Policy pivot: Will the latest oil shock finally jolt India into looking outward for economic success?

The International Energy Agency has called the 2026 disruption the worst energy shock the world has ever seen. Every such moment in history has belonged to countries that treated it as an inflection point rather than just an emergency.

In 1973, Japan pivoted to a manufacturing base re-engineered around fuel efficiency, led by its ministry of international trade and industry, in response to an oil shock. Korea’s 1973 heavy and chemical industries (HCI) drive built Posco, Hyundai and its wider heavy-industry base; the 1979–80 shock then forced a stabilization programme that converted that base into export capacity.

This year’s shock could serve as a strategic opportunity for India.

An oil shock is a cascading event.

The import bill widens first; every $10 per barrel adds $14-16 billion to our annual outflows, so a jump from $70 to $100 means roughly ₹4 trillion in extra bills; and $120 means almost ₹7 trillion.

The rupee weakens, making dollar-priced crude costlier in rupee terms. Foreign portfolio investors exit as the rupee slides. Input costs transmit through energy, petrochem and diesel-linked logistics, which is especially punishing because 65% of our freight moves by road (with a six-to-nine-month lag before raising core inflation).

The Reserve Bank of India (RBI) has projected 2026-27 inflation at 4.6%, more than double the 2.1% reading for 2025-26. And it does not stop at one cycle; a price spiral can persist if the first round is not managed. Dearer fertilizer could impact kharif crops to spell 12-18 months of food inflation.

India, fortunately, confronts it from a position of unusual strength. Six budgets of fiscal consolidation have compressed the Centre’s deficit from 9.2% of GDP in covid year 2020-21 to 4.4% in 2025-26 (though a GDP data revision widens it a bit), eliminated off-budget borrowings and held capex above 3% of GDP, while RBI has $703 billion in foreign-exchange reserves. That’s about 11 months of import cover.

India is cushioned, but not insulated. The question is how India must respond to today’s shock.

Oil prices quadrupled in 1973 and then doubled in 1979.

Japan and Korea took opposing approaches to these shocks on almost every dimension, be it their monetary stance, industrial priority, external finance or exchange-rate regime.

Japan tightened credit late in 1973 and paid with a 25% inflation peak; it tightened early in 1979 and took a shallower recession. Korea ran expansionary policy through both shocks and paid on its external account.

Japan restructured away from energy-intensive heavy industry towards electronics, precision instruments and fuel-efficient automobiles; Korea pressed on with its HCI strategy, financed with external debt that touched 53% of GDP by 1982 and suffered its first post-war economic contraction of 1.7% in 1980 before attaining stability.

But both converged on one instrument: exports. Korean exports grew at an annual average of over 30% through 1973–75. The businesses that pushed into export markets after the shock outperformed their peers for 30 years after the programme ended.

Oil shocks are external, but India will need internal absorbers like targeted subsidies for fuel, food and fertilizer through the kharif season to protect farmers and households. This will buy time for forex-generating policies to work.

The ₹25,060 crore Export Promotion Mission approved last November can act as a scaffold. A three-year rolling window for Remission of Duties and Taxes on Exported Products would let exporters price two-year contracts with certainty. Production-linked incentives could be given an export-linked multiplier.

As WTO rules have been stretched by many countries, these need not hold us back. This was a tool that Korea used through its HCI drive to convert domestic subsidies into export success.

The foreign direct investment (FDI) that India attracts is oriented towards our market more than exports, while Korea, Taiwan and Singapore attracted capital for the latter. Korea’s Foreign Capital Inducement Act, Taiwan’s Hsinchu Science Park and Singapore’s Economic Development Board each tied preferential treatment to export performance. This aided their export success.

India could deploy an aggressive export-oriented industrial policy, perhaps with five-year tax holidays for greenfield FDI above $50 million conditional on 20% export intensity within three years and 10-year tax holidays for semiconductor and defence FDI with 40% domestic-sourcing defence offsets.

Gulf sovereign-fund capital could be attracted for refinery and strategic petroleum reserve capacity, alongside a National Investment and Infrastructure Fund co-investment window to anchor large strategic projects.

To assure foreign investors of policy predictability, an investment-certainty package with a dispute-resolution cell and a single-window tax-customs desk drafted a decade ago must be operationalized. Portfolio flows can be channelled into infrastructure and real-estate investment trusts.

The oil shock of 1973 forced Japan into efficiency. The 1979-80 one forced Korea to scale. This shock must force India into external orientation. Why wait for the next shock to teach us the same lesson at a higher price?

The author is a director at Arrjavv who researches and writes on behavioural finance and economics. Her X handle is @DivaJain2