India’s economy is bracing for significant challenges as the nation’s currency, the rupee, has fallen to the lowest point among Asian currencies. Foreign capital has been leaving, exacerbating the fall. This near acute reduction in equity valuations has led to billions of dollars evaporating in Indian markets. The United States is about to retaliate by lowering the boom with a punitive new 50% tariff on hundreds of Indian exports. This political maneuver could have catastrophic consequences for India’s labor-intensive sectors that depend almost entirely on the US market.
The Indian rupee’s recent slide is both symptomatic of, and vulnerability to, the country’s economic underlying weaknesses. And foreign investors have pulled out close to $30b of capital, adding unprecedented pressure to India’s financial markets. This counterrevolutionary trend has rocked investor faith in the equity markets. Over the last few months – at least tens, if not hundreds, of billions in available capital have disappeared. With the US set to increase tariffs, many fear this will exacerbate the situation, especially as India grapples with its reliance on domestic consumption to drive growth.
To counteract these mounting crises, India is inverting its foreign relations calculus. Internationally, the nation is working to deepen ties with fellow BRICS members. Second, it is further increasing its collaboration with Brazil, Russia, China and South Africa. In particular, India has made significant efforts to restore frayed relations with Beijing, even as Delhi has moved to consolidate its historic alliance with Moscow. The country is the world’s largest importer of Russian crude oil, bringing in almost two million barrels a day. The Indian government strenuously argues that this decision is based purely on economic need, and not geopolitical considerations.
Prime Minister Narendra Modi’s administration has repeatedly insisted that India’s continued acquisition of cheap Russian oil is necessary to keep the world’s largest democracy — and its economy — running. The federal government continues to emphasize that access to inexpensive Russian energy resources is key to keeping the lights on and industry running. Yet this new and heightened dependency on Russian oil, against a backdrop of sharp global economic changes, continuingly poses risks to India’s longer-term economic interests.
As the US prepares to implement its new tariffs, concerns are mounting over the potential fallout for India’s export-dependent sectors. Sectors that rely on exports to the US, such as agriculture and manufacturing, would face devastating shocks. This would result in thousands of factory shutdowns and millions of job losses across India’s export strongholds. The impending 40 percent tariff hike puts the future of these industries in jeopardy. It might result in increasing recessionary unemployment rates at a moment when we can most use an economic recovery.
The coming tariff increase marks another serious blow to India’s competitive, labor-intensive export industries. The US is the third largest export market for these products. A dramatic increase in duties might prove to be difficult obstacles to overcome. Many businesses do not understand how this situation would bring all production to a grinding stop. They’re finding it increasingly difficult to stay in the black amid rising costs and falling demand.
In spite of these headwinds from the outside world, the global narrative on India’s economy continues to be mostly fixated on domestic consumption. The Modi administration continues to emphasize that India’s economic growth is primarily powered by internal demand rather than external markets. While this way of thinking can offer a measure of resilience in the near term, it does little to mitigate the acute danger stemming from these short-sighted US tariff decisions.
India ships much of its formal and informal trade — around $598 billion plus — with China. Many officials continue to search for solutions to repair and stabilize the nation’s economy. The priority continues to be building up our homegrown industries and making our trade partners more diversified to limit our reliance on one market.