In South Asia, Iran War Fallout Risks Worsening Economic and Political Instability

(Punit PARANJPE/AFP via Getty Images)

A passenger boat sails past the Indian-flagged oil tanker Kashimasan, which is docked near an offloading terminal at Butcher Island (also known as Jawahar Dweep) off the coast of Mumbai, India, on April 1, 2026.

Energy and fertilizer price shocks from the Iran war will increasingly threaten energy supplies, crop yields and economic growth across South Asia, pressuring governments' foreign exchange reserves and heightening unrest risks. The U.S.-Israeli conflict with Iran is driving wide-ranging challenges for South Asian countries, as the ongoing disruptions to Gulf energy and fertilizer supplies continue to drive up global prices on crucial imports. Governments have so far managed the economic fallout from the war by implementing early rationing and austerity measures, as well as pursuing emergency energy supplies and financial assistance from foreign partners. However, a protracted conflict that continues to impede shipping through the Strait of Hormuz would increasingly threaten enduring and expansive energy supply shortages, reduced crop yields and more substantial declines in economic growth across the region, exacerbating existing economic and political instability. Even if the United States, Israel and Iran eventually agree to a more lasting ceasefire, such an agreement may be fragile, and the consequent shocks to energy, agriculture and the broader economies of South Asia would still linger for months.

While South Asian countries have so far avoided immediate energy shortages through early austerity measures and reduced consumer use of gas appliances, the ongoing market shocks will increasingly force governments to raise energy prices and enact more disruptive rationing measures, thereby increasing the risk of unrest. Weeks of mild spring weather and authorities' austerity measures — which have included shortening working hours, limiting power consumption and rationing energy supplies — have so far spared South Asian countries from enduring severe energy shortages. Additionally, India, Pakistan, Nepal, and the Maldives have moved to subsidize energy costs, while Bangladesh has opted to purchase additional supplies on the spot market, which have helped shield households and consumers from the Iran war price shocks, albeit at high financial cost to governments. Consumer choices have also eased pressure on supplies in some countries: Pakistanis have in recent years invested heavily in rooftop solar panels, while consumers in India and Nepal have in recent weeks replaced gas with electric appliances, further easing near-term pressure on energy supplies. Still, many South Asian countries remain reliant on energy imports that travel through the Strait of Hormuz, and consumers risk increasingly bearing the costs of price hikes and experiencing supply shortages as governments are unable to sustain subsidies or purchase sufficient supplies on the volatile spot market. Heatwaves and the imminent planting season will also intensify demand for electricity and fuel as early as the coming weeks, further straining supply. Meanwhile, governments will struggle to ease consumer anxieties, especially if energy shortages worsen. This could, in turn, trigger panic buying, violent unrest at gas distribution centers and protests in cities and around government buildings — all of which would only exacerbate supply shortages and elevate personal safety risks.

Pakistan has experienced some of the region's most severe price hikes linked to the Iran war. This is largely because 80-85% of the country's total petroleum needs are met by imports that primarily travel through the Strait of Hormuz. Furthermore, roughly 80% of Pakistan's petroleum products are used to power transportation. Pakistani authorities initially spent around $464 million attempting to stabilize energy prices, but have proven increasingly incapable of sustaining these costs, hiking prices twice in recent weeks. The latest adjustment on April 3 raised petrol prices an additional 42.7% to $1.74 per liter and diesel 54.9% to $1.87 per liter. In some cases, Pakistan has sought to ease popular hardships by easing price hikes and introducing additional, narrower subsidies. However, the International Monetary Fund (IMF) reportedly initially opposed Pakistan's plan to shield consumers at the expense of revenues needed to remain aligned with the fund's bailout conditions. The IMF's reported hesitance may portend additional constraints on the options economically-challenged countries like Pakistan have to manage shocks from the conflict.
Bangladesh is particularly reliant on imported fossil fuels for electricity generation, with customs data indicating that it imports roughly 63% of its crude from Saudi Arabia, the United Arab Emirates and Iraq, as well as around 64% of its LNG from Qatar. Bangladesh's coal supplies are also under growing pressure, as its major coal plants are burdened with mounting arrears and will face even higher costs as global demand for coal spikes prices. This spells trouble for Bangladesh's electricity supply, 39% of which is generated by LNG, 23% by coal and 19% by oil. Local reports suggest load-shedding is occurring in some areas, and authorities have seemingly hinted they are considering expanding such practices in the near term. Meanwhile, gas distribution centers have faced frequent supply shortages, long lines and unrest due to irregular deliveries that cannot keep up with high demand from panic buying. If these energy supply disruptions continue, there is a risk of significant, long-term shortages, which could lead to widespread load-shedding this summer.
India is better positioned than its neighbors to withstand the energy shocks from the Iran war. This is due to its greater fiscal stability and the fact that it is the only South Asian country with a formal strategic petroleum reserve, which provides a limited additional buffer of supply on top of commercial stocks. In addition, India's strong relationship with Russia and years of oil purchases have enabled it to quickly increase Russian crude imports after the United States issued a March 12-April 11 sanctions waiver on such purchases. According to analytics firm Kpler, India has bought about 45-50 million barrels of Russian crude since the start of the Iran war in late February.

