Why growth isn’t saving the rupee

Business Standard January 20, 2026

Last year was not a good one for the Indian rupee. It weakened steadily, even against a soft US dollar, ending 2025 as Asia’s worst-performing currency. Some argue that the rupee’s slide will be a blessing in disguise, giving long-struggling exporters a much-needed boost. Perhaps it will. But before taking comfort, it is worth asking a more fundamental question: Why is the rupee falling in the first place?

The puzzle is sharpened by the apparent strength of the Indian economy. Growth remains brisk, and inflation has fallen to multi-decade lows. It is true that exports have taken a hit from higher US tariffs, with merchandise shipments growing by less than 1 per cent year-on-year between August and December 2025. Yet gross domestic product (GDP) is still projected to expand by 6.5-7 per cent in 2026-27, keeping India firmly in place as the world's fastest-growing major economy.

Ordinarily, such performance would attract foreign capital, as investors chase returns, lifting the currency in the process. That was the pattern during the boom of 2004-08, when equity inflows averaged a little over 2 per cent of GDP and the rupee appreciated by around 2.5-3 per cent a year. This time, the script has flipped. Despite strong growth, the rupee has fallen by more than 5 per cent so far in 2025-26.

What makes the decline more striking is the modest current account deficit (CAD) — around 1 per cent of GDP in April-September 2025. A weakening rupee suggests that even financing so small a gap has become difficult.

The reason lies in a persistent imbalance: demand for rupees has lagged supply, reflecting pressures on both the trade and capital accounts. Merchandise imports averaged about $62 billion a month in 2025, far exceeding exports of roughly $37 billion and leaving a $25 billion trade deficit. Although services exports offset much of this gap, weak goods exports and a rising import bill — driven in part by higher gold and silver prices — have skewed demand towards dollars. Importers are buying more dollars than exporters are supplying, pushing the dollar up and the rupee down.

Normally, such a shortfall would be easy to finance — if capital inflows were behaving as they usually do. Last year, they were anything but normal. In 2025, foreign portfolio investors (FPIs) withdrew about $19 billion from Indian equities on a net basis — the worst outflow on record. This exodus occurred even as capital flows into the broader MSCI Emerging Markets index remained robust. India was a clear outlier.

Foreign direct investment (FDI) has been no more reassuring. This should have been a moment of opportunity, with multinationals diversifying away from China and India opening more sectors to foreign capital while offering incentives through production-linked schemes. Yet investors remain hesitant. Gross FDI inflows have been stuck at around 1.7 per cent of GDP since early 2023, well below the 3 per cent seen in the mid-2000s.

The graph tells the story starkly. Between January 2024 and October 2025, gross FDI inflows averaged about $7 billion a month, while withdrawals ran close to $4 billion, leaving net inflows of barely $3 billion — negligible for a $4 trillion economy. Once rising outward investment by Indian firms, averaging $2-3 billion a month, is taken into account, the picture worsens. In effect, India has received close to zero net FDI each month over the past 22 months.

The conclusion is hard to escape: India has failed to capitalise on the global shift in FDI in any meaningful way. This has in turn soured the mood among portfolio investors who now appear far less confident about India’s long-term growth prospects. Instead, capital is being redirected to East Asia, where economies are seen as better positioned to benefit from the China+1 strategy and the artificial intelligence (AI) boom. Delays to a US-India trade deal have only reinforced this perception. The rupee’s slide reflects this deeper malaise — India’s waning appeal as a destination for foreign capital. The Reserve Bank of India’s heavy interventions in the foreign-exchange market have offered only a temporary fix; a durable remedy lies in reforms that restore credibility and rekindle India’s appeal to global investors. 

All of this places the forthcoming Union Budget firmly in the spotlight. Strong headline numbers — rapid growth, low inflation and a modest current account deficit — have fostered the belief that little needs fixing. That would be a misjudgement. Both foreign investors and domestic firms are signalling that something is amiss, as evident in the prolonged weakness of private investment. The government has taken a few policy steps in recent months. One can only hope that more decisive measures will follow when the Budget is presented on February 1.

Monetary policy needs good data

Business Standard December 16, 2025

The Reserve Bank of India’s (RBI) policy rate cut on December 6 took many analysts by surprise. It came just after the government reported that the economy was growing at a staggering rate of 8.2 per cent. According to the standard macroeconomics playbook, when an economy is growing so fast, central banks are expected to tighten monetary policy — meaning they raise rates pre-emptively — to control inflationary pressures and stop the economy from growing too quickly.

This time, however, the situation was different because inflation has been running at less than one per cent. This comfortable price environment gave the RBI the flexibility to lower rates but it does not automatically justify such a move. The core dilemma remains: Why provide further stimulus to an economy that is already booming at an 8 per cent growth rate?

