India's Economic Lifeline: Multi-Sector Risks and Impacts of Hormuz Dependence

THE GEOSTRATA
2 days ago
5 min read

When people think about the Strait of Hormuz, they usually think about oil. They picture giant tankers slowly moving through a narrow strip of water between Iran and Oman, carrying fuel to power cars, factories, and cities around the world. But for India, this thin stretch of water that is only 33 kilometres wide at its narrowest point is far more than an oil route. It is a critical lifeline that touches almost every part of the Indian economy.

Illustration by The Geostrata

The Strait of Hormuz connects the Persian Gulf to the Arabian Sea. It is the only sea exit for countries like Saudi Arabia, the UAE, Kuwait, Qatar, Iraq, and Iran. Together, these nations supply a huge share of the world's energy. But for India specifically, it is far beyond fuel. The Strait is the gateway through which India receives crude oil, natural gas, fertilisers, and a wide range of goods. Any disruption, even a partial one, can quickly raise prices, reduce farm output, slow down industries, and squeeze the budgets of ordinary Indian families.

Understanding India's dependence on the Strait of Hormuz means looking beyond energy. It means examining how a single chokepoint in West Asia can affect the price of onions in a Delhi market, the cost of a flight from Mumbai to Bengaluru, or the amount of wheat a farmer in Punjab can grow.

INDIA'S DEPENDENCE ON THE STRAIT OF HORMUZ

India is the third-largest consumer of crude oil, importing over 85% of the oil it needs, and roughly 60% of that oil comes from countries like Saudi Arabia, Iraq, the UAE, and Kuwait.

All of this oil passes through the Strait of Hormuz before reaching ports like Mundra, Vadinar, and Mumbai. India also imports liquefied Natural Gas (LNG), which is used to generate electricity and power industrial units.

A noticeable portion of this comes from Qatar, i.e. one of the world's largest LNG exporters. Indian farmers depend heavily on fertilisers to grow crops. Many of the key inputs like phosphate rock, ammonia, and sulphur all come from Gulf countries and North Africa. India also imports around 90% of its phosphoric acid and diammonium phosphate (DAP), which originates in or passes through the Gulf region. India's trade relationship is also enormous with Gulf countries in human terms.

Over nine million Indians live and work in the Gulf. They send home billions of dollars in remittances each year. This money supports families, fuels local spending, and contributes to India's foreign exchange reserves. Any instability in the region affects not just ships and cargo, but the livelihoods of millions of Indian families.

AVIATION AND TRANSPORT: COSTLY JOURNEYS

Aviation turbine fuel, commonly known as ATF, is produced from crude oil. When the prices of oil increases, the operating expenses for airlines also rise. Indian airlines, which already function with narrow profit margins, are responding by raising ticket prices. As a result, air travel becomes less accessible for millions of travellers. In a nation with rapid growth in domestic aviation, such price hikes have the potential to slow that growth. Road transportation is also heavily affected.

Trucking companies are left with higher diesel prices, which they often pass on to customers. This leads to increased expenses for transporting goods from farms to markets, from factories to ports, and from warehouses to retail stores throughout the country.

INDUSTRY: HIGHER COSTS, LOWER MARGINS

India's industrial sector is extremely vulnerable to energy prices. Steel plants, cement factories, chemical facilities, and textile mills all need a lot of fuel and energy. Oil and petrol prices rise by raising production expenses. Smaller enterprises with insufficient financial resources may be forced to reduce production or lay off employees.

The logistics industry also suffers the same way, as higher shipping insurance fees and longer delivery delays increase the cost of importing raw materials. Industries like plastics and petrochemicals that rely on Gulf imports experience margin challenges, which can lead to decreased investment and slower growth.

ENERGY: FUEL PRICES AND POWER COSTS

Greater LNG Prices = Greater Energy Generation Costs

Electricity generation gets affected simultaneously. Several Indian states depend on LNG-based power plants to generate electricity. which results in higher electricity bills for homes, businesses, and factories. Oil prices are the most directly impacted. Oil refineries, including state-owned refineries, must pay more for their raw material when crude oil gets more expensive.

India generally maintains only about 9-10 days of oil consumption in its Strategic Petroleum Reserve (SPR). A disturbance can create concerns about supply, which can trigger inflation in domestic markets.

This cost is then also passed on to the customers or ordinary people. Since diesel is used in the majority of Indian trucks and agricultural equipment, a price increase affects the whole supply chain.

In addition to oil, there is an added risk due to India's limited access to alternative suppliers for several essential imports. Major phosphate exporters are not located close to the Indian coasts. Liquefied natural gas (LNG) from the Middle East is more affordable and consistently available compared to options from other regions.

Agriculture: Fertilisers and Food Security

The least discussed but most serious impact of a Hormuz disturbance is on Indian agriculture. Fertilisers are the backbone of India's food production. The country needs millions of tonnes of urea, DAP and other chemical fertilizers every year to sustain crop yields. A huge portion of fertiliser raw materials, especially phosphate and ammonia are imported from the Gulf and nearby regions.

If these shipments are delayed, or if reduced fertiliser production in India slows down. Prices of fertiliser rise in domestic markets. Farmers, many of whom are already under financial stress, are forced to use less fertiliser. This leads to lower crop yields, higher food prices, and the risk of food shortages in vulnerable areas.

WHY IS THIS DEPENDENCE RISKY?

The Strait of Hormuz has always been a sensitive region, and recent happenings have shown how quickly tensions there can affect global trade. Incidents like the 2019 tanker seizure by Iran, the escalation after General Qasem Soleimani’s assassination in 2020, and more recent attacks on ships in nearby routes highlight how risky the situation can be. The primary concern for India is not only the complete closure of the strait, which has never actually happened.

The larger risk is when the threat level increases and shipping companies start demanding increased insurance premiums for shipments through the area. Ship owners may choose to reroute cargo or postpone shipments.

The expense of chartering a tanker rises. Higher transport costs affect the price of almost everything. Vegetables, grains, and daily essentials become more expensive as logistics costs increase. Cooking gas and electricity bills also rise, putting pressure on household budgets.

Farmers are affected as well. Fertilisers imported through this region may become costly or delayed, reducing usage and lowering crop yields. This further pushes food prices up, creating a cycle that is difficult to control.

For typical households, particularly those with restricted finances, this circumstance can become overwhelming. A noticeable portion of their income is already allocated to essential expenses, so even a minor hike in prices necessitates challenging adjustments in their daily routines. Meanwhile, the government faces limited alternatives. It can either cover some of the rising costs through subsidies impacting public finances, or permit prices to increase, leading to higher inflation. Neither option is optimal.

Another challenge is the lack of easy alternatives. Many key imports like oil, LNG, and fertilisers are more accessible and affordable from the Gulf region than from elsewhere. Switching suppliers is not quick or simple, which keeps India dependent on this route.