The Strait of Hormuz has been at the center of tensions between the United States and Iran since the war began on February 28. Following the US and Israeli attacks, Tehran responded by effectively closing the strait, which carries about a fifth of the world’s oil and a significant portion of global liquefied natural gas (LNG).
According to geopolitical consultancy The Asia Group, although the entire world was affected by the shutdown, its impact was felt most in Asia. The group said about 80% of the oil and about 90% of the LNG passing through the waterway was typically destined for Asian markets.
In its latest report, No Safe Harbour, it examined how India could respond if the crisis escalates into a prolonged blockade. The analysis is AI-based and uses the firm’s proprietary scenario-modeling platform, which simulates how governments, businesses, central banks and other key institutions might respond during a crisis.
Also read: Mines, tolls and the US attack on Iran: Shipping through the Strait of Hormuz remains complicated
What did the simulation investigate?
The simulation modeled the interactions of five key players in India—the Government of India, the Reserve Bank of India (RBI), Parliament, large industry and small and medium-sized businesses—and how they would respond under various crisis scenarios. It also examined how India would deal if the disruption in the Strait of Hormuz became serious and continued for more than 90 days.
The simulation was run 50 times and the interactions were modeled over 180 days, starting on June 11. Results were evaluated at the 90-day mark (mid-September) and again after 180 days (mid-December).
What did the report find?
The report found that India was able to manage the crisis during the first 90 days in all simulations. However, it did so by putting pressure on government finances and key sectors of the economy. It said the period after the first 90 days, starting in mid-September, became more challenging, particularly in simulations that projected severe disruption in the Strait of Hormuz.
Also read: What is Article 5 of the US-Iran MOU, how it is behind the latest attacks. Explained
In the short term, the simulations showed that government measures such as subsidies and fuel tax cuts helped mitigate the impact of the crisis. However, these measures also came at a fiscal cost.
According to the report, “While government approvals remained relatively stable in 80% of the simulations, the fiscal deficit consistently remained above the government’s target of 4.8% of GDP for FY 2026-27. Depending on the severity of the disruption, it ended up between 5% and 5.3% of GDP by mid-December.”
Overall, the report suggests that India’s existing institutions and policy mechanisms are capable of cushioning the initial shock.
What measures helped limit the impact?
According to the report, policymakers relied on a combination of measures to mitigate the immediate impact of the crisis. These include imposing temporary fuel price caps, implementing fuel subsidies, ensuring alternative energy supplies through diplomatic channels, using compensation funds to support refiners, and deploying strategic petroleum reserve swaps in selected cases.
Also read: India withdraws commercial LPG supply ban amid hopes of US-Iran deal
The report said these measures helped limit immediate energy disruptions and maintain political stability during the early stages of the crisis.
What if the disruption continues?
According to the report, if the disruption lasts for more than three months, India’s ability to absorb shocks becomes weak. Although government measures such as fuel subsidies and tax cuts may initially help keep the economy stable, they come at an increasing cost to the government.
The report says that families will start feeling pressure due to increase in LPG prices and subsidy. cooking gas Refills have been reduced for low-income families. “Continued disruption in Hormuz will not derail India’s growth ambitions, but it could fuel inflation, widen India’s current account deficit and weaken the Indian rupee, which could reduce private investment over time,” the report said.
Also read: Negotiation or no negotiation? Confusion reigns in Doha over upcoming US-Iran discussions. Here’s what we know
Its impact will also be felt on key sectors.
Agriculture may face higher fertilizer costs as India imports most of its sulphur, a key ingredient in fertiliser, from the Gulf countries. “Since about 42% of India’s workforce depends on agriculture, even small increases in farming costs could hurt rural incomes and employment,” the report said.
In 34 runs, the food consumer price index rose above 8 percent in the September-October window and remained elevated, though broadly stable, through mid-December, according to the simulations.
India’s pharmaceutical industry, one of the country’s largest export sectors, may also come under pressure. Higher oil prices will increase manufacturing, packaging and transportation costs, while imported raw materials used to make medicines will become more expensive. Larger drug manufacturers may be able to afford higher costs, but smaller manufacturers may face lower profit margins.
The report also said that a prolonged energy crisis could accelerate India’s turn towards renewable energy as the country looks to reduce its dependence on imported fossil fuels.
Overall, the report says India is well positioned to deal with short-term disruption in the Strait of Hormuz. But if the crisis drags on for more than three months, it could be very difficult to protect households, businesses and the economy from rising costs.