The ongoing instability in West Asia has revived memories of an earlier era when conflicts in the region sent shockwaves through the Indian economy. During the Iran-Iraq War in the 1980s, the Gulf War in the early 1990s, and the broader geopolitical disruptions that accompanied the collapse of the Soviet Union, India confronted a familiar challenge in the form of heavy dependence on imported energy and limited capacity to absorb external shocks. Rising oil prices, pressure on the rupee and widening macroeconomic imbalances eventually culminated in the balance of payments crisis of 1991.
More than three decades later, another geopolitical crisis is unfolding in the same region. Yet, the nature of India's vulnerability has fundamentally changed. In the early 1990s, India's exposure was concentrated largely in energy imports. Today, the risks extend across supply chains, manufacturing inputs, logistics networks and global production systems. While India is far stronger economically than it was in 1991, it is also far more integrated into the global economy. That integration has generated enormous opportunities for growth, but it has also created new channels through which external disruptions can affect the domestic economy.
India has made remarkable progress in addressing the vulnerabilities that defined the economy of the 1980s. Today, the country imports crude oil from more than 40 countries, compared with a far narrower supplier base than in previous decades. Foreign exchange reserves exceed $650 billion, providing a substantial buffer against external shocks. The economy has expanded from roughly $270 billion in 1991 to nearly $4 trillion today, making India the world's fifth-largest economy.
However, economic resilience can no longer be assessed through the lens of energy security alone. Merchandise exports now approach $450 billion annually, while manufacturers increasingly rely on imported raw materials, intermediate goods and components that cross multiple borders before reaching Indian factories. As a result, India's vulnerability to external shocks is now shaped as much by the reliability of global supply chains as by the availability of crude oil.
Beyond Crude
The strategic significance of these risks becomes particularly evident in the Strait of Hormuz. While attention often focuses on its role in energy security, India's exposure extends far beyond crude oil. Nearly 17% of India's total trade is linked to economies whose connectivity depends on this maritime route. Around 40%-50% of India's crude oil imports and more than half of its liquefied natural gas imports originate from countries whose exports transit through the strait. Fertilisers, petrochemicals and a range of industrial inputs also move along the same corridor. Any prolonged disruption would therefore affect not only fuel supplies but also manufacturing costs, agricultural production, logistics networks and trade competitiveness. In an interconnected economy, chokepoints such as Hormuz represent systemic economic risks rather than merely energy risks.
To its credit, India has managed the current turbulence with considerable diplomatic skill. Over the past decade, New Delhi has cultivated strong relationships across competing power centres in West Asia, maintaining close ties simultaneously with Saudi Arabia, the United Arab Emirates, Israel and Iran. Combined with diversified energy sourcing, prudent macroeconomic management and strong foreign exchange reserves, this has helped cushion immediate economic risks.
Yet, diplomacy and crisis management can only mitigate short-term disruptions. They cannot eliminate structural dependence. Critical sectors remain vulnerable to supply chain bottlenecks and concentrated sources of supply.
Critical Chain
The semiconductor sector illustrates the challenge. Despite being one of the world's largest markets for electronics, India imports around 90% of its semiconductor requirements. Electronic goods now account for more than 15% of India's import basket, up from around 10%-11% a decade ago. Similar dependencies exist in battery materials, advanced engineering equipment, specialty chemicals and rare earth elements that are essential for clean energy technologies and advanced manufacturing.
In the pharmaceutical industry, although India supplies around 20% of the world's generic medicines by volume, more than 70% of its active pharmaceutical ingredient imports come from China. Such concentration may be economically efficient during periods of stability, but it becomes a strategic vulnerability when geopolitical tensions or supply disruptions emerge.
Addressing these challenges requires a shift in industrial policy from a narrow focus on production growth towards a broader focus on resilience. The Production Linked Incentive schemes launched in 2020 have played an important role in expanding manufacturing capacity and attracting investment across multiple sectors. However, long-term resilience will require India to deepen domestic capabilities in critical upstream industries rather than relying primarily on assembly-based manufacturing.
India's success in electronics production demonstrates both the opportunities and the limitations of the current model. Smartphone manufacturing has expanded rapidly, yet a substantial share of high-value components continues to be imported. Imports of electronic items remain around 2.5 times exports. If semiconductors, battery cells, precision machinery and advanced industrial equipment remain concentrated in a handful of countries, India risks replacing one form of dependence with another. Future industrial incentives should therefore place greater emphasis on sectors where import dependence poses strategic risks, including semiconductors, electronics components, battery technologies, advanced materials and critical industrial inputs.
At the same time, logistics infrastructure must be elevated from a development objective to a strategic imperative. Accelerating investments in multimodal logistics networks, dedicated freight corridors, modern ports and alternative trade routes such as the International North-South Transport Corridor and Chabahar Port can strengthen both economic efficiency and resilience.
The most important lesson from 1991 is not simply that vulnerabilities eventually demand reform. It is that reforms undertaken from a position of strength are far more effective than those imposed by crisis. Unlike three decades ago, India possesses substantial foreign exchange reserves, diversified energy sources, stronger macroeconomic fundamentals and a growing industrial base. The current turbulence in West Asia does not pose an immediate threat to economic stability. But it does offer a warning about the changing nature of economic risk.
The next major shock may not arrive through an oil embargo or a sudden spike in crude prices. It may emerge through semiconductor shortages, disruptions in maritime trade routes, shortages of critical minerals, cyber attacks on logistics systems or the fragmentation of global supply chains. If the oil shocks of the past revealed the dangers of dependence on a single commodity, today's geopolitical uncertainties highlight the risks of dependence on concentrated networks of trade, technology, production and logistics.
India has successfully navigated the transition from energy vulnerability to energy resilience. The opportunity now is to build a similar level of resilience across the supply chains that underpin a modern economy.
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