A new IFPRI analysis shows Iran war-related closure of the Strait of Hormuz could cut India’s GDP by up to 2.38% and slash farming household income by 27% under prolonged conflict. India’s heavy reliance on imported fertilizers — including 60% of DAP and 100% of potash — and imported LNG for urea production magnifies vulnerability. Crude oil prices surged 58% and fertilizer prices 66% between February and April 2026. Model results show technology-driven fertilizer efficiency (a 5% intensity reduction) offers the most fiscally sustainable resilience path, avoiding massive budget deficits that would reach 159.5% under full price-absorption subsidies.
According to www.ifpri.org, India’s economy faces severe macroeconomic strain from supply chain disruptions triggered by the closure of the Strait of Hormuz during the Iran war, with GDP projected to fall by 2.38% and farming household income dropping by 27% under the most severe conflict scenario extending through end-2026.
Economic Exposure Rooted in Import Dependence
India’s fertilizer and energy security is structurally vulnerable to maritime chokepoint disruptions. The country imports approximately 60% of its diammonium phosphate (DAP), relies entirely on imported potash, and depends on liquefied natural gas (LNG) for domestic urea production — a dependency underscored by the fact that nearly 50% of India’s LNG and about 85% of its crude oil requirements are met through imports.
Global commodity price surges followed the Strait’s closure: crude oil prices rose 58% and fertilizer prices jumped 66% between February and April 2026, per World Bank data. Though prices have since moderated amid U.S.–Iran negotiations, shipping uncertainty persists. The International Monetary Fund (IMF) forecasts crude oil averaging $82 per barrel in 2026 if the conflict ends in April, rising to $100/bbl if it lasts until July, and potentially reaching $125/bbl if hostilities continue through year-end.
Modeling Three Policy Responses
The International Food Policy Research Institute (IFPRI) applied its Rural Investment and Policy Analysis (RIAPA) model — calibrated using India’s 2022–23 Social Accounting Matrix — to simulate three policy responses across three conflict timelines: full pass-through of global prices to domestic markets; full absorption via subsidies to freeze pre-crisis fertilizer prices; and technology adoption targeting a 5% reduction in chemical fertilizer intensity through nutrient management technologies.
These were tested against three international price scenarios: Reference (conflict ends April 2026), Adverse (continues until June 2026), and Severe (extends through December 2026). Under the full pass-through scenario, GDP declines by 0.32% in the Reference case, worsening to 1.07% in the Adverse case and 2.38% in the Severe case. Farm household incomes fall by 2.6%, 11.65%, and 27%, respectively.
Household and Fiscal Impacts
Rural non-farming households see income reductions of 1.9%, 5.39%, and 10.77% across the same scenarios; urban households experience smaller but still significant drops of 0.51%, 1.56%, and 3.47%. These losses stem primarily from reduced private consumption — which accounts for roughly 65% of India’s GDP — and lower investment levels.
The fiscal cost of shielding consumers varies dramatically. Under full pass-through with proportional subsidies, the government budget deficit expands by 3.5%, 8.1%, and 12.6% across the three scenarios. In contrast, full absorption — freezing domestic fertilizer prices regardless of import costs — causes the deficit to balloon by 7.7%, 50.2%, and 159.5%. Such deficits risk deep public spending cuts and depressed long-term investment.
Technology as Resilience Leverage
The analysis identifies technology adoption as the most fiscally sustainable path forward. Scaling nutrient management tools to achieve a 5% reduction in fertilizer intensity mitigates GDP loss without triggering unsustainable subsidy burdens. As the report states:
“Technology offers the most effective policy path to cushion the blow and build resilience. Improving fertilizer efficiency can limit losses while avoiding large subsidy-driven fiscal pressures.” — IFPRI report
This approach avoids the trade-off between protecting farm incomes and preserving macroeconomic stability. While currency depreciation boosts exports — a consistent bright spot across all scenarios — export gains fail to offset the steep contraction in private consumption. The findings reinforce that food system resilience hinges not only on agricultural productivity but also on stable energy supplies, secure shipping lanes, and robust agri-input markets — all now exposed by geopolitical fragility in the Strait of Hormuz.
Source: ifpri.org
Compiled from international media by the SCI.AI editorial team.