Does this mean the RBI’s policy decision was misguided? Not really. Rather, the rate cut becomes perfectly understandable when viewed through the lens of the policymakers’ primary dilemma: The need to guide the economy while navigating through a thick statistical fog.

Let us begin by examining the gross domestic product (GDP) data itself. Official figures suggest that growth is soaring, far above last year’s estimated growth rate of 6.5 per cent. On the surface, the expansion appears broad-based and robust, with the manufacturing and services sectors each growing at 9 per cent.

The problem, however, is that these numbers are hard to explain. Some commentators have suggested the cuts in goods and services tax (GST) rates boosted consumer spending, thus raising GDP. But this is unlikely: The tax cuts started on September 22, too late in the July-September quarter to significantly affect the data.  Could other key indicators help provide a clue? Not really. In fact, they raise further questions. 

This sets off a virtuous cycle. Credibility keeps expectations anchored, stable expectations help keep prices low, and low inflation in turn strengthens credibility.

For example, industrial output grew by only 3 per cent during April-September 2025. This is the slowest growth since the pandemic year of 2020-21. The core sectors of mining, manufacturing, and electricity showed slower growth or even contracted. 

Bank credit growth also suggests a weakening economy, with non-food credit — a proxy for credit demand, slowing to 10 per cent in the July-September period from a growth rate of 13 per cent in the previous year. 

Perhaps most worrisome, tax collections have decelerated dramatically. During April-September, the central government’s gross tax collections grew by only 2.8 per cent, the slowest pace in 15 years. Income, corporation tax, and GST all grew in low single digits. 

Finally, it is hard to square strong growth with the weak rupee. The Indian rupee has depreciated by more than 6 per cent against the US dollar this year, making it the worst-performing currency in Asia. While external factors have hurt exports, the current account deficit remains modest at less than 2 per cent of GDP and should, therefore, be easy to fund. But this has not proved possible, thereby putting pressure on the rupee. Capital inflows have remained feeble, and oddly enough, have weakened further after the GDP news was announced. The inability of the fastest-growing country in the world to attract capital seems quite an anomaly. 

In short, it is hard to know how the economy is truly performing. What does this mean for policymaking? 

For the RBI, it makes its job very difficult. To target inflation effectively, the RBI must set interest rates based on its inflation outlook. But if it cannot reliably assess the real strength of the economy, how can it accurately forecast future inflation?

It is true that all central banks find it hard to forecast inflation because food and fuel prices are volatile. They usually fix this by basing their forecast on core inflation, which leaves out these volatile items. However, the situation becomes harder for the RBI when it cannot even forecast core inflation, because it cannot properly judge the underlying strength of the economy.

In such circumstances, policymakers have to adopt an approach based on managing risks. The RBI likely worried that collapsing inflation was causing real interest rates to rise. This, in turn, could severely harm the economy if demand was actually weak. On the other hand, cutting the nominal interest rate would not threaten the 4 per cent inflation target, even if demand turned out to be strong, simply because inflation is so low right now. Therefore, the RBI cut rates. For the same risk-based reason, the government also reduced GST rates.

Both policy decisions were reasonable, but a large problem remains: They may prove wrong if it turns out that demand is, in fact, quite strong. Meanwhile, the inability to come up with accurate macroeconomic forecasts has already confused financial markets. This confusion has potentially weakened policy credibility, creating further problems.

For all these reasons, it is imperative to resolve the data issues. The good news is that the National Statistical Office will soon release updated GDP and consumer price index (CPI) series. We can only hope that these new numbers will mark a significant improvement. Until they do, monetary policy will remain constrained by this data uncertainty.

The good run of inflation targeting: Keep the framework, improve data

Business Standard November 19, 2025 (with Vaishali Garga)

(The authors are, respectively, with the Indira Gandhi Institute of Development Research and Federal Reserve Bank of Boston. The views expressed in this article are solely those of the authors and should not be reported as representing the views of the Federal Reserve Bank of Boston, the principals of the Board of Governors, or the Federal Reserve System.)

Next year a critical policy review looms for the Indian government: Whether to retain or revise the inflation-targeting framework, a cornerstone of India’s monetary policy for a decade. Critics have been pushing for major changes — ranging from tweaking the target number to redefining the target variable, or even shifting the Reserve Bank of India’s (RBI’s) core mandate. However, a major revision now would be unwise because evidence shows that the framework has delivered.

India's formal adoption of inflation targeting in 2016 marked a fundamental shift in the way monetary policy was conducted. Until then, the RBI had been juggling several goals — rapid economic growth, adequate credit flow, and a stable exchange rate. This left its primary responsibility of controlling inflation somewhat diffused. The 2016 reform fixed that by giving the RBI a single, clear mandate: Keep the inflation rate based on the consumer price index (CPI) at 4 per cent, give or take 2 percentage points. This framework made the central bank’s objective both clearer and easier to evaluate.

