India's merchandise exports declined 7.2% year-over-year to $41.1 billion in March 2026, the Commerce Ministry reported Wednesday, marking the sharpest monthly contraction since the pandemic era and underlining the far-reaching economic damage the U.S.-Iran conflict is inflicting on countries far removed from the battlefield. The decline was broad-based, with petroleum products, engineering goods, chemicals, and textiles all posting significant contractions.
Petroleum product exports — India's single largest export category, representing roughly $8-9 billion per month — fell 18% as refiners struggled to source crude through disrupted Middle East shipping lanes and global buyers delayed purchases amid price volatility. India is one of the world's largest crude importers and has benefited from discounted Russian crude since 2022, but Russia's own export logistics have been complicated by the conflict's impact on tanker routing through the region.
Freight Costs and Demand Disruption
Freight rates on routes through or around the Middle East have spiked 35-60% since the conflict began, adding significant costs to India's export supply chains. More critically, India's Middle East trading partners — the UAE, Saudi Arabia, Qatar, and Kuwait — have collectively cut merchandise imports by 12-18% as their own economic activity contracts under the weight of the regional crisis.
Engineering goods exports fell 9%, with Indian manufacturers of industrial equipment and infrastructure components citing cancelled orders from Middle Eastern construction projects and delayed payments from regional buyers. The gems and jewelry sector, traditionally one of India's strongest export performers, saw a 14% decline as tourism-dependent retail demand in Dubai and Riyadh collapsed.
Policy Response and Longer-Term Outlook
Commerce Minister Piyush Goyal announced an emergency support package for affected exporters, including interest rate subsidies on export credit, fast-track customs processing, and expanded trade insurance coverage for routes with elevated risk premiums. The government is also accelerating trade agreement negotiations with the European Union to diversify export destination risk.
Economists at ICICI Securities forecast India's goods exports will remain under pressure for at least two more quarters if the conflict persists, potentially reducing India's 2026 GDP growth from a projected 6.7% to 6.1%. The rupee has depreciated 3.8% against the dollar since the conflict began, providing some offset through price competitiveness, but not enough to compensate for the demand destruction in key export markets.