It is foolish to simply waste the policy opportunities offered by economic distress — especially if it is imposed on you by external events. Instead, use it to make tough decisions which are unacceptable when times are good. How well is India using the ongoing global trade uncertainties and sharp increase in the price of petroleum caused by the Iran war?
Global growth is poised to drop from 3.1 per cent to 2.5 per cent and inflation to increase from 4.4 to 5.4 per cent as the West Asian crisis drags on into the second half of 2026. Damaged energy infrastructure could extend higher oil prices for longer, taking inflation to 6 per cent and reducing growth to 2 per cent. Country outcomes shall vary significantly. Developing economies shall do worse than advanced economies with more reserve capacity to manage adverse impacts. Those with pre-exiting frailties like high fiscal deficits and debt will do even worse. Can we buck the downward trend?
India continues to have stable macro fundamentals. Inflation at 3.14 per cent in April this year (2024 base with a lower share of food) remains low, albeit trending up.
Growth remains above 6 per cent, with public debt at about 80 per cent of GDP and the fiscal deficit at 4.4 per cent. India did well to diligently pursue a return to stable macro fundamentals over the intervening four years from the fiscal extravagances during the Covid-19 pandemic as global growth and demand normalised.
Are policies now aligned with the changed circumstances of demand uncertainty and higher energy prices? Previously, an expansionary path for public spending on decarbonisation, defence and infrastructure was savvy. But these assumptions no longer hold. First, Donald Trump’s reciprocal tariff and trade dislocations and now the war in Iran have derailed these plans: the latter more conclusively than the former. Is India’s policy response sufficiently robust reflecting the sense of global unease and belt-tightening?
The answer is no. The policy machine has marched on assuming things would blow over. This is reflected in an April 2026 proposal, just prior to five sub-national elections, to appease the women’s vote bank by proposing to reserve 33 per cent of legislative jobs — MPs and members of State Assemblies — for them. By itself, the affirmative action is laudable but regressive because it envisaged enhancing the strength of these bodies rather than eating into the seats already occupied by men.
The proposal cited the need to improve representation but was rejected in Parliament. The problem isn’t under representation. It is excessive concentration of powers in 5,000-odd MPs and MLAs, thereby excluding the 3.5 million elected city and village representatives where reservation for women already exists. Simply decentralising political power, as constitutionally approved in 1992 but sparingly implemented, can empower existing women representatives, open meritocratic career progression for ground-level party workers and avoid capture of national and state legislative positions by “princelings”. Ignoring this missing step in political reform, is a profligate approach to women’s empowerment.
Navigating the difficult path ahead requires fiscal restraint, targeting low-hanging fruit, spending capital only for the most productive projects. Pressing ahead with proven technologies – battery-supported RE (share in electricity supply is in the low teens}, modular nuclear power expansion, grid strengthening for resilient multi-point electricity supply, more efficient electric end-use appliances, efficient water storage and supply, should take precedence over moonshots. Invest in de-clogging traffic, making roads resilient to flooding and strengthen bridges rather than on empty, shiny new highways, with motorcycles roaring past at 200 kmph! Incremental capital output ratio (ICOR) is a useful thumb rule for programmatic efficiency. This metric implicitly favours enhanced business efficiency over consumer thrill or comfort and is appropriate for resource-constrained economies. Railway track strengthening and higher speeds with operational safety (Kavach) before fancy coach facilities is a good example of efficient programmatic choices.
Opinion is divided on whether we should build global confidence in the India story by shoring up dwindling capital inflows versus burgeoning outflows via contracting external commercial debt. The share of external liabilities in India’s public debt profile is miniscule.
There is scope for such actions. Whether it is wise to incur the additional cost now linked with external debt merely to assure external investors of our fiscal resilience is the issue. Keeping this as a last resort is better than a first move. Panicking is worse than being slow to respond.
The weakest link today is the unwillingness of the private sector to invest in India. India remains protected from competition. Business process decluttering to attract new foreign investors, a review of “strategic” constraints on FDI and realigning with international investment promotion practices like choice of arbitration venue and resisting capital controls can rekindle languishing foreign investment. Industrial competitiveness is most needed in the small and medium enterprises. Industrial policy should encourage large industrial houses to play the lead goose to a gaggle of following SME geese.
In return, the “unique” but declaratory 2 per cent compulsory spend on post tax, corporate profits imposed in 2013 in the name of Corporate Social Responsibility, should be terminated. This “quasi tax” is a drain on the earnings of the ordinary shareholder — many of whom might already be “social do-gooders”. The usefulness of this imposition is also unclear. Prescribing minimum spending on activities not directly connected with their business — poverty alleviation, education, healthcare, gender equality, rural development, disaster relief, protection of heritage and culture, sports promotion — often merely rebrands existing corporate activities. More important, it is an avoidable regulatory intrusion on the rights of corporate boards to manage their money. Other specified areas like environmental sustainability or technology incubators are best promoted via incentives rather than via a de facto tax on corporate profits.
Government allocations are fragmenting into proliferating national schemes. Union government allocations must remain within constitutional guard rails. In turn, the states must step back from intruding in city and village governance. The cascade of fiscal resources and functional powers must empower all three levels of government. Political capacity and wisdom are not concentrated at the top. It is equally vested in the 3.5 million elected political representatives at the bottom. Convert these “statistical jobs” into effective engines of change. Bapu would possibly agree and so might Babasaheb Ambedkar, because the chains binding India today are not in New Delhi. They enslave the 0.64 million villages and 783 zila parishads which remain mere bystanders as India’s growth story whizzes past them.
The writer is Distinguished Fellow, Chintan Research Foundation, and was earlier with the IAS and the World Bank
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