The unfolding geopolitical tensions in West Asia have rapidly evolved into one of the most consequential external shocks confronting Indian manufacturing in recent history. While global conflicts have historically disrupted trade flows and commodity markets, the present crisis carries a distinctive intensity and breadth—cutting across energy, logistics, financial systems, and industrial supply chains. The scale of its impact is perhaps best captured by the latest macroeconomic indicators: the HSBC India Manufacturing Purchasing Managers’ Index (PMI) for March 2026 declined to a 45-month low of 53.9, down from 56.9 in February. Though still above the neutral 50 mark, this sharp moderation signals a palpable slowdown in industrial momentum amid escalating cost pressures and supply disruptions.

Simultaneously, external demand has softened, with India’s merchandise exports declining by 7.4 per cent year-on-year in March, following a contraction in February. Imports too fell by 6.5 per cent, reflecting both weakened demand and heightened global uncertainty. These numbers underscore a critical reality: what began as a regional geopolitical flashpoint has swiftly morphed into a systemic economic challenge for India’s manufacturing ecosystem.

At the heart of this disruption lies India’s structural dependence on energy imports and global trade networks—dependencies that have now become conduits for economic stress. As industries grapple with rising costs, delayed shipments, and volatile demand, the current crisis is not merely cyclical but deeply structural in nature.

Mounting pressures

The most immediate and visible impact of the West Asia conflict is through energy markets, logistics networks, and financial volatility. However, as Manmohan Parkash, Former Senior Advisor, Office of the President, Asian Development Bank (ADB), emphasises, the deeper implications are far more pervasive.

“The immediate impact of the West Asia conflict on India is most visible through energy, trade routes, and financial volatility, but the deeper effects are structural and extend across multiple industries,” says Manmohan Parkash. He further elaborates that India’s reliance on imported crude—over 80 per cent of its requirement—creates a direct vulnerability, especially since a significant portion of these imports transit through the Strait of Hormuz. Any escalation in this corridor exposes the country to price shocks, supply uncertainty, and currency pressures, ultimately cascading into inflation and rising input costs across sectors.

These vulnerabilities are not isolated. They intersect with logistics disruptions, as shipping routes become risk-prone and insurance premiums surge. Parkash points out that rerouting vessels or delays in transit significantly increase freight costs, placing export-oriented sectors such as textiles, engineering goods, and chemicals under immense pressure. With margins already tight and global demand uneven, such disruptions amplify financial strain.

Beyond logistics, the second-order effects are equally concerning. Parkash highlights that Indian industries depend heavily on intermediate goods—petrochemicals, specialty chemicals, and metals—whose pricing is linked to West Asia. Disruptions in these supply chains ripple across manufacturing cycles, complicating inventory planning and production schedules.

Equally critical is the financial channel. Rising energy prices and global uncertainty often trigger capital outflows from emerging markets, weakening the rupee and increasing import costs. As Parkash notes, this compounds inflationary pressures and complicates macroeconomic management. In his words, “what appears as a regional conflict quickly becomes a systemic economic risk for India,” given the interconnected and mutually dependent nature of global supply chains.

Mukul Goyal, Cofounder and Director, Stratefix Consulting, frames the crisis through three critical dimensions: “The impact manifests across three critical dimensions: energy cost inflation, supply chain discontinuity, and working capital strangulation, each disproportionately affecting SMEs operating on razor-thin margins of 5-8 per cent.”

Expanding on the energy dimension, Goyal explains how crude oil dynamics are reshaping cost structures across industries. With India’s crude import dependence nearing 90 per cent and a large share transiting through vulnerable routes, any upward movement in global prices directly translates into manufacturing cost inflation. Industries reliant on petroleum-derived inputs have been hit hardest. He notes that the leather and footwear sector has witnessed input cost increases of nearly 30 per cent for materials such as polyurethane and thermoplastic rubber, while packaging materials have surged by 30–50 per cent.

The automotive component sector is also facing acute shortages, with supply gaps emerging across regions. This underscores a broader issue: supply chains are not merely delayed—they are increasingly fragmented and unpredictable.

