6 May 2026, NIICE Commentary 12476
Gadde Omprasad
The ongoing war in West Asia has once again demonstrated the vulnerability of the energy sector in South Asian economies, which heavily depend on energy flows from the region, and that any disturbance can undermine the economic stability of nations. The Strait of Hormuz accounts for about 25 percent of global oil and more than 90 percent of South Asia's daily fuel supplies. India, the largest economy in the region, imports around 40-45 percent of its crude oil through this route, along with more than half of its LNG and nearly 90 percent of its LPG, although it has started diversifying its sources. Pakistan depends almost entirely on oil and gas supplies from Gulf countries such as Saudi Arabia, the United Arab Emirates, and Kuwait, all of which must pass through Hormuz, making it extremely vulnerable. Bangladesh and Sri Lanka also rely heavily, around 70 to 90 percent, on energy imports from the Gulf, including LNG from Qatar. Smaller countries show varying levels of exposure: Bhutan and Nepal are indirectly dependent as their fuel needs primarily come through India; the Maldives relies almost entirely on imported petroleum for its energy needs.
The partial closures, naval blockades, and shipping restrictions on the Strait of Hormuz have resulted in the collapse of vessel traffic, leading to supply disruptions and price volatility for South Asian countries. As a result, the fuel prices in Sri Lanka, to begin with, increased by 25 percent, in Bangladesh 15 percent, in Nepal and Pakistan by 40 percent and in the Maldives 20 percent, affecting their daily consumer expenditure. Energy imports constitute a significant share of total imports across South Asian countries. They account for roughly 25-30 percent of total imports in India, 30-35 percent in Pakistan, 20-25 percent in Bangladesh, 20-30 percent in Sri Lanka, 15-20 percent in Nepal and 20-25 percent in the Maldives. These figures highlight that energy imports form a critical component, generally between 20 percent and 35 percent of total imports in South Asia, underscoring the region’s economic vulnerability to external energy shocks affecting inflation, growth, fiscal stability, and overall development trajectories. Damage to Gulf energy infrastructure and disruptions in refining capacity led to a prolonged period of uncertainty, not merely a temporary shock.
Rising oil prices quickly translate into inflation, fiscal stress, and political pressure. The region’s limited strategic reserves and weak regional energy integration exacerbate this vulnerability. Since most South Asian countries are net energy importers, higher oil prices increase their import bills and widen their current account deficit (CAD). If oil prices remain around $100 per barrel, the CAD could rise to 1.9-2.2 percent of GDP. While government expenditure may increase due to fuel and fertilizer subsidies also forces governments to either cut development spending (e.g., infrastructure, welfare) or increase borrowing, thereby constraining long-term economic development. Rising energy costs reduce household purchasing power, increase poverty risks, and distort investment patterns. Studies highlight that inflation driven by energy prices affects savings, reduces real incomes, and creates uncertainty for businesses, thereby lowering investment and employment opportunities. In extreme cases, as seen in Pakistan, high inflation (over 40 percent in recent years) has severely impacted household welfare and required large compensatory transfers.
India’s Evolving Role
India plays a central and increasingly strategic role in shaping energy flows within South Asia, not as a primary producer of crude oil, but as a regional hub for refining and redistribution. Countries like Nepal are almost entirely dependent on India for their energy needs, with nearly 100 percent of petroleum imports sourced through Indian supply chains, making India its sole energy lifeline. In the case of Bhutan, the relationship is more interdependent: India supplies a large share of petroleum products (around 70-80 percent), while Bhutan exports hydropower back to India. Bangladesh has increasingly relied on India for 10-15 percent of its energy imports, particularly refined petroleum and cross-border electricity, reflecting growing regional integration. Similarly, Sri Lanka has depended on India for 15-20 percent of its fuel needs during crisis periods, especially when external supply chains were disrupted, highlighting India’s role as a first responder in regional energy emergencies. The Maldives sources around 20-30 percent of its petroleum products from India, further reinforcing India’s position as a key supplier to island economies. In contrast, India’s role in Pakistan remains negligible due to political constraints, despite geographic proximity. Overall, India’s large refining capacity and strategic location enable it to act as a net exporter of refined energy products within South Asia, positioning it as a crucial energy security provider capable of stabilising regional supply, especially during periods of global disruption.
The ongoing energy crisis and volatility in global supply chains have opened a significant strategic window for India to reclaim trust and leadership in South Asia by positioning itself as a reliable provider of regional public goods, especially in the energy sector. One of the most important opportunities lies in crisis responsiveness. During the 2022 economic collapse in Sri Lanka, India extended over USD 4 billion in assistance, including fuel supplies and credit lines, which helped stabilise essential services. This kind of timely intervention builds credibility and contrasts with slower or more conditional external support. Similarly, India’s near-total energy supply arrangement with Nepal, through uninterrupted petroleum flows and expanding electricity trade, demonstrates how reliability can translate into long-term trust.
A second major opportunity is deepening regional energy integration. India is already exporting electricity to Bangladesh, facilitating Nepal-Bangladesh electricity trade, and importing hydropower from Bhutan and Nepal, creating a nascent sub-regional grid. Expanding this into a more formalised South Asian power pool could reduce costs, enhance resilience, and bind countries through mutual dependence. For instance, trilateral power trade agreements (India–Nepal–Bangladesh) can serve as confidence-building measures that move beyond political mistrust toward functional cooperation.
Third, India has the opportunity to act as a developmental partner in the energy transition. Many South Asian countries lack capital and technology for renewable energy expansion. By investing in solar, hydro, and grid infrastructure in neighbors like the Maldives (solar projects) or Bangladesh (grid connectivity), India can project itself not merely as a supplier, but as a partner in sustainable development. Initiatives under the International Solar Alliance and cross-border green energy corridors further reinforce this role.
Fourth, India can leverage connectivity and infrastructure diplomacy. Energy pipelines, transmission lines, and coastal shipping routes can physically integrate the region. The 130 km long India–Bangladesh Friendship Pipeline, connecting Siliguri (India) and Parbatipur (Bangladesh), for example, is a concrete step toward institutionalizing energy cooperation. Reviving broader sub-regional frameworks like BBIN (Bangladesh, Bhutan, India, Nepal) can help bypass political deadlocks at the SAARC level while still promoting regionalism.
There is also an important geopolitical opportunity. At a time when external actors are increasingly active in South Asia, India can differentiate itself by offering non-coercive, transparent, and demand-driven cooperation. By ensuring that energy assistance is timely, affordable, and free from political overreach, India can rebuild confidence that has sometimes been strained in the past. Such initiatives would not only enhance regional energy security but also serve as instruments of political normalization. Energy interdependence can act as a confidence-building measure in a region often marked by mistrust.
Conclusion
In sum, the current crisis allows India to shift from being seen as a dominant power to a dependable partner, using energy security as a tool of diplomacy. If managed effectively, these efforts can not only stabilize the region’s energy landscape but also re-anchor India’s leadership through trust, interdependence, and shared development gains. The present crisis highlights the urgent need for collective resilience. India can leverage this moment to promote regional energy grids linking Nepal, Bhutan, Bangladesh, and Sri Lanka through electricity trade. It can facilitate joint strategic petroleum reserves to cushion supply shocks. There is an opportunity to revive stalled pipeline and connectivity projects under a broader framework of sub-regional cooperation (e.g., BBIN). India can also position itself as an energy hub, supplying refined petroleum products and electricity to neighbouring countries.
Gadde Omprasad is an Associate Professor at the Centre for South Asian Studies, School of International Studies, Jawaharlal Nehru University, New Delhi, India.
