13

Apr

From Oil Shock to Strategic Reset: Why India Must Reclaim SAARC Leadership

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Shivaji Sarkar

New Delhi I Monday I 13-04-2026

The Iran–Israel conflict has abruptly exposed critical fault lines in India’s growth story—energy dependence, imported inflation, and policy vulnerability. With the Strait of Hormuz under threat, even a modest spike in crude prices can send ripples through the economy, raising fuel costs, widening the trade deficit, and feeding directly into inflation.

It is not just the IMF; both the RBI and NITI Aayog have expressed concern. Once viewed by the IMF as a key global growth engine, India now faces heightened downside risks in the post-conflict environment. The Fund has warned that such shocks are “asymmetric,” disproportionately affecting energy-importing economies like India.

The IMF has also flagged the dangers of excessive dependence on external powers for security. Developments in West Asia demonstrate that massive arms imports and security guarantees have failed to ensure stability in the Gulf. Despite spending hundreds of billions of dollars on defence, regional rivalries and mistrust have prevented the emergence of a credible, low-cost security framework.

This offers a clear lesson for the Indian subcontinent, where regional cooperation through SAARC has steadily eroded.

The RBI’s April 2026 monetary policy decision to hold the repo rate at 5.25 percent reflects caution rather than confidence. Its 6.9 percent growth projection for FY27—down from earlier expectations of 7.6 percent—already carries downside risks. Sustained high oil prices could drag growth closer to 6.7 percent while pushing inflation towards 4.6–5 percent, thereby squeezing consumption.

This is not merely a cyclical disruption; it is a structural warning. Voices within NITI Aayog, including former CEO Amitabh Kant, have called for a faster pivot to renewable energy. Yet the immediate reality remains stark: India is deeply exposed to external energy shocks. The question is no longer whether to diversify, but how long the economy can absorb repeated geopolitical disruptions before growth and policy space begin to erode.

The IMF notes that rising energy costs could fuel inflation and compel central banks to maintain higher interest rates, dampening growth. In effect, the RBI may not be able to hold the repo rate for long. The conflict is already affecting supply chains and raising input costs across energy-dependent economies. The Fund has also cautioned against resorting to price controls.

The Supply Chain Challenge

NITI Aayog estimates that rising crude prices could significantly inflate India’s annual fuel import bill, weakening the rupee and intensifying inflationary pressures. A sustained 10 percent increase in oil prices could shave 20–25 basis points off GDP growth.

The impact extends beyond fuel. Higher energy costs affect LPG supplies, fertilisers, FMCG production, and packaging industries. While the IMF has supported India’s move to allow up to 74 percent FDI in defence, this comes with its own costs, including profit repatriation and pressure on foreign exchange.

Data from the Stockholm International Peace Research Institute (SIPRI) indicates that India remained the world’s second-largest arms importer between 2021 and 2025, accounting for 8.2 percent of global imports.

Despite policy discussions, energy diversification strategies remain limited largely to solar and wind, which face efficiency and technological constraints. A comprehensive roadmap to reduce dependence on petroleum is still lacking.

India must also reassess its alignment with Western carbon reduction frameworks and carbon trading mechanisms. Emerging alternatives, such as mobile nuclear reactors, carry significant risks, including radiation hazards and challenges in managing nuclear waste.

Revisiting Strategic Alignments

Across governments, India has gradually tilted towards the West, often at the expense of strengthening ties in regions such as Africa. This trend predates recent administrations.

A key turning point came in 2005–06, when India voted alongside the United States and the European Union at the International Atomic Energy Agency to declare Iran non-compliant with nuclear safeguards. This shift was closely linked to the Indo-US civil nuclear agreement and marked a departure from earlier strategic engagement with Iran, exemplified by the 2003 New Delhi Declaration.

The earlier phase of cordial ties, reinforced by Prime Minister Atal Bihari Vajpayee’s visit to Tehran, gave way to a more US-aligned posture. The long-term implications of this shift are now visible in India’s reduced strategic space in the region.

Reclaiming the SAARC Space

The resulting vacuum has altered regional dynamics. Pakistan—despite its record of supporting terrorism—is increasingly positioning itself in diplomatic engagements involving Iran and the United States, a role traditionally associated with India.

Meanwhile, India’s relationship with Iran has cooled compared to a decade ago, when bilateral trade included rupee-based oil transactions and reinvestment mechanisms. As a neighbour, Iran requires renewed engagement, strategic sensitivity, and calibrated diplomacy.

India must reclaim its pre-2016 leadership within SAARC to build a cooperative economic and security framework in South Asia. The current West Asian crisis and the failure of Gulf security structures underscore the need to revitalise regional mechanisms closer to home.

India’s recent efforts to ensure petroleum supplies to Bangladesh, Nepal, and Sri Lanka during disruptions in the Strait of Hormuz are steps in the right direction. These initiatives could serve as the foundation for a renewed regional compact.

History shows that nations recalibrate in times of crisis. India now has an opportunity to reshape its regional and global role. The eight SAARC nations—including Pakistan—can collectively emerge as a significant force for energy cooperation, economic growth, and regional security.

India stands at a critical inflection point. External shocks are exposing internal policy gaps—energy vulnerability, strategic drift, and weakening regional engagement. These challenges cannot be addressed through incremental adjustments.

The lesson from West Asia is unmistakable: dependence—on fuel, arms, or alliances—comes at a cost.

India must build resilience through energy diversification, stronger domestic capabilities, and renewed regional leadership. Reviving SAARC is not merely a diplomatic option; it is a strategic necessity.

The choice is clear: react to crises—or shape a stable, self-assured future.

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