Continued shipping disruptions through the Strait of Hormuz could worsen shortages and raise the costs of fertilizers and LNG, threatening crop yields and risking unrest as the planting season gets underway in many South Asian countries. The Gulf maintains outsized importance for the world's food supply, largely due to its exports of nitrogen and phosphate-based fertilizers. India, Pakistan, Bangladesh and Nepal have some of the region's largest agricultural sectors, comprising 46% of India's workforce, 38% of Pakistan's workforce, 40% of Bangladesh's workforce and over 60% of Nepal's workforce. These countries' dependence on fertilizer that transits through the Strait of Hormuz varies, ranging from around 20% of India's fertilizer imports, around 20-25% of Pakistan's fertilizer imports, 25-30% of Bangladesh's fertilizer imports, and around 25-30% of Nepal's fertilizer imports (which it receives from India). Some of these countries' agricultural sectors also depend heavily on Gulf LNG supplies, which are key to nitrogen fertilizer production; this is especially important for India and Pakistan, which produce most of their total fertilizer domestically and respectively source around 53% and 99% of their LNG from Gulf suppliers. Disruptions to fertilizer and LNG exports from the Gulf have thus rapidly created challenges for South Asia's agricultural sectors, with India reporting that urea production dropped by around 25% from February to March. Fertilizer plants in India, Pakistan and Bangladesh have also closed due to LNG shortages. Even without outright shortages of the aforementioned fertilizers, increased input costs may still impede authorities' ability to secure adequate supplies. The timing of the global fertilizer shocks — occurring at the start of many South Asian farmers' planting seasons — exacerbates these consequences. Sugarcane planting has already begun, while rice (a critical regional staple crop) and corn are scheduled for June-July planting. Other crops, such as jute, peanuts, sorghum and sesame, are also typically planted in the coming months. The most direct challenge a squeeze in fertilizer supplies would pose is reduced crop yields, which would worsen food insecurity in the region and likely force South Asian governments to reduce agricultural exports to shore up domestic supplies. Growing challenges to the agricultural sector will also raise the risk of mass demonstrations in these countries, where farmers are often well-organized and politically influential and active. For example, farmers' unions in India have organized significant nationwide protests in recent years, including demonstrations in 2020-2021 that led the government to withdraw controversial farm bills. In addition to causing widespread disruptions, such farmer protests could thus also hinder the implementation of necessary austerity measures, potentially prolonging economic difficulties if governments ease those measures to protect the farming sector.

