Whalesbook
Geopolitical instability in West Asia is increasingly challenging India's trade and economic stability. A NITI Aayog report suggests these tensions could widen the country's trade deficit and weaken the Indian rupee. The unrest has also reportedly delayed progress on the India-GCC Free Trade Agreement (FTA), hindering efforts to diversify trade. This comes as India's GDP showed strong growth, rising 7.8% in the third quarter of FY2025-26, highlighting the economy's underlying strength against external shocks.
The West Asia conflict has directly affected India's trade, especially for the key gems and jewellery sector. While overall trade remained resilient in April-December FY'26, reaching $1.37 trillion, the gems and jewellery sector's exports for FY2025-26 fell 3.32% in dollar terms to $27.72 billion. This drop was largely due to a sharp 44.92% decline in demand from the United States, a major market. The slowdown has prompted exporters to rethink their market strategies and seek new destinations.
India's gems and jewellery sector, which accounts for about 7% of the nation's GDP and 10-12% of merchandise exports, is navigating a complex global landscape. The Gem and Jewellery Export Promotion Council (GJEPC) notes a significant shift, with the UAE becoming the top export destination, showing 10.52% growth for the full financial year, aided by the India-UAE FTA. This diversification is vital as the sector faces geopolitical uncertainties and changing US trade policies. NITI Aayog's report emphasizes the need for design-led manufacturing and high-value exports. It recommends improving trade processes, securing raw material access, and expanding financial support for MSMEs to lower costs and improve profits.
Past trade data shows India's vulnerability to geopolitical events in West Asia. The current conflict has heightened concerns about energy security, as nearly 90% of India's crude oil imports pass through vital chokepoints like the Strait of Hormuz. Analysts caution that a prolonged crisis could increase India's trade deficit to about 2% of GDP, due to higher import costs and reduced foreign investment. Financial conditions have tightened significantly, with CRISIL's index showing the tightest environment since the COVID-19 pandemic in March 2026. This is driven by capital leaving the country and a weaker rupee, which some analysts predict could reach 97-98 against the dollar if fighting continues.
Despite diversification efforts, the gems and jewellery sector faces ongoing structural issues. The significant drop in US demand, along with falling prices for lab-grown diamonds and high gold prices affecting plain gold jewellery, points to market weaknesses. While silver and platinum jewellery segments show growth, the overall export decline shows dependence on a few products and markets. Negotiations for an India-GCC FTA are positive but could face delays due to regional instability, creating uncertainty about future market access. Moreover, the broader economy, with persistent inflation risks and tighter global funding, could reduce consumer spending and investment, impacting discretionary purchases like high-value jewellery.
The NITI Aayog report recommends deeper integration through FTAs and business reforms to strengthen India's trade resilience. The gems and jewellery sector's shift towards diverse markets, higher-value products, and better financial access is considered key to managing global instability. Immediate economic risks remain due to ongoing conflicts affecting energy prices and trade. However, India's fundamental economic strengths and focus on structural reforms aim to overcome these challenges and maintain its growth. The IMF forecasts India will be the world's fourth-largest economy by 2025, suggesting a positive long-term view despite current pressures.