That said, lower inflation by itself does not prove that the framework has succeeded. Prices can fall for reasons that have nothing to do with monetary policy — like a global drop in commodity prices or strong agricultural output. In fact, studies show that such favourable shocks played a big role in bringing the inflation rate down soon after the framework was introduced. Critics point to this and argue that the success in this respect was driven more by good luck than by sound policy.

But this argument overlooks the real test, which came later. Between 2022 and 2024, global energy and food prices spiked after war in Ukraine started. In India, the food inflation rate averaged about 7 per cent. Yet, barring a few months, the overall inflation rate stayed within the target band for most of this period. This was a sharp contrast to the pre-framework years, when similar shocks routinely pushed the inflation rate into double digits. This stability suggests that something deeper than good luck is at work: The RBI has built credibility.

Credibility is at the heart of any inflation-targeting regime. It captures the public’s confidence that the central bank will follow through on its commitment to keep prices in check. When households and firms trust the RBI, temporary supply shocks, such as spikes in food or fuel prices, do not immediately feed into long-term inflation expectations. In other words, expectations stay anchored. And once expectations are anchored, inflation itself becomes easier to manage because firms are less likely to raise other prices in response to a shock, and workers are less likely to demand higher wages.

This sets off a virtuous cycle. Credibility keeps expectations anchored, stable expectations help keep prices low, and low inflation in turn strengthens credibility.

There are signs that this cycle is beginning to take hold in India. Surveys show that while people still expect the inflation rate to be higher than the 4 per cent target, their expectations fluctuate far less than they once did. Research by RBI economists Sitikantha Pattnaik, G V Nadhanael, and Silu Muduli (2023) finds that households’ inflation expectations have become less sensitive to short-term price movements — another indication that expectations are gradually becoming more anchored.

Studies of professional forecasters show the same pattern. Research by Bhanu Pratap and Kundan Kishor (2023) and by IMF (International Monetary Fund) economists Patrick Blagrave and Weicheng Lian (2020) finds that medium-term inflation forecasts have become more stable and less sensitive to short-term inflation surprises. In our own research (Vaishali Garga, Aeimit Lakdawal Lakdawala and Rajeswari Sengupta, 2022), we find that professional forecasters now expect the RBI to react more strongly to rising inflation than it did before the inflation-targeting regime. Their expectations have also become less responsive to shocks in oil prices. Together, this evidence suggests that India's recent inflation stability is not just the result of favourable global factors. It reflects a steady buildup of policy credibility.

In this context, making major changes to the framework would be risky because it could undermine the credibility that has been built since 2016. This does not mean the framework cannot be improved. Rather, any changes should focus on better data, greater transparency, and clearer communication — not on rewriting the core rules. Two areas for improvement stand out.

First, the RBI's survey of household inflation expectations needs a major upgrade. At present, it asks people mainly about expected price changes over the next three months or one year. The survey should be redesigned to capture households’ longer-term inflation expectations more effectively. This would offer far more useful insights for policy because decisions about saving, investing, or negotiating salaries depend on how people expect inflation to evolve over several years — not just in the near term.

Second, policymakers need better information on what businesses expect. Since firms are the ones that set prices and wages, their view of future inflation is crucial. Yet India currently lacks systematic data on firms’ inflation expectations. The RBI could address this gap by regularly surveying firms and publishing the results. This would help the central bank judge whether price pressures are becoming entrenched and enable it to respond more effectively.

The next decade will bring fresh challenges — climate-related supply shocks, volatile energy prices, and global financial uncertainties. The best way for India to prepare is by preserving and strengthening the RBI’s hard-won credibility. If, instead, the framework is rewritten and trust in monetary policy is weakened, rebuilding that credibility could take another decade or more.

Internationalising the rupee: India's path must diverge from China

Business Standard October 20, 2025

At its last policy meeting, the Reserve Bank of India unveiled several measures to boost the Rupee’s use in cross-border trade—a step toward its gradual internationalisation. The notion that an emerging economy's currency can gain global traction took off after the IMF added China’s Renminbi (RMB) to its Special Drawing Rights basket in 2016. Now, amid renewed geopolitical tensions involving the US, Russia, and China, the question resurfaces: how can India meaningfully advance the Rupee’s journey toward international status?

For the Rupee to become an international currency, non-residents must both want and be able to trade and invest in it. A Russian importer, for instance, should be able to pay for South African goods in Rupees. Likewise, a UK investor should be able to buy Rupee-denominated bonds or shares with ease. In these cases, foreigners—not Indians—bear the currency risk. That shift is the essence of true currency power. It’s also the "exorbitant privilege" the US dollar has long enjoyed.