Goyal further highlights India’s deep trade linkages with the Gulf, with bilateral trade exceeding $180 billion. This creates significant exposure for sectors such as pharmaceuticals, engineering goods, textiles, and chemicals. Disruptions at key trans-shipment hubs like Jebel Ali and Salalah have multiplied delays, affecting not just exports but also global supply chains that rely on these nodes.

Pankaj Chadha, Chairman, EEPC India, underscores the export dimension of this crisis. He explains that geopolitical tensions have severely impacted engineering exports, which derive around 16 per cent of their demand from the region. “The disruption of exports routed through the UAE—India’s second-largest export destination—has been particularly damaging, given its role as a re-export hub. While short-term declines in exports are inevitable, recovery will hinge on the normalisation of geopolitical conditions,” he notes.

For small and medium enterprises (SMEs), the situation is even more precarious. Goyal points to the sharp decline in manufacturing PMI as a reflection of weakening momentum, particularly among smaller firms. He cites the ceramics cluster in Morbi, where freight costs have skyrocketed from $300 to $8,000 per container—completely erasing profit margins. Exporters dependent on receivables for working capital are facing acute liquidity crises due to shipment delays.

Similarly, the carpet cluster in Bhadohi is experiencing raw material delays of two to three weeks, extending production cycles and forcing slowdowns. These are not isolated incidents but symptomatic of a broader structural fragility in supply chains.

The disruption extends beyond logistics into core industrial operations. Goyal points out that Qatar’s LNG production halt has forced production cuts at Indian urea plants during a critical agricultural season. In Firozabad, gas-powered glass furnaces requiring continuous high temperatures are struggling to sustain operations amid supply uncertainty. Such disruptions reveal how deeply integrated and vulnerable industrial ecosystems have become.

Echoing these concerns, Vivek Prasad, Executive Director, Avalon Consulting, states, “Fuel shortages, rising raw material costs, and higher export access costs are key pain points. Energy-intensive industries such as steel, aluminium, and chemicals have been particularly affected, with cascading impacts on downstream sectors like electronics and electrical products.”

Prasad also highlights a strategic shift that may emerge from this crisis. Companies, he says, will increasingly explore alternative markets—possibly domestic—to sustain volumes. At the same time, there will be a strong focus on cost optimisation, driving greater adoption of automation and emerging technologies like generative AI.

SMEs under stress

The challenges are particularly acute for SMEs, which operate with limited financial buffers and bargaining power. R Srinivasan, Director at AIRA Consulting Pvt Ltd, explains, “Input price volatility has severely impacted cost structures, while the inability to pass on these costs to customers has squeezed margins. Compounding the problem, large industries are postponing purchases, affecting order flows during a critical quarter.”

Srinivasan identifies three key challenges: rising input costs, labour shortages, and currency depreciation. Labour shortages, exacerbated by seasonal migration and rising LPG costs, continue to disrupt operations. Meanwhile, the depreciation of the rupee has increased import costs, further straining financials.

Adding to this, Goyal observes a “cruel paradox” for SMEs: they lack the scale to maintain inventory buffers and are too small to command supplier priority during shortages. This has led to a surge in force majeure requests, as companies seek relief from contractual obligations they can no longer meet.

Energy shock

If logistics disruptions represent the visible layer of the crisis, the energy shock forms its core. India’s heavy dependence on imported energy has amplified the cascading effects of rising crude and gas prices on manufacturing competitiveness.

Tushar Bhaskar, Chief Business Officer, Rubix Data Sciences, describes the situation as a “classic energy-led cost cascade,” where external shocks translate directly into domestic manufacturing stress. With over 85 per cent dependence on crude imports, even modest price increases have significant economic implications. A $10 per barrel increase in crude oil prices adds an estimated $13–14 billion to India’s import bill annually, he explains.

At the firm level, Bhaskar explains, rising energy costs impact production through three primary channels: energy, transport, and feedstock. Energy-intensive sectors such as cement, metals, and petrochemicals face direct cost escalation, while transport costs increase both inbound and outbound expenses. This raises the total landed cost of goods, reducing competitiveness in domestic and export markets.

The second-order effects are particularly pronounced in petrochemical-linked value chains. Industries dependent on plastic resins have seen input costs rise by 40–60 per cent, leading to packaging cost increases of up to 50 per cent. This has severely compressed margins in sectors such as FMCG and toys, with manufacturers already projecting price increases.

