Sanjeev Ahluwalia | The Economic Resilience of India: Taking Stock…

Economic shocks from war, climate or inept leadership are the norm and not an aberration. Some economies sail through depressing times. Others flounder. The Nordic economies, the United States, Britain, Germany, Japan, Canada, South Korea, Singapore and Switzerland all come to mind as being particularly resilient amongst the rich economies.

China is on the cusp of joining this group formally in terms of per capita income, but in real-world metrics -- economic heft, defence capabilities and range of engagement in global affairs -- it already sits at the high table. However, hell-for-leather investments have provoked a property crash, repressed domestic consumption while the consequences of the “one-child norm” are manifesting in a stagnating workforce.

Rich or “near rich” countries have a head start on resilience because they have deep private and government buffers to bide through a shock. Strategic planning can enhance resilience even in middle-income economies. Think Asean, which learnt from the 1997 Asian financial crisis that adequate forex reserves, market reflective exchange rates, prudent external debt levels, and fiscal stability are key metrics of resilience. Vietnam is the outlier for its strong export-led growth -- a strength in good times but also a source of volatility in uncertain times, as the example of China illustrates.

In South Asia, Bangladesh’s rapid export growth and the deep, domestic moorings of its nationalism enhance resilience. Both Nepal and Bangladesh, with new, elected governments in place, successfully retained their democratic credentials despite the recent political disruptions.

In India, political stability over nearly eight decades, despite enormous cultural diversity, is a gift of democracy. Remittances from its 38 million expatriates meet one half of the merchandise trade deficit of $300 billion. Export of services account for the other half. Public debt levels are acceptable at around 82 per cent of GDP. The fiscal deficit has been trending downwards from its Covid-driven spike of 9.5 per cent to its normative level of four per cent of GDP. Inflation was at 3.2 per cent prior to the outbreak of the Gulf war. Forex reserves are at $689 billion versus a merchandise trade deficit of $283 billion in 2024-25, up from $241 billion in the previous fiscal. Export of services account for 45 per cent of total exports, generating a surplus of $188 billion in 2024-25, which together with about $135 billion in remittances, kept the current account deficit at around 0.06 per cent of GDP and economic growth at 6.5 per cent of GDP. In fiscal 2025-26, growth is expected to be about 7.5 per cent of GDP.

How resilient is India to the ongoing Gulf war? Thus far, four weeks into the war, we were relatively shielded from the non-availability of LNG and LPG, which we substantially import from Qatar and Saudi Arabia. India’s long-standing economic cooperation with Iran and nifty diplomacy ensured that India-bound petro-cargo ships are being permitted through the Strait of Hormuz by Iran. Alternative supply options from Russia also help. Remittances -- about 40 per cent from the Gulf – are holding up. However, stock markets are 10 per cent lower due to the outflow of foreign portfolio investors.

Every $10 per barrel increase in crude price increases India’s CAD by 0.35 per cent of GDP and inflation by 0.5 per cent of GDP. The extent of price increase depends on the volume of oil reduced from global demand. In 2022 the Ukraine war spiked oil prices by about 60 per cent to $130 per barrel. Just three per cent of global supply from Russia was directly affected, but sanctions and realignment of supply chains caused a wider ripple effect of 10 per cent. The Gulf exports 20 per cent of global oil demand.

Extensive destruction of production capacity and export terminals could spike oil price significantly.

In the short term -- three months -- both impacts can be diluted by the RBI using its reserves to support INR, thereby reducing imported inflation. The Union government could absorb the price impact by cuts to budgeted fiscal outlays or by borrowing; but the latter would enlarge the fiscal deficit well beyond the norm of four per cent.

State Assembly elections are scheduled in April for four states -- Assam, Kerala, Tamil Nadu and West Bengal, and the Union territory of Puducherry. The Centre is unlikely to risk passing through the market price of oil and thereby stoking inflation -- though this could act as an automatic stabiliser for contracting demand. Sadly, it does lead to frayed voter tempers. The exaggerated presence of state-owned oil majors in the distribution business paves the way for a quasi-administered system for pump prices. Crude prices reduced by 45 per cent from $99 a barrel in 2014 to $54 a barrel in 2017. However, the government kept pump prices stable -- much to the chagrin of consumers. Instead, it used the fiscal bonanza to reduce the fiscal deficit from 4.3 to 3.4 per cent of GDP. Fiscal prudence enabled it to peak the deficit at 9.5 per cent in 2020-21 to counter the economic depression during the Covid pandemic.

This example is instructive in the present context. The targeted fiscal deficit this year is 4.3 per cent, but the government has the firepower to unleash an additional four per cent of GDP (Rs 16 trillion, or about $170 billion) to protect consumption, if the war disruptions continue. This would increase public debt to 86 per cent of GDP -- still less than China at 88 and Brazil at 87 per cent of GDP (IMF 2024). The real constraint on using this reserve fiscal capacity is the inflation consequences. India is loath to lose its “Goldilocks moment”, with inflation below four per cent and real growth above seven per cent.

Four lessons learnt stand out. First, developing multiple supply options for trade and particularly for energy, is the resilient choice, even if it comes at a cost. This means adequate storage for LNG and LPG. Coal is here to stay and, post-gasification and carbon capture, likely to grow. The government is right to promote nuclear power expansion along with renewable energy. Pushing harder on electrifying and greening transport is critical. Integrated national grid expansion and management, for a national energy and carbon market is key.

Second, multipolar trade and investment arrangements make sense given frayed multilateralism. Third, the focus on plurilateral arrangements should commence within South and East Asia, including establishing a substantive trade and investment relationship with China. Fourth, greater market orientation of the domestic economy is the key for enhancing competitiveness and global integration.

Finally, India can thrive and shall survive.

The writer is Distinguished Fellow, Chintan Research Foundation, and was earlier with the IAS and the World Bank