Twin Risks of War and Weather Threaten Indian Economy

The ongoing military conflict in West Asia involving Israel and the US on one side and Iran on the other has heightened geopolitical tensions and geoeconomic uncertainty. How long the conflict will last and what its outcome will remain uncertain. 

The impact on global commodity markets in general and energy markets in particular is severe. With the virtual closure of the critical shipping passage through the Strait of Hormuz, energy supplies (crude and LNG) face massive disruption. 

Energy infrastructure in the Gulf has come under attack even as several producing countries have shut down oil production. Security risks have curtailed tanker movements, freight rates have surged, and insurers have turned extremely hesitant.

Unsurprisingly, crude oil prices have spiked, with Brent breaching the psychological $100-a-barrel mark. Natural gas prices have also risen sharply. Asia is a net oil importer and is therefore highly exposed to supply disruptions and higher oil prices. Asia-Pacific economies still rely heavily on oil, coal, and natural gas as major sources of energy. India is no exception. India’s dependence on crude oil imports is well over 80%.

In just a few days, the war has altered energy market fundamentals. The oil market has swung from oversupply to scarcity as countries scramble for alternatives.  

As crude oil is a universal intermediate, rising energy prices will inevitably push inflation higher. Central bankers, in turn, may become hesitant to cut interest rates. The initial growth optimism for 2026 is already giving way to caution.

For India, the challenge is not confined to war and energy prices. A looming weather risk threatens to adversely affect ready-for-harvest Rabi crops — mainly grains (wheat), oilseeds (rapeseed/mustard), and pulses (chickpeas).

The risk is now becoming real. Heatwaves across northern parts of the country — major wheat-growing areas of Uttar Pradesh, Madhya Pradesh, Bihar and Rajasthan — are reeling under unusually high daytime temperatures.

Despite a record sown area of 33.4 million hectares, the wheat harvest risks falling well short of the official production target of 119 million tonnes.

But the worst may still lie ahead, possibly in the second half of this year. Meteorological experts worldwide are warning of an emerging El Nino that could hit South Asia. El Nino is associated with dry weather conditions. Of course, it is still not known if the weather phenomenon will be mild or severe. India will have to brace for the worst.

El Nino could potentially impact the 2026-27 Kharif crops — rice, coarse cereals, pulses, oilseeds, cotton and sugarcane. In other words, two back-to-back adverse weather events threaten agriculture, food security and rural incomes. It is unclear whether New Delhi has taken cognisance of the looming risk.

Already, imports of edible oil, pulses and cotton stand at record levels. Any threat to Kharif production will force India to import more, send global prices soaring, and stoke food inflation.

Soaring crude oil prices also affect vegetable oil markets through the biofuel channel. Prices of palm and soy oils have spurted 15-20% in the last week. Crude palm oil, which was languishing around $1,000 a tonne until two weeks ago, is now quoted sharply higher at $1,200 per tonne. India, incidentally, is the world’s largest importer of palm oil at about 9 million tonnes valued at close to $10 billion.

The emerging scenario is deeply concerning. The government faces a daunting challenge to contain weather damage, augment food availability, and rein in food and energy inflation.