Agricultural irrigation and other equipment often rely on diesel, meaning supply or cost challenges resulting from the global energy crisis will also affect planting, harvesting and possibly eventual crop yields.
China is Sri Lanka's largest fertilizer supplier, which somewhat reduces its direct exposure to Gulf-related shocks. That said, Sri Lanka still imports a similar share of its total fertilizer as countries like India, Pakistan and Bangladesh, and it is even more dependent on these imports due to its relative lack of domestic fertilizer production.
Afghanistan's years-long humanitarian challenges, alongside its ongoing conflict with Pakistan, render it more vulnerable to shocks from the Iran conflict. While data on Afghanistan's fertilizer imports and use have been scant since the Afghan Taliban retook control of the country in August 2021, reports by the United Nations and humanitarian organizations suggest Afghanistan is significantly less reliant on fertilizer for its agriculture compared to others in the region, in part because pervasive poverty challenges farmers' ability to purchase such supplies.
Indian authorities have for weeks been building up urea stocks to prepare for the monsoon season, which begins around June, providing India with a greater buffer of fertilizer supplies. However, these stocks will deplete as the season gets underway, and the country's Ministry of Earth Sciences announced on April 13 that a likely El Nino weather pattern could reduce rainfall amounts between June and September, presenting an additional risk to crop yields.

Alongside energy and fertilizer shocks, risks of tourism and remittance declines from the Iran conflict will fuel inflationary pressures and constrain economic growth regionwide. As much of South Asia was already enduring economic challenges and precarious recoveries from domestic crises prior to the Iran conflict, these latest shocks will only exacerbate constraints on economic recovery and growth. Shortages and increased costs of energy supplies, for example, will present sustained challenges to Bangladesh, Sri Lanka and Pakistan's crucial garment sectors. Representatives of Bangladesh's garment industry told authorities on April 14 that unreliable gas and electricity supplies had already reduced production capacity by 25-30%. Meanwhile, Indian authorities have expressed concern about disruptions to the supply chains of its economically important pharmaceutical sector, which, if sustained, would risk increasing drug prices and challenging production. Reductions in tourism driven by increased costs and logistical challenges to air travel — alongside risks to remittances, should an enduring conflict disrupt business operations in the Gulf that heavily employ South Asian migrant labor — would also challenge South Asia's economies. Against this backdrop, inhabitants regionwide will face lingering inflationary pressures, while countries with limited foreign exchange reserves and/or high debt burdens will face particular difficulties limiting the drain of their reserves, especially without sufficient financial assistance and flexibility from foreign creditors.

The economies of Afghanistan, Pakistan, and the Maldives are among the most vulnerable in the region. In April, the World Bank projected Afghanistan's economy would grow by 4% in 2026, but the continued return of Afghans deported from foreign countries, continued declines in foreign aid, and shocks linked to the Iran conflict all threaten to contract per capita and, by extension, aggregate GDP growth, exacerbating already severe humanitarian conditions. Pakistan and the Maldives both have high debt burdens and limited foreign exchange reserves with which to service these debts and absorb costs linked to the Iran conflict. Reports indicate Pakistan's usable reserves were around $16.4 billion in early April, while the Maldives' usable reserves stood around $330 million in March, but both countries have since paid or are set to pay sizable debts. Alongside the costs incurred by the Iran conflict, this will further deplete these countries' reserves unless they secure debt refinancing, rollovers and other assistance from foreign creditors.
The IMF on April 9 reported Sri Lankan authorities had "ameliorated disruptions to economic activity by securing sufficient fuel supplies" and had accumulated reserves of around $7 billion by the end of March as it continued to recover from its 2022 economic crisis. The fund also assessed that the country remained aligned with its bailout conditions, paving the way for Sri Lanka to receive a $700 million tranche from the IMF upon its executive board's approval. That said, the IMF also noted Sri Lanka was "significantly exposed to the Middle East conflict," which will require the country to sustain austerity and fiscal prudence to limit economic risks.
Bangladesh and Nepal have more fiscal space, recording reserves of around $34.35 billion in early April and $20.5 billion in March, respectively. However, both countries' economies will remain at heightened risk of instability, in part due to their recent political crises and newly elected governments fueling policy uncertainty. Bangladesh's government will face additional scrutiny from the IMF, which will monitor whether the country's new government complies with the fund's bailout conditions to unlock additional aid.
India faces lower risks of an immediate economic crisis as it has a substantial reserve buffer of $688.06 billion. However, the Iran conflict will weigh on the country's economic growth, challenging a years-long priority of Prime Minister Narendra Modi.