Bhaskar also highlights the impact on fertilisers and agriculture-linked industries. Rising natural gas prices increase production costs, creating a feedback loop into food inflation and wage pressures. This ultimately dampens demand for manufactured goods, further weakening industrial output.

At a macro level, the implications are profound. Bhaskar notes that every $10 increase in crude prices can reduce India’s GDP growth by approximately 0.5 per cent. This underscores the deep integration of energy costs with economic activity and the systemic nature of the current crisis.

Dual vulnerability

While the overall impact of the West Asia conflict is widespread, certain sectors are particularly vulnerable due to their dependence on imported energy, crude-linked inputs, and export markets in the region.

Bhaskar explains that energy-intensive industries such as cement, steel, aluminium, ceramics, and glass are among the hardest hit, as fuel and power costs dominate their production expenses. Petrochemicals and plastics, closely tied to crude prices, are also facing severe margin pressures.

Fertiliser manufacturing represents another structurally exposed sector, given India’s reliance on imports and the Middle East’s significant share in supply. Metals and MSME-scale foundries are similarly vulnerable due to their dependence on energy-intensive processes and imported raw materials.

Consumer-facing industries such as paints, adhesives, and textiles are experiencing input cost inflation due to their reliance on crude-derived materials. In textiles, the rising cost of synthetic fibres is eroding margins, particularly for smaller players.

However, the vulnerability is not limited to inputs alone. West Asia is also a critical export market for Indian goods, creating a dual-channel stress. Bhaskar notes that the region accounts for a significant share of exports across categories such as rice, meat, spices, automobiles, and gems and jewellery. Even pharmaceuticals, though more diversified, maintain a strategic presence in the region.

This dual exposure—rising input costs and weakening export demand—creates a compounding effect. As Bhaskar concludes, the conflict has created a “dual-channel stress” that structurally impacts sectors with high energy intensity and strong Gulf linkages.

Crisis playbook

To mitigate the fallout, policymakers have moved swiftly with a mix of fiscal relief, regulatory flexibility, and institutional coordination. Yet, as industry voices suggest, the effectiveness of these measures will ultimately hinge on execution and adaptability.

Highlighting the need for sustained policy agility, Pankaj Chadha underscores that while the government has acted promptly, exporters continue to face operational uncertainties. He notes, “The government has been proactive in addressing export-related issues; however, there is a need for continued responsiveness to operational challenges faced by exporters. Given the current global uncertainties, policy flexibility and timely intervention will be critical. Exporters are navigating an unusually complex environment, and sustained government support will be essential in maintaining growth momentum.”

The centrepiece of the government’s response is the RELIEF scheme—an ambitious attempt to cushion exporters against immediate shocks. Mukul Goyal describes it as a structured intervention, stating, “The government's response demonstrates comprehensive crisis management, though implementation effectiveness will determine ultimate outcomes. The Rs 4.97 billion RELIEF (Resilience & Logistics Intervention for Export Facilitation) scheme addresses immediate exporter vulnerabilities through three mechanisms: up to 100 per cent additional ECGC risk coverage for shipments during February 14-March 15, 2026; up to 95 per cent risk coverage for upcoming shipments through June 15, 2026; and up to 50 per cent reimbursement of freight and insurance surcharges for MSME exporters, subject to Rs 5 million ceiling.”

Beyond this immediate relief, the government has deployed a broader toolkit to stabilise trade and production ecosystems. Goyal elaborates on these interventions, noting, “Beyond RELIEF, the government has deployed multi-pronged interventions: import duty cuts on 41 petrochemical items to cushion input cost inflation; allowing SEZ manufacturing units to sell domestically at concessional duty for one year; extending RoDTEP export benefits through September; automatic extension of export obligations for Advance Authorisations and EPCG falling due March-May 2026 to August 31 without penalties; and waivers on storage and dwell time charges at ports for stranded cargo.”

Equally critical has been the institutional response aimed at real-time coordination. As Goyal explains, “The Inter-Ministerial Group on Supply Chain Resilience, operational since March 2, 2026, with daily review meetings, coordinates responses across ministries, financial institutions, logistics providers, and exporter associations. Force majeure relief, granted case-by-case during Covid-19, is being examined for government contracts affected by raw material disruptions.”

