Middle East Conflict Poses Direct Economic Threat to India, Warns NITI Aayog
The ongoing conflict in the Middle East, particularly involving Iran, presents significant risks to India's economic stability and trade ambitions, according to a new report from NITI Aayog. The policy think tank's quarterly Trade Watch report for October-December (Q3) of FY 2025-26, released on Monday, highlights how regional instability could directly impact New Delhi's macroeconomic landscape.
Trade and Macroeconomic Vulnerabilities Exposed
NITI Aayog's analysis indicates that the Middle East conflict could put substantial pressure on India's current account deficit (CAD) and exchange rate. The report specifically points to the Iran war as a key factor that might disrupt trade flows and create economic headwinds for the country.
Perhaps more significantly, the instability is slowing down crucial negotiations on the India-Gulf Cooperation Council (GCC) Free Trade Agreement (FTA). This delay directly affects India's strategic efforts to widen its trade base and improve access to new markets in the region.
FTAs: A Two-Way Street for Market Access
At the report's release, NITI Aayog Vice Chairman Suman Bery emphasized the reciprocal nature of trade agreements. "Let us be clear that FTAs are not a one-way street, nor should they be," Bery stated. "In the way that we are seeing them as a tool for market access, others are seeing it as a tool for market access too."
Bery provided a nuanced perspective on India's trade performance, noting that merchandise trade has remained steady despite global uncertainty. He highlighted the particularly strong performance of services trade during what he described as the "very confusing year" of 2025.
The Critical Role of Imports in Economic Competitiveness
In a notable departure from conventional trade wisdom, Bery emphasized the importance of imports for economic vitality. "For trade economists, imports matter much more than exports," he explained. "It is imports that force you to be competitive, so we should welcome imports as much as we welcome market access."
The Vice Chairman expressed confidence in India's macroeconomic stability, pointing out that the economy has grown at an average of 6% over the past two decades, demonstrating resilience amid global challenges.
Strategic Recommendations for Gems and Jewellery Sector
The NITI Aayog report dedicates significant attention to India's gems and jewellery sector, recommending a strategic shift toward higher-value exports. Key recommendations include:
- Design-led manufacturing approaches
- Cluster-based research and development initiatives
- Promotion of GI-branded products, particularly in lightweight, fashion, and men's jewellery segments
The report calls for specific policy interventions to strengthen the sector:
- Aligning Free Trade Agreements to benefit the industry
- Streamlining duty drawback and refund mechanisms
- Expanding access to the India International Bullion Exchange (IIBX)
- Improving raw material supply chains to reduce input costs and boost MSME margins
Financial Support for MSMEs
Recognizing the challenges faced by micro, small, and medium enterprises (MSMEs), the report recommends enhanced financial access through:
- Collateral-free loan facilities
- Credit guarantee schemes
- Interest subvention programs
- Export factoring arrangements
- Supply chain finance solutions
The comprehensive analysis underscores how geopolitical tensions in the Middle East could reverberate through India's economy, affecting everything from macroeconomic indicators to specific sectoral growth and trade negotiations. As regional instability continues, India faces the dual challenge of navigating these external pressures while pursuing its domestic economic objectives.
