The Strait of Hormuz has been at the centre of tensions between the United States and Iran since the war began on February 28. Following strikes by the US and Israel, Tehran responded by effectively closing the strait, which carries nearly a fifth of the world’s oil and a significant share of global liquefied natural gas (LNG).
Although the entire world was affected by the closure, the impact was felt most strongly in Asia, according to geopolitical consultancy The Asia Group. Around 80% of the oil and nearly 90% of the LNG passing through the waterway was typically destined for Asian markets, the group noted.
In its latest report, No Safe Harbor, it examined how India could respond if the crisis were to escalate into a prolonged blockade. The analysis is AI-based and uses the firm’s proprietary scenario-modelling platform, which simulates how governments, businesses, central banks and other key institutions are likely to respond during a crisis.
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What did the simulation examine?
The simulation modelled the interaction of five key players in India—the Government of India, the Reserve Bank of India (RBI), Parliament, large industries, and small and medium-sized businesses—and how they would respond under different crisis scenarios. It also examined how India would cope if disruptions in the Strait of Hormuz became severe and continued for more than 90 days.
The simulation was run 50 times and modelled interactions over 180 days, beginning on June 11. The results were assessed 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 added that the period after the first 90 days, beginning in mid-September, became much more challenging, particularly in simulations that assumed severe disruptions in the Strait of Hormuz.
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In the short term, the simulation showed that government measures such as subsidies and fuel tax cuts helped reduce the impact of the crisis. However, these measures also came at a fiscal cost.
“While government approval remained relatively stable in 80% of the simulations, the fiscal deficit consistently exceeded the government’s FY2026-27 target of 4.8% of GDP. Depending on the severity of the disruption, it ended between 5% and 5.3% of GDP by mid-December,” according to the report.
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 reduce the immediate impact of the crisis. These included imposing temporary fuel price caps, rolling out fuel subsidies, securing alternative energy supplies through diplomatic channels, using compensation funds to support refiners, and deploying strategic petroleum reserve swaps in selected cases.
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The report says these measures helped limit immediate energy disruptions and maintain political stability during the early stages of the crisis.
What happens if disruption continues?
According to the report, India’s ability to absorb the shock weakens if the disruption lasts beyond three months. While government measures such as fuel subsidies and tax cuts can help keep the economy stable initially, they come at a growing cost to the government.
The report says households would begin to feel the pressure as cooking gas prices rise and subsidised LPG refills for low-income families are reduced. “A sustained Hormuz disruption would not derail India’s growth ambitions, but it could fuel inflation, widen India’s current account deficit, and weaken the Indian rupee, all of which could crowd out private investment over time,” the report said.
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The impact would also be felt across key sectors.
Agriculture could face higher fertiliser costs because India imports most of its sulphur, a key ingredient in fertiliser, from Gulf countries. “Since around 42% of India’s workforce depends on agriculture, even a moderate rise in farming costs could hurt rural incomes and employment,” the report said.
In 34 runs, food Consumer Price Index breached 8 percent in the September-October window and remained elevated, though broadly stable, through mid-December, as per the simulation.
India’s pharmaceutical industry, one of the country’s biggest export sectors, could also come under pressure. Higher oil prices would increase manufacturing, packaging and transport costs, while imported raw materials used to make medicines would become more expensive. Larger drugmakers may be able to absorb the higher costs, but smaller manufacturers could face tighter profit margins.
The report also says a prolonged energy crisis could speed up India’s shift towards renewable energy as the country looks to reduce its dependence on imported fossil fuels.
Overall, the report says India is well placed to handle a short-term disruption in the Strait of Hormuz. But if the crisis stretches beyond three months, it could become much harder to protect households, businesses and the economy from rising costs.
