By Shishir Gupta
Current economic debates in India focus on why the rupee has fallen and how much to rely on foreign-exchange reserves. This is understandable, given the volatile geopolitical environment. But the biggest risks to the Indian economy today stem from more specific shocks: elevated oil prices, potentially strong El Niño conditions during the monsoon season, and the tariff-induced fragmentation of global trade. These developments are especially worrying because India also faces the spectre of a structural slowdown in the IT services industry, one of its main growth drivers, linked to AI’s rise. A back-of-the-envelope estimate suggests that these simultaneously unfolding shocks could produce a cumulative drag on GDP growth of roughly 1–1.5 percentage points, relative to the baseline assumption at the start of the year.
Notably, most agencies have revised down India’s growth forecast only modestly, by around 0.5 percentage points, so far. A sustained $10 increase in oil prices is generally believed to lower India’s GDP growth by roughly 0.2–0.3 percentage points, implying a growth slowdown of 0.5–0.8 percentage points if crude stays around $90–100 per barrel for a prolonged period.
Historically, severe El Niño episodes have resulted in stagnation or even contraction of agricultural output, which accounts for about 18% of GDP. Stagnation, never mind contraction, would thus shave around 0.4–0.6 percentage points from GDP growth. As for merchandise trade, the World Trade Organization’s latest forecast indicates global growth of around 1.5% this year, down from 4.6% in 2025. India’s exports, which tend to mirror global patterns, seem likely to experience a similar deceleration.
But these adverse conditions may be a blessing in disguise if they force India to push through serious reforms that target binding constraints on near- and medium-term economic growth. This implies picking areas that are critical for growth and have not seen any improvement over the last decade or two.
First, that would mean slashing the tariffs that have undermined the competitiveness of Indian manufacturing, which remains stuck at around 15% of GDP despite many efforts in recent decades to increase it to 25%. Consider that China’s average applied most-favoured-nation tariff rate is 7.5%, whereas India’s is 16.2%. It is impossible to boost exports while maintaining such high tariff walls. Over the next 8–10 years, India should move toward tariff structures comparable to those of the members of the Association of Southeast Asian Nations and better integrate into global supply chains. Joining regional trading blocs like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership would signal a credible commitment to such reform.
Second, Indian policymakers must overhaul the country’s mining policy, which separates exploration from extraction—a fundamentally flawed approach to a sector that thrives when high-risk discovery promises high reward. While India’s geological make-up is similar to Australia’s, the latter has transformed its mineral deposits into a growth engine in recent decades by introducing stable exploration incentives, easier development pathways, and predictable commercial frameworks. In 2000, the mining sector accounted for 5% of GDP in Australia and around 3% in India; but of late, India’s share has slid to 2%, whereas Australia’s has surged to 14%.
Third, land use and availability must be improved, particularly in cities. The lack of credible and rigorous land-use planning and implementation has led to soaring urban real-estate prices. On average, a median-earning household must save 11 years’ worth of income to purchase an apartment. Manufacturing has responded to high urban prices by moving to the countryside: the share of manufacturing in Indian cities fell from about 70% in 1994 to less than 50% in 2012.
To boost their credibility and facilitate the entry of new developers, Indian cities’ master plans must be more detailed and include sustainable financing models. The monetization of public land is a key way to unlock urban development and improve living conditions. The onus lies squarely on the government, as the country’s biggest landowner, to reform dysfunctional urban land markets.
Fourth, the central government and state governments must rein in subsidies, the burden of which has increased over the last couple of decades and especially since the Iran War began. According to the World Development Indicators, subsidies and other transfers account for 42.5% of central government expenses in India, compared to around 25–30% in most peer countries. The money poured into subsidies, a popular electoral tactic, is often wasted, and would be better spent on education and health, sectors that are perennially fund-starved.
Lastly, India should spend more on research and development to increase productivity and long-term growth. Spending on R&D investment accounts for only about 0.7% of GDP, far below the 2–3% typical in high-tech countries like the United States and China. This reflects low private-sector participation, with firms contributing less than 40% of total R&D spending in India, compared to around 70% in advanced economies. The Indian government has taken strides toward closing the gap, announcing a $10.5 billion Research Development and Innovation Scheme last year, but disbursement must be effective and efficient.
As India tries to reduce the economic pain caused by recent shocks, it must also focus on building long-term resilience. To achieve that objective, the country’s unfinished reform agenda can no longer take a backseat to immediate fixes. The government has the policy toolkit; now it needs the political will to use it.
The writer is a senior fellow at the Centre for Social and Economic Progress in New Delhi.
