India’s economy faced a precarious situation over the past week as geopolitical tensions between Israel and Iran threatened to escalate further. The nation stood at the edge of a potential economic crisis, but rather than being dragged into turmoil, India found a strategic opportunity in the unfolding events to enhance its domestic defense sector.
The conflict, which had global ramifications, culminated in a ceasefire agreement on Wednesday. This truce followed a U.S.-led bombing campaign that, according to President Donald Trump, eliminated Iran’s nuclear capabilities. The ceasefire brought some relief to global markets, leading to a drop in oil prices that had surged amid the conflict. With this development, India narrowly avoided a potential economic disaster, but the situation underscored the country’s dependence on foreign oil and its vulnerability to external shocks.
Although India stopped purchasing Iranian oil some time ago, it still relies heavily on oil transported through the Strait of Hormuz. Approximately 40% of its crude oil imports pass through this narrow and strategically crucial maritime route. Any disruption here would have resulted in significant economic consequences.
According to a report from SBI Research, every $10 increase in global crude oil prices could push up consumer price inflation in India by as much as 35 basis points and reduce GDP growth by 30 basis points. Madan Sabnavis, the chief economist at Bank of Baroda, emphasized the implications of such a price surge. While he noted that a 10% rise in oil prices might be manageable, he warned, “A sustained price above $100 per barrel can have a major impact.”
India also faces a complex diplomatic situation. On one hand, it has strategic investments in Iran, including the Chabahar port project which is managed by Indian companies. On the other, it shares a close defense relationship with Israel. This dual engagement presents a challenge as India seeks to maintain strong ties with both nations amid ongoing tensions.
The scale of India’s defense ties with Israel is significant. According to a March 2024 report by the Stockholm International Peace Research Institute, India is Israel’s largest arms buyer, accounting for 34% of its total defense exports. In return, Israel contributes 13% of India’s arms imports.
This dependency on foreign arms was starkly visible during India’s recent military action dubbed “Operation Sindoor,” launched in retaliation to an April militant attack in Jammu and Kashmir. The operation combined older Russian equipment with modern Israeli systems like the Heron drones and Spyder and Barak-8 missile systems. Analysts at investment bank Jefferies highlighted this operation as evidence of India’s ongoing reliance on imported military technology.
India’s traditional defense partner, Russia, has become an increasingly unreliable supplier. Following the invasion of Ukraine, Russian military production has shifted toward meeting its own wartime needs, resulting in delays for countries like India. Furthermore, there are questions about the effectiveness of Russian military hardware. For example, equipment such as the T-90S tanks—widely used by the Indian Army—has reportedly not performed well in Ukraine, according to defense analysts.
In light of these developments, India recognizes the urgent need to pivot toward a more self-reliant defense strategy. However, making this transition won’t be easy or quick. Bernstein Research notes that as of 2023, about 90% of India’s armored vehicles and 70% of its combat aircraft were of Russian origin. Diversifying and localizing such a significant portion of defense infrastructure will take considerable time and resources.
Still, global developments are pushing India and other nations in the same direction. Anna Mulholland, head of emerging market equities research at Pictet Asset Management, observed, “I think undoubtedly the situation will have increased the desire and conviction that all the countries have to increase their defence spending, which was initiated because of the Russian invasion of Ukraine.” She added, “The Middle East turmoil, while not new, will surely have increased people’s resolve and commitment to those increased defence budgets that have been spoken about.”
India is attempting to transform this crisis into a strategic opening for its domestic defense industry. JPMorgan analysts described the current geopolitical climate as a “pivotal moment for widespread recognition of BEL’s capabilities.” BEL, or Bharat Electronics Limited, is a state-owned company that has seen its stock price rise roughly 38% this year.
Atul Tiwari, an executive director at JPMorgan, commented in a June 23 client note, “A steady stream of orders, elevated geopolitical risks both in India and globally, and strong medium-term growth prospects … with healthy [return on equity] should continue to lead to outperformance, in our view.”
One of the most prominent signs of India’s commitment to defense self-sufficiency is “Project Kusha,” a domestically developed alternative to the Russian S-400 air defense system. BEL plays a central role in this initiative. Tiwari added that the program “is expected to contribute significantly to the company’s long-term order book once contracts are finalized.”
India is not only investing in defense for its own needs but also aims to become a global exporter in this sector. According to Jefferies, the country is targeting a doubling of its defense exports to nearly $6 billion annually by the end of this decade.
Meanwhile, in the financial sector, the tentative ceasefire between Iran and Israel brought temporary relief. Dhiraj Nim of ANZ stated that although the spike in global oil prices poses risks for the Indian rupee, the truce “has helped stabilize investor sentiment and improved near-term outlook for the currency.”
Economists like Frederic Neumann of HSBC and Tim Seymour of Seymour Asset Management believe that emerging markets, particularly Korea, India, and Vietnam, remain undervalued and present attractive investment opportunities.
In other developments, Proseus, a major tech investor, projected that India will soon produce a $100 billion technology company. Proseus has backed major Indian tech firms like PayU and Meesho, further indicating growing investor confidence in the country’s innovation potential.
However, not all economic indicators are uniformly positive. The Reserve Bank of India reported that while manufacturing and services remained strong in May, there was a notable slowdown in urban consumption demand.
India’s aviation sector also made headlines. Air India, now owned by Tata Sons, received a capital injection of 9,588 crore rupees (around $1.1 million) from Tata and Singapore Airlines during the 2024-25 fiscal year. The airline is also grappling with the aftermath of a tragic air crash on June 12.
In the stock market, the Nifty 50 index climbed to a record high of 25,549 points as investor sentiment improved following the de-escalation of Middle East tensions. The index rose more than 2% over the past week and is up over 7% for the year. Meanwhile, the yield on India’s 10-year government bond declined by 3 basis points from the previous week, now trading at 6.27%.
As India weathers another round of global instability, its ability to adapt and seize opportunities—especially in the defense sector—signals a significant shift in economic and strategic thinking.