The Strait of Hormuz has remained at the centre of tensions between the United States and Iran since the war began on February 28. Following military strikes by the United States and Israel, Tehran responded by effectively closing the strategically important waterway, which carries nearly one-fifth of the world's oil supplies and a substantial share of global liquefied natural gas (LNG).
Although the closure affected economies across the world, Asia experienced the greatest impact. According to geopolitical consultancy The Asia Group, nearly 80 percent of the oil and almost 90 percent of the LNG transported through the Strait of Hormuz is normally destined for Asian markets.
In its latest report, No Safe Harbor, The Asia Group examined how India could respond if the crisis escalated into a prolonged blockade. The assessment is based on the firm's proprietary AI-powered scenario-modelling platform, which simulates the likely responses of governments, businesses, central banks, and other major institutions during a crisis.
The simulation evaluated the interaction of five major stakeholders in India, including the Government of India, the Reserve Bank of India (RBI), Parliament, large industries, and small and medium-sized enterprises. It assessed how these institutions would respond under different crisis scenarios, particularly if disruptions in the Strait of Hormuz became severe and continued for more than 90 days.
According to the report, India successfully managed the crisis during the first 90 days in every simulation. However, this stability came at the cost of increased pressure on government finances and several critical sectors of the economy. The report noted that conditions became considerably more difficult after the initial 90-day period, beginning in mid-September, especially in scenarios involving severe and prolonged disruption in the Strait of Hormuz.
The simulation found that, in the short term, government interventions such as fuel subsidies and reductions in fuel taxes helped soften the economic impact. However, these measures also created a significant fiscal burden.
The report stated that government approval ratings remained relatively stable in 80 percent of the simulations. Despite this, the fiscal deficit consistently exceeded the Government of India's fiscal year 2026-27 target of 4.8 percent of Gross Domestic Product (GDP). Depending on the severity of the disruption, the fiscal deficit rose to between 5 percent and 5.3 percent of GDP by mid-December.
Overall, the findings indicate that India's existing institutional framework and policy mechanisms are capable of cushioning the immediate economic shock.
According to the report, policymakers relied on a combination of temporary fuel price caps, fuel subsidies, diplomatic efforts to secure alternative energy supplies, compensation funds for refiners, and selective deployment of strategic petroleum reserve swaps. These measures helped limit immediate energy disruptions while maintaining political stability during the early phase of the crisis.
The report warned that India's ability to absorb the shock weakens significantly if disruptions continue beyond three months. Although subsidies and tax reductions can initially stabilise the economy, their long-term fiscal cost continues to rise.
Households would increasingly face financial pressure as cooking gas prices increase and subsidised liquefied petroleum gas (LPG) refills for low-income families are reduced. According to the report, a prolonged Strait of Hormuz disruption would not derail India's long-term economic growth ambitions but could fuel inflation, widen the country's current account deficit, weaken the Indian rupee, and gradually crowd out private investment.
The agricultural sector could also face mounting challenges because India imports most of its sulphur, an essential ingredient used in fertiliser production, from Gulf countries. Since approximately 42 percent of India's workforce depends on agriculture, even a moderate increase in farming costs could adversely affect rural incomes and employment.
The simulation further showed that in 34 scenarios, the Food Consumer Price Index exceeded 8 percent during the September-October period and remained elevated, although broadly stable, through mid-December.
India's pharmaceutical industry, one of the country's largest export sectors, could also come under sustained pressure. Higher oil prices would increase manufacturing, packaging, and transportation costs, while imported raw materials used in medicine production would become more expensive. Large pharmaceutical companies may be able to absorb these higher costs, but smaller manufacturers could experience significant pressure on profit margins.
The report also suggested that a prolonged energy crisis could accelerate India's transition towards renewable energy as the country seeks to reduce its dependence on imported fossil fuels.
The assessment concludes that India is well positioned to withstand a short-term disruption in the Strait of Hormuz through existing policy measures and institutional resilience. However, if the blockade extends beyond three months, protecting households, businesses, and the broader economy from rising costs would become increasingly difficult, making prolonged energy security a major economic challenge for the country.
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