The ongoing Middle East conflict presents an opportunity for India to step up domestic investments in targeted sectors, according to a latest report by Morgan Stanley titled 'India Economics & Strategy - Opportunities and Risks amid Conflict'. The brokerage expects a strong policy response and greater capital expenditure activity to address India's supply-side challenges in energy, fertilizers, and defence. India could also emerge as a more favourable destination globally for data centres.
Energy: Cornerstone of Reducing Vulnerability
The report highlights coal and renewable energy expansion as key factors that will help India reduce its import dependence over the medium term. As of early 2026, India imported about 85% of its crude oil and roughly 50% of its natural gas requirements, making the economy vulnerable to commodity price spikes and supply disruptions from geopolitical conflicts. Morgan Stanley points out that India's strategic petroleum reserve (SPR) framework remains underdeveloped. However, India has built record coal stocks, reaching approximately 210 million tonnes as of March 2026, enough for 88 days of consumption. This cushion, along with Strategic Petroleum Reserves for oil providing about 9-10 days of crude cover, helps insulate the economy from short-term disruptions.
India's import dependence on hydrocarbons remains a key external vulnerability. The government is advancing coal gasification under the National Coal Gasification Mission. Morgan Stanley views China's vast deployment of coal to create oil, gas, and other products as a guide for India. Renewable energy is the central pillar of India's medium-term strategy to reduce external energy dependence, though a meaningful portion of the solar ecosystem remains exposed to external supply chains, especially from China. India remains under-penetrated in nuclear energy, suggesting significant headroom for expansion. The brokerage recommends a multi-pronged strategy: expansion of Strategic Petroleum Reserves, more emphasis on coal gasification and mining, greater electrification, continued focus on renewable energy, and fast-tracking nuclear power projects.
Fertilizers: Crucial for Food Security
The fertilizer sector is vital for India's food security. India is heavily reliant on fertilizer imports, particularly from the Middle East, and the ongoing conflict has disrupted supply and raised prices. Morgan Stanley advocates a three-part strategy: diversify supply sources, expand domestic production capacity, and reduce nutrient intensity via better agronomy and input efficiency. India's total fertilizer consumption rose from about 53 million tonnes in 2018-19 to approximately 60 million tonnes in 2023-24. However, the structure of risk has improved only partially since the Russia-Ukraine conflict. The government's strategy has focused on calibrated capacity expansion, pricing support, and supply diversification. India has strengthened its urea position with domestic production, but import dependence persists in phosphatic and potassic segments. Geographic concentration compounds this, with urea production and gas feedstock tied to the Gulf. Reducing fertilizer import dependence is important to protect fiscal stability and food prices.
Defence: The Need for Indigenisation
The Middle East conflict reinforces the need for higher defence spending to enhance supply-chain depth and domestic production. India is among the top five military spenders globally. Global and regional conflicts are prompting India to scale up defence spending and accelerate indigenisation. The government aims to raise defence spending to 2.5% of GDP over five years. Initiatives under 'Make in India' and 'Aatmanirbhar Bharat' are building an indigenous defence industrial base. Reforms such as DAP 2020, indigenisation lists, higher FDI limits, and innovation schemes are reducing reliance on foreign suppliers. Indigenous defence production reached Rs 1.54 trillion in FY 2025. However, global surges in defence orders strain supply chains, posing challenges for modernization timelines. Sustained higher defence spending could support GDP growth, manufacturing, and job creation but raises fiscal concerns.
Remittances Add to External Sector Resilience
Gulf-linked remittances make up 38% of India's overall remittances, supporting the external account. While prolonged regional instability raises risk, India is less vulnerable as remittance sources diversify. Near-term downside risks include sustained slowdowns in Gulf labour markets, affecting remittance-dependent states. Offsets include higher-skilled migration corridors and potential reconstruction-led labour demand. Policymakers may support returning workers and intensify diplomatic engagement. Over the long run, the rising share of skilled migrants in developed markets reduces reliance on any single region.
Policy Direction, Boost to Capex
Morgan Stanley expects India to emphasize self-reliance, with global shocks encouraging higher capital expenditure in vulnerable areas. Efforts to reduce import reliance across energy, fertilizers, defence, and critical supply chains are capex-intensive. The brokerage expects India's headline capex to rise 1.6 times to $2.2 trillion by FY2031, with incremental cumulative capex of $800 billion over five years, growing at 11.9%. Around 60% of incremental capex is likely to flow into new-age industries like energy transition, data centres, and defence. The strategy to reduce concentration risk is growth-positive over the medium term, supporting a stronger capex cycle. India's medium-term growth trajectory remains well-supported, with real GDP growth of around 6.5-7%.