However, the crisis has also revealed structural weaknesses that policy alone cannot resolve. Goyal cautions that industry must move in tandem with government action, particularly in areas such as energy sourcing and supply chain design. Stressing the importance of diversification, he says, “However, industries must implement parallel strategic responses. Energy diversification proves critical, fertilizer producers should accelerate sourcing from Russia, Central Asia, and North Africa markets not Hormuz-dependent. Indian refineries are already exploring alternatives in Africa and South America, though the 25-day strategic crude reserve provides limited buffer.”

Further emphasising operational resilience, he adds, “Supply chain redesign demands immediate attention. Digital risk management systems mapping supplier tiers, plant locations, port exposure, energy intensity, logistics routes, and concentration risk by country enable proactive resilience. Companies should prioritise buffer inventory for inputs with longest alternative sourcing lead time and highest production impact if interrupted. The current crisis exposes the false economy of just-in-time inventory systems when geopolitical risk materialises.”

The need to reduce overdependence on specific geographies is another recurring theme. Goyal points out, “Geographic diversification of export markets reduces Gulf dependency, though execution requires investment in new market development and relationship building that takes years. Regional trade agreements and alternative corridors, INSTC (International North-South Transport Corridor) via Chabahar port, though itself affected by Iran tensions, need acceleration.”

From a financial stability perspective, the stress on small and medium enterprises (SMEs) is particularly concerning. Srinivasan draws attention to the cascading risks within the credit ecosystem, warning, “One clear outcome is the stressed cashflows of SMEs. There will definitely be an increase in NPAs - delayed payments of outstanding liabilities due to cashflow issues. The government must be alive to this fact and assist in reclassification of NPAs. Further there is a need for working capital support without insistence on additional collateral something on the lines of ECLGS during Covid. Term loans taken for capital expansion will also face delayed payments, so it is important to provide support. One also apprehends delays in statutory payments - TDS and GST so some kind of regulatory support on this to accommodate delayed payments is welcome. The government should also be conscious of opportunities for profiteering in the current volatility and provide necessary guidelines to prevent this.”

Building resilience

While government interventions provide a crucial buffer, the onus of long-term resilience rests squarely on industry. The current crisis serves as a catalyst for Indian manufacturers to reimagine their sourcing strategies, energy dependencies, and market alignments.

Outlining a multi-pronged approach centred on diversification and flexibility, Tushar Bhaskar says, “Indian manufacturers can reduce exposure to a US–Iran conflict by structurally diversifying energy sourcing, strengthening supply chain flexibility, and reducing the dependence on chokepoint-driven imports such as those passing through the Strait of Hormuz. A key shift already visible is India’s increasing crude diversification: India’s crude imports from Russia surged in March 2026, with purchases rising by more than three times to nearly €5.3 billion (about $6.2 billion) compared to €1.4 billion ($1.6 billion) in February 2026, reflecting opportunistic sourcing amid West Asian instability and concerns around route disruptions. This underscores a broader strategy of reducing the reliance on Gulf-linked supply chains by expanding procurement from Russia, the US, West Africa, and Latin America. Policy frameworks also support this direction through strategic petroleum reserves, which currently cover roughly 6–8 weeks of consumption, with expansion efforts aimed at moving closer to global benchmarks of around 90 days, helping cushion short-term supply shocks.”

Energy transition is emerging as a parallel imperative, particularly for resource-intensive sectors. Bhaskar highlights the urgency of reducing dependence on fossil fuel imports, noting, “Beyond crude diversification, manufacturers, especially in energy-intensive sectors like steel, cement, and petrochemicals, need to increasingly adopt electrification, renewable energy procurement through captive solar and wind PPAs, and early-stage exploration of green hydrogen to reduce exposure to imported LNG and oil-linked inputs. This is critical given that freight disruptions during geopolitical shocks have previously increased shipping costs by 40 per cent–50 per cent and extended delivery timelines by 15–20 days due to rerouting, significantly affecting industrial working capital cycles.”

