The ongoing crisis in West Asia isnot merely a distant geopolitical crisis for India. Tension in this economically strategic region enters India through multiple interconnected channels, such as energy security, trade, remittance flows, and employment.
West Asia remains one of the most important trade and energy partners for India. It accounted for around 15% of India’s merchandise exports in 2024-25, with exports ranging from food products to engineering goods. The monthly export value is between USD 5 and 6 billion, making the region critical for many export-oriented sectors. Some industries are particularly exposed, and this makes them highly vulnerable to the region’s current instability. For instance, around 70-75% of India’s Basmati exports are directed towards West Asian Markets. India’s dependence on this region is even stronger in terms of energy. As the world’s third-largest oil consumer, India imports around 88% of its crude oil requirements. More than half of the LNG and LPG consumption is also facilitated through imports. A significant share of this,in the case of LPG, close to 90%, transits through the Strait of Hormuz. Any disruption in this strategic shipping route has important implications for India’s fuel availability, import bills, and inflation trajectory.
The importance of the West Asian region extends beyond trade and energy. More than 8 million Indian workers are employed across the Gulf region, particularly in countries such as Saudi Arabia, Qatar, and the UAE. According to the data from the Ministry of External Affairs, this workforce sends back close to USD 40 billion annually, accounting for around 35% of India's total remittances.
Given this importance and interconnectedness, the geopolitical instability in the West Asian region has the potential to quickly translate to economic stress in India. One of the first channels is through rising costs. Increasing crude oil prices directly increase fuel prices and transportation costs. Fuel and liquid gas have aweight of 6.8% in India’s consumer price index basket. This makes energy price volatility an immediate inflationary concern. Energy accounts for approximately 2 to 4% of operating expenditure for listed companies. Which means an increasein energy costs leads to an increase in production costs. Along with this direct cost, supply chain disruptions result in increased freight costs and raw material shortages. This indirect cost leads to higher costs and growing operational risks in sectors such as fertilisers, steel, chemicals, manufacturing, agriculture, and services.
The impact is already visible in the economy. In March 2026, India’s Manufacturing PMI by HSBC reached its lowest level since June 2022. Increasing input costs, freight charges, longer shipping routes and weak demand are cited as the factors behind this low manufacturing activity. The export sector is also facing a slow down with exports to the West Asian region, including Saudi Arabia and the UAE, recording a sharp decline. Uncertainty and supply chain disruptions lead to an overall contraction of the export volume as well. For instance, India’s engineering exports to West Asia and North Africa declined sharply since the beginning of this conflict. Export-oriented MSMEs are severely affected, facing both demand and supply side shocks.
When firms face shocks such as increased input costs and a demand crisis, labor often becomes a relatively easier “shock absorber”. In the event of cost pressure, firms are often unable to cut down costs on inputs such as rent, raw materials, machinery, and infrastructure. Labor, however, becomes relatively more adjustable in the shortrun. This is feasible, especially in sectors where informal, contractual, and migrant workers are employed. This affects recruitment and leads to layoffs and slow wage growth. For instance, since the beginning of the conflict, one-third of the workers in the textile MSMEs in Surat have lost their jobs, with shrinking export demand and rising fuel bills being the driving factors.
The pressure on labor market becomes more concerning because this geopolitical crisis is unfolding alongs idea global phenomenon of increasing AI and automation adoption. Firms benefit interms of efficiency advancements, reduced dependence on labor, and cost reduction from this technological advancement. When faced with increasing input costs and uncertain demand, firms may increase their dependence on automationas a navigation mechanism. Recent layoffs by multinational companies in India, including Oracle and Amazon, and hiring slowdowns across sectors such as consulting and technology, indicate that this transition is already happening. It is not the technological improvements that become concerning; the timing of automation during a period of global uncertainty and slowing demand becomes concerning. The concurrent development of geopolitical instability and technological restructuring could compound the pressure on the labor market. Especially in the context of a labor surplus country like India, the simultaneous occurrence of these shocks can intensify employment stress.
