absorb the shock. However, if they persist, a shift from containment to mitigation will be necessary, requiring active fiscal, monetary, and sectoral interventions. The defense strategy aims to preserve stability amid global uncertainty.