Another key pillar of resilience lies in reconfiguring supply chains through regionalisation and dual sourcing. Bhaskar elaborates, “A second strategic response is supply-chain regionalisation and dual sourcing of critical intermediates such as chemicals, resins, and metals. Firms need to expand their procurement bases into the Association of Southeast Asian Nations (ASEAN), Africa, and Latin America while also building domestic vendor ecosystems to reduce the dependency on Middle Eastern inputs. In export-facing sectors like automobiles, where West Asia accounts for a significant share of demand (about 26 per cent of India’s automobile exports, as per Rubix Data Sciences), companies need to actively diversify into Africa and Southeast Asia to reduce regional demand concentration risk.”

Trade policy is also playing a pivotal role in reshaping India’s global integration. Bhaskar points to the expanding network of free trade agreements as a strategic lever, stating, “A key strategic lever for improving resilience is India’s recently concluded and expanding Free Trade Agreement (FTA) network, which helps manufacturers diversify both export markets and input sourcing away from geopolitically sensitive regions like West Asia.”

India has recently concluded FTAs with multiple countries and regions, such as the UK, Oman, European Free Trade Association (EFTA), European Union (EU), and New Zealand, collectively providing preferential access to more stable and diversified markets across Europe, Oceania, and strategically important partners. “These agreements are particularly significant as they connect Indian industry to large, demand-stable economies such as the UK and EU, resource- and manufacturing-intensive blocs like EFTA, and emerging trade partners like New Zealand, while also reinforcing linkages with Oman as a key regional node. This diversification is crucial given West Asia’s substantial share in India’s export basket (around 26 per cent of automobile exports and 22 per cent of spice exports, as highlighted by Rubix Data Sciences) and helps reduce overdependence on a single region,” states Bhaskar. 

He adds, “Through tariff concessions, improved market access, and stronger rules-of-origin frameworks, these FTAs enable Indian manufacturers to expand into higher-value segments such as engineering goods, pharmaceuticals, and textiles while also broadening sourcing options for critical industrial inputs. Overall, this evolving FTA architecture strengthens supply chain resilience by creating more geographically balanced trade networks and reducing vulnerability to geopolitical shocks.”

Yet, beyond tactical adjustments, experts stress the need for deeper structural transformation. Manmohan Parkash advocates for a forward-looking approach aligned with national industrial policy. He observes, “India needs to accelerate supply chain diversification, particularly in sectors such as electronics, semiconductors, critical minerals, and specialty chemicals. Initiatives under ‘Make in India’ and production-linked incentives are steps in this direction, but they must be complemented by deeper integration into trusted trade partnerships and regional value chains.”

There is also a need to at alternate philosophy of supply chain management. Parkash adds, “Equally, there is a need to build resilience by design. This means moving beyond just-in-time supply models toward systems with spare capacity, dual sourcing, and inventory buffers in critical sectors. While this may increase costs, it reduces vulnerability to external shocks. Finally, India must strengthen strategic coordination between government and industry. Much of the infrastructure and supply chain risk sits with private players, and resilience requires alignment across policy, finance, and corporate strategy.”

Strategic reset

Policymakers today are confronted with a stark reality: efficiency-led globalization has reached its limits. The focus must now shift toward resilience, adaptability, and strategic foresight. As Manmohan Parkash insightfully observes, “The most important lesson is that globalization has not eliminated risk—it has concentrated it in a small number of critical chokepoints.” This concentration of vulnerabilities calls for what he describes as a transition “from a mindset of efficiency to one of managed interdependence.”

This shift is not merely semantic—it represents a fundamental redesign of economic thinking. For decades, industrial policies across the world have emphasised cost optimisation, lean inventories, and just-in-time systems. However, the current environment demands a recalibration. Parkash underscores this necessity, stating, “Resilience must be treated as a core economic objective.” He highlights the importance of accepting trade-offs, where “redundancy, diversification, and strategic buffers are necessary even if they come at a higher cost.”

The complexity of modern supply chains further amplifies this challenge. These systems are no longer linear but deeply interconnected ecosystems. Parkash points out that “modern supply chains are mutually load-bearing systems,” where disruptions in one sector cascade rapidly across others. This interconnectedness necessitates a more integrated policy framework—one that treats energy, trade, finance, and industrial strategy not as silos but as interdependent pillars of economic security.

