Gulf war poses new risks to India's growth story

Generations of Indian workers and businesses have turned the Arab side of the Gulf into a vital appendage of their own country, writes Alex Travelli from New Delhi

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Migrant workers taking a break in Dubai this month.

(AFP)

Only a few weeks ago, the stars seemed to be aligning for India's economy.

India was one of the fastest-growing major economies, consistently outpacing its powerful neighbour, China. It had surpassed Britain to become the world's fifth-largest economy and was within striking distance of overtaking Japan for fourth. In a world beset by risks — from the war in Ukraine to President Donald Trump's tariff campaign — India's skilled labour force, fiscal discipline and strong currency reserves made it a relatively safe bet.

An underappreciated component of the momentum was India’s deepening ties to the Arab countries of the Persian Gulf. But that advantage is now turning into a liability.

The US-Israeli war on Iran is a perfect storm for India’s economy.

The Middle East accounts for roughly 40% of the country’s oil imports and 80% of its gas. As energy prices soar, the effects ripple across the economy, threatening India’s mix of strong growth and mild inflation.

The Gulf is also a crucial export market for Indian goods, now at risk from disruptions to air routes, shipping and business operations. Many Indian businesses rely on hubs like Dubai, United Arab Emirates, to distribute their goods globally.

India is the world’s largest recipient of remittances from workers abroad, with about 40% coming from the Middle East. Any hit to overseas Indian workers’ earnings would further weaken an already softening currency.

Last week, Goldman Sachs warned that India was facing slower growth, higher inflation and a weaker currency over the coming year, driven by rising energy prices, slowing exports to the UAE and its neighbours and potentially lower remittances.