The risks extend beyond domestic employment generation. The Gulf region is home to a large number of Indian migrant workers and contributes to the country’s foreign remittances significantly. Thus, a prolonged crisis in West Asia raises concerns about remittance stability and the possibility of reverse migration. This can result in broader macroeconomic consequences. A reduction in remittance flows could affect household incomes and consumption demand. If reverse migration also intensifies along with weaker domestic employment generation, this could further increase the pressure on labor market.
The concern, therefore, is not limited to a single external shock. It is the interaction between inflation, weakening demand, slowing exports, restructuring due to automation, and labor market uncertainty that makes the current scenario extremely vulnerable. In such an environment, sustaining income growth and employment becomes critical for maintaining economic stability.
As the labor market pressure intensifies, the pressure on the government to increase support through welfare spending is also very likely to increase. Rising inflation, along with decreasing household income, might require supporting measures to prevent further reduction in domestic demand. This becomes important since the majority of India’s workforce is informal and therefore highly vulnerable to external shocks. However, the fiscal space available for such interventions remains limited. The recent Union budget estimated the Union debt-to-GDP to be at 55.6%, and the general debt to GDP with states and Union combined at 81%. CRISIL estimates suggest that the crisis could widen the current account deficit by 1.5-2% of GDP in 2027 if the volatility in oil prices persists, which could further constrain fiscal headroom. In such a situation, higher welfare expenditure may create pressure on growth-oriented public capital expenditure.
This is significant because public capital expenditure is a major driver of infrastructure development and employment creation. Thus, any reduction in public capital expenditure has the potential to weaken productive capacity and employment generation. The impact could extend beyond the manufacturing sector to the service sector as well. In sectors such as restaurants, the gig economy, transport, and retail, demand conditions are determined by household incomes and overall economic activity to a greater extent. They could be adversely impacted. Together, these pressures can multiply the employment crisis in the economy.
At the same time, the current crisis presents an opportunity as well. It is to accelerate the long pending structural reforms. As global supply chains face uncertainty, India has the opportunity to strengthen its position through regulatory reforms, investment facilitation, productivity enhancement, and labor-intensive growth strategies. In recent years, the government has given attention to reducing “regulatory cholesterol” by removing excessive clearances, inspections, licensing requirements, and compliance burdens. NITI Aayog Member Rajiv Gauba recently argued that governance should move from a “prohibited unless permitted” approach to “permitted unless prohibited” under the Jan Viswas Siddhant. The objective is to make India a global power house in production and innovation by increasing the ease of doing business and investment confidence during a period of global uncertainty.
Elements of this approach are already visible at the union and state levels. According to government estimates, more than 42000 compliances have been eliminated, and over 3700 provisions were decriminalised. At the state level, Rajasthan’s Raj Udyog Mitra Initiative is an example. It provides MSMEs with exemption from several approvals and inspections during the initial years of operation. It improves the ease of establishing enterprises and supports small businesses operating under difficult economic conditions.
The importance of increasing investment and expanding labor- intensive manufacturing to sustain employment generation is also stressed during this crisis. According to S. Mahendra Dev, Chairman of the EAC-PM, increasing investment and supporting labor-intensive manufacturing are important for India to achieve its Vision 2047. To ensure that this growth results in job creation, focus should be on private capital spending and state-level reforms. This is further supported by a statement made by NITI Aayog Vice Chairman Suman Bery. At the Business Mantan, he argued that improving labor productivity and increasing labor force participation are essential to support India’s demographic dividend and to reach the goal of Viksit Bharat by 2047.
At a time when geopolitical instability and automation are increasing pressure on employment, sectors capable of large-scale employment generation become important. They are critical for sustaining income growth and domestic demand. Careful calibration of automation and AI isalso required in the context of a labor-surplus economy like India. There is no doubt that technological advancement can improve productivity and competitiveness. However, excessive labor displacement during a crisis could deepen existing employment pressures further.
The challenge before policy makers, therefore, is to attract investment and ensure that it translates into employment generation. How effectively the country balances reforms, productivity growth, investment, and employment growth during this period of global uncertainty will play an important role in determining the country’s long-term economic growth and stability.
