As Israel-Iran conflict escalates, India's central Asia trade aspirations could take a hit

For India, the escalation hurts its ambitions of expanding trade with Central Asia.

As Israel-Iran conflict intensifies with Iran firing a salvo of ballistic missiles on Israel, experts say this puts a cloud over India’s Central Asia aspirations.

For India, the escalation hurts its ambitions of expanding trade with Central Asia. As of 2021, India’s trade with Central Asia was about $2 billion or less than 0.5 percent of its total trade. In the last few years India has comprehensively engaged with Central Asian economies with a strategic tilt in its foreign policy towards Central Asia. In 2015, Prime Minister Narendra Modi became the first Indian prime minister to have visited all five Central Asian States during a single trip. He hosted the first India-Central Asia virtual summit in 2022. In May 2024, India and Iran signed a ten year agreement to develop the strategically significant Chabahar port – hoping to expand Central Asia trade. India aims to become a $5 trillion economy and Central Asia has a big, untapped market for Indian exports.

Biswajit Dhar, Professor and Head of the Centre for TWO Studies at the Indian Institute of Foreign Trade explained that the current escalation would be a big blow to India’s aspirations.

“ Despite US sanctions we kept our relations with Iran. We decided to go against what the Americans were doing .. there wasn’t a big reaction from the West, they had come to accept that India will follow its self interest. Now with the Middle east conflict and Iran getting drawn in, our aspiration for getting access to this untapped market will be a very big blow.”

The escalation could pose difficult questions for India on how it decides to navigate this crucial relationship.

At a time of slowing global growth, the rise in tensions add to logistics and shipping costs for Indian exporters and for exporters across the world. JP Morgan in a report said that with 30 percent of global container trade transiting through the Suez Canal, the Red Sea crisis has led to a rise in shipping costs and inflation, especially for routes from Asia to Europe. There has been an almost 30 percent increase in shipping costs, most of the ships are already taking longer routes through Cape of Good Hope, around Africa. If the conflict spreads to the Strait of Hormuz, it could potentially have a big impact.

The Strait of Hormuz is a major shipping route that handles almost 30 percent of the world’s oil trade and threats from Iran to take revenge for the killing of Hezbollah, the top Hamas leader, have raised concerns.

Professor NR Bhanumurthy, Director, Madras School of Economics explained that while Indian exporters have shifted their destination in the last one year to Europe and Asian countries but volume of trade has reduced significantly. “There is reverse globalisation taking place with focus being on domestic and security..one of the reasons for a dip in India’s growth forecast to 6.5-7 percent from 8 percent is because of a dip in export forecast.”