The Full Economic Toll of the Iran War on India Beyond LPG

The ongoing Iran war's initial impact on India has been largely limited to specific gas segments. However, if the conflict prolongs, India faces significant second-order effects. Supply chain disruptions are anticipated in petrochemicals, plastics, textiles, and semiconductor-dependent industries, as critical gas and shipping lanes are affected. This represents a negative supply shock, potentially leading to stagflation with lower output and higher prices, where traditional economic policies may prove ineffective. India must prepare for sluggish growth and sustained inflation.

The article highlights that the immediate impact of the US-Israel versus Iran conflict on India has primarily been felt in specific sectors of the gas market, particularly commercial LPG consumers and industries reliant on natural gas feedstock like fertilisers and petrochemicals. While the supply of petrol, diesel, and domestic LPG cylinders has remained stable, the looming threat is the escalation of second-order effects if the war persists.Beyond the initial gas shortages, India could face widespread supply chain disruptions. Curtailments in gas supplies to petrochemical plants would force production cuts in essential polymers like polyethylene, polypropylene, and PVC, impacting manufacturers of various plastic products from bottles to packaging materials. The textile industry, especially synthetic fibres, would also see price increases in tandem with crude oil. A major concern is the global semiconductor industry, heavily reliant on LNG and helium gas from West Asia. Disruptions here would have cascading effects on India's technology sector, affecting smartphones, consumer electronics, automobiles, and artificial intelligence, all powered by chips.The article characterizes this conflict as a negative supply shock, fundamentally different from a demand shock like Covid-19 or an energy price shock like the Russia-Ukraine war. A negative supply shock shifts the aggregate supply curve leftward, threatening both lower economic output and higher price levels – a scenario known as stagflation. Unlike previous crises where fiscal or monetary policies could be employed (e.g., subsidies, tax cuts), such levers are ineffective when supply chains are broken, and economic agents struggle to access vital energy and shipping lanes. The only short-term hope is a swift end to the war, but even then, India must brace for a period of more sluggish growth and structurally higher inflation.