Geopolitics, too, has emerged as a defining force in shaping industrial outcomes. Access to critical inputs such as semiconductors and minerals is increasingly governed by strategic alliances and regulatory controls. Parkash emphasises the need for India to engage proactively with this reality, noting that the country must position itself “within these emerging networks through targeted partnerships and agreements, rather than relying solely on market mechanisms.”

Another dimension of resilience lies in governance structures. Much of the infrastructure that underpins global supply chains—ports, logistics networks, energy systems—is privately owned and globally dispersed. Building resilience in such a landscape requires unprecedented levels of collaboration. Parkash calls for “new frameworks of public-private collaboration, data sharing, and coordinated contingency planning,” signalling a move toward more cooperative and transparent economic systems.

Perhaps the most critical takeaway, however, is the need for anticipation. Crises are no longer rare disruptions; they are recurring features of the global economy. Parkash frames this succinctly, arguing that such conflicts are “not anomalies—they are signals of a more fragmented and contested global order.” Preparing for this reality demands a deeper rethinking of how risk and interdependence are understood in economic planning. In his words, “long-term manufacturing resilience will depend less on insulation from the world, and more on the ability to navigate and absorb shocks within it.”

Energy security has emerged as a parallel and equally urgent concern. Vivek Prasad highlights how recent conflicts have exposed vulnerabilities in traditional energy dependencies. He notes that these events have reinforced “how vital energy security is to a nation and how quickly legacy relationships and established norms of trade & commerce can get upended.” The implication is clear: India must accelerate its transition toward alternative energy sources. Prasad advocates for a concerted push toward solar and nuclear energy, urging industry and policymakers to reduce dependence on fossil fuels through sustained investment and coordinated action.

From shock to strategy

Even as structural challenges mount, India’s economic outlook remains cautiously optimistic. There is a palpable sense of unease across industries, but also a recognition that crises often catalyse transformation. Srinivasan captures this duality when he reflects on the increasing frequency of disruptions in the post-war global order. He notes that the world is entering a phase where such shocks may become routine, compounded by technological disruptions such as artificial intelligence.

For small and medium enterprises (SMEs), this evolving landscape presents both risks and opportunities. Srinivasan urges them to respond proactively: “SMEs need to make themselves stronger, invest in innovation, professionalise their set up, make world class products and compete globally.” He further emphasises the importance of leveraging global partnerships to scale operations, calling this moment “too important a crisis to waste.”

Macroeconomic indicators offer some reassurance. India’s private sector has demonstrated resilience, with output rebounding in April 2026 after a brief slowdown in March. The HSBC Flash India Composite PMI Output Index rose to 58.3, signalling renewed momentum in both manufacturing and services. This recovery has been driven by improved output and rising new orders, suggesting that domestic demand remains robust.

However, the picture is not without its challenges. Rising input costs—particularly in fuel, gas, and raw materials—continue to exert pressure on businesses. These cost escalations are directly linked to global disruptions, reinforcing the need for structural reforms in energy sourcing and supply chain management.

Vivek Prasad highlights the uncertainty that continues to cloud the global outlook. He points out that the duration of the West Asia conflict remains unclear, leading many companies to adopt a wait-and-watch approach. At the same time, he identifies a likely shift in corporate strategy, noting that manufacturers may increasingly seek to “hedge this risk by looking for alternative sources and lobbying the government for better energy security.” This indicates a growing alignment between industry priorities and policy imperatives.

Looking ahead, the trajectory for FY27 will depend significantly on geopolitical developments. Pankaj Chadha offers a measured perspective, stating that “the outlook for FY27 remains cautiously optimistic, contingent on geopolitical stability.” He underscores the importance of the first quarter, warning that any escalation in tensions could alter the growth trajectory. At the same time, he points to positive drivers such as free trade agreements and diversification efforts, which could support export growth if global conditions stabilise.

Encouragingly, multilateral institutions share this optimism. Projections from the World Bank and the International Monetary Fund suggest that India’s growth will remain strong, supported by domestic demand and improving trade dynamics. However, these forecasts are predicated on a relatively stable external environment—an assumption that remains uncertain.

In a world where uncertainty is the only constant, India’s success will depend on how effectively it can transform disruption into strategy—and volatility into opportunity.