Export down, Russia in, yield up
As stock prices drop like hot potatoes, crude oil surges like a mega gush, and the rupee takes a massive beating, the Indian policy-makers have devised a multi-faceted strategy to counter the Iran-Israel-US-Middle-East crisis that has engulfed the entire world. The short-term solutions range from lower exports, and higher output to increase local supplies, higher dependence on the US and Russia (despite American protests) for oil offtake, and means to arm-twist domestic users to consume less. However, the latter may create a new cycle of destruction, as India will trade-off one set of crises with another one.
First, let us examine the solutions, and then we will look at the possible repercussions. Although India is a buyer of crude oil and gas, it is a small exporter of refinery products. There are refineries, like the one owned by Reliance Industries in Jamnagar, which are export-oriented. According to the International Energy Agency, almost six per cent of the domestic production is exported. The value (April-December 2025) was more than $300 billion, and destinations included the Netherlands, UAE, the US, Singapore, Australia, even China. India exports gas, with an annual value of $500 million or so, to Nepal, Myanmar, and China.
Some of these exporters can be immediately stopped, or will be naturally curtailed. The latter include shipments to the UAE, as the shortest sea routes are dangerous, insurance is unavailable, and longer transport routes will imply higher prices. The nations with whom India can decide not to do business in the short-term may include China, or even the US, which has put relentless pressure on India for buying Russian oil. This may turn out to be a minor form of payback time. However, one will need to calculate the diplomatic gains. Indian refineries, especially those owned by the State, can be nudged to produce higher quantities for local distribution in the short run. This is especially true for products like cooking gas, and motor fuel. In any case, niche consumption segments like aviation fuel may take a beating because of the disruptions in overseas flights. Lower tourist inflows may lower energy demand by the hospitality and transport segments. India can hike coal production in the interim to produce higher power from this fossilised fuel rather than depend on imported gas.
Crude oil and gas sources may undergo yet another change. Over the last 12 months, India shifted from over-reliance on Russian oil to minimal purchases due to the US pressures, and the urgency to sign a bilateral trade deal with the latter. Now, the situation can partially reverse. Russia will surely become more dependent as the supply routes will be largely unaffected by the Middle-East crises. The US may emerge as a major supplier. America wants India to buy more. It even offered Venezuelan oil to Indian refiners. The transport routes can avoid the dangerous Strait of Hormuz, and opt for the Suez Canal.
India-US oil bargain can take the form of crude oil imports to India for the exports of petroproducts. According to oil executives, India can even tap American liquefied natural gas through the same route. Such a deal, rather than shut out product exports to the US, as mentioned earlier, may reignite India-US trade relations. America may begin to look at India in a more friendly way, especially if India buys energy. However, this will require a delicate balance between dependence on Russia and the US, and blocking out China in the interim period.
One of the oil executives, quoted in a media report, said, “Even if there is a force majeure, we have other sources of supply, which we can tap. Besides, no one is going to stop supplies indefinitely. Indian refiners are in touch with global traders to tie-up whatever capacity is available.” The Indian oil ministry tweeted, “We are continuously monitoring the evolving situation, and all steps will be taken to ensure availability, and affordability of major petroleum products in the country.” The petroleum minister, Hardeep Puri, met the refiners.
Two other issues may determine the impact on India. These include domestic prices of the refinery products, and demand chokes. There are rumours on social media that if the Middle-East war persists, petrol prices may touch INR 500. This may be in the realm of exaggeration. Officials maintain that Indian refiners are reluctant to increase local prices. They follow a “calibrated approach, and absorb losses when global prices are high, and recoup them when prices soften.” In effect, although petrol and diesel prices do not go up when global crude rises, the former do not ever come down when the latter drop.
Demand choke is entirely another problem. If the fuel supplies to local corporate users, like power, fertilisers, and steel players are curtailed, it will impact the core sectors, as well as the sensitive set of farmers. If the ordinary consumers are asked to reduce the use of petrol and diesel, there are other issues. We have witnessed them in the past when some states imposed odd-and-even schemes, and car-pools. This is a tricky area, which can lead to mass unrest if either the prices go up, and supplies remain uneven. The policy-makers will tread carefully.
This brings us to the repercussions. A reduction in exports, and shift to alternative sources may increase costs due to higher global crude prices, longer transport routes, and higher insurance costs. Ships and tankers may not be easily available for the shipments, which will add to the costs. This will further impact the trade deficit, and cause a further downward pressure on the rupee, which breached INR 91 to a dollar. Similar, deliberate demand chokes locally may hit production in core segments, and lower GDP growth rate by 1-2 per cent.
Remember that like most years, this is another election year, and four states, including West Bengal, will hold the assembly elections. Hence, any movement in the prices of refinery products, especially petrol, diesel, and cooking gas, can impact voting patterns. Holding back supplies may lead to other difficulties as it will enrage a few crucial business sectors. Inflation is another red flag. Although the Government may not mind a slight increase in retail prices, which will push up the nominal GDP, and bring some stability to the financial numbers. Indeed, the finance minister will need to calculate the possible benefits, and mark them against the dangers. But theoretical and paper calculations can go awry within no time.