The willingness and ability to use a currency globally rest on three key conditions. First, the issuing economy must have scale—measured by GDP, trade flows, and volume of international transactions. China, with an $18 trillion economy, meets this bar; India, at around $4 trillion, does not yet. To build that scale, India must sustain a growth rate of 7–8 percent annually over the coming years—a difficult but necessary condition for the Rupee's global ambitions.

Second, the value of the currency must be stable over time. A currency is considered stable when the general level of prices does not vary too much. Stability has multiple aspects: macroeconomic, financial and political. On the macroeconomic front, India has done well. CPI Inflation is at multi-year lows, and the RBI has built credibility in keeping it close to the 4 percent target. Financial stability, too, has strengthened: banks are better capitalised, balance sheets are cleaner, and the broader financial system appears sound.

Political stability is the third pillar. The fact that India is a democracy, like issuers of major international currencies in the 19th and 20th centuries, goes in its favour. Democracy, with its institutional checks and balances, reassures foreign investors about policy credibility and continuity. That confidence, in turn, lends long-term stability to the currency.

Currency stability is often mistaken for the absence of volatility—but the two are not the same. A stable currency reflects true market forces, not central bank management. Its value should be shaped by cross-border capital flows, much like the USD–EUR exchange rate, which stays broadly stable despite constant movement in global finance. Think of it like administered prices: India once controlled prices of essentials like steel and diesel, keeping them artificially steady. Today, those prices fluctuate with supply and demand—and that's a sign of a healthy market. Currency markets should work the same way.

Finally, a currency must be liquid—meaning investors can buy and sell large amounts of assets in it without moving prices. Liquidity depends on deep financial markets and an open capital account. India’s equity market is vibrant, but its debt market remains shallow. History shows that countries with capital controls tend to have thinner markets, while openness to foreign investors boosts liquidity. Yet, more than three decades after liberalisation began, India still maintains extensive controls—especially in its debt and derivatives markets—limiting the Rupee's global reach.

Studies of professional forecasters show the same pattern. Research by Bhanu Pratap and Kundan Kishor (2023) and by IMF (International Monetary Fund) economists Patrick Blagrave and Weicheng Lian (2020) finds that medium-term inflation forecasts have become more stable and less sensitive to short-term inflation surprises. In our own research (Vaishali Garga, Aeimit Lakdawal Lakdawala and Rajeswari Sengupta, 2022), we find that professional forecasters now expect the RBI to react more strongly to rising inflation than it did before the inflation-targeting regime. Their expectations have also become less responsive to shocks in oil prices. Together, this evidence suggests that India's recent inflation stability is not just the result of favourable global factors. It reflects a steady buildup of policy credibility.

This is where India's approach must differ sharply from China's. Beijing has sought to internationalise the RMB while retaining capital controls and a tightly managed exchange rate—a combination no currency has ever succeeded with. China’s advantage lies in scale: it commands over 12 percent of global trade, and in some products, more than half of world exports. That dominance allows it to partially offset the constraints of limited convertibility. India, with only about 3 percent of global trade, lacks that leverage. The contrast shows in the data—the RMB accounts for nearly 9 percent of global FX turnover, while the Rupee lags below 2 percent.

India's best path forward is to gradually ease its capital controls. The RBI and the government have taken meaningful steps since 2020, but more are needed. Alongside this, India should embrace a genuinely flexible exchange rate while ensuring ample hedging options for market participants. Encouragingly, progress is visible: from the near-pegged regime of 2022–24, when INR-USD volatility hit record lows, the RBI has since allowed the currency to move more freely with market forces.

Of course, India cannot liberalise the capital account or adopt a fully flexible exchange rate overnight. One promising approach is to use GIFT City, the International Financial Services Centre, as a controlled experiment. It could become India’s "Hong Kong," with an open capital account, flexible exchange rates, and robust hedging instruments. Over several years, the RBI could gain valuable experience managing such a system, gradually scaling it up to advance the Rupee's journey toward international status.

Making the Rupee an international currency aligns with India’s vision of becoming an advanced nation by 2047. But achieving this over the next two decades will demand sustained, deliberate action. Currency internationalisation is a long journey, requiring multiple building blocks. Indian policymakers must chart a path distinct from China’s, steadily dismantling the barriers that limit the Rupee's global role. Success will hinge on a steadfast commitment to economic reforms that inspire international confidence in the currency.

Reinforcing the Anchor: The Next Five Years of Inflation Targeting in India

Reinforcing the Anchor: The Next Five Years of Inflation Targeting in India, Leap Blog, Sep 25, 2025

The unending saga of India's GDP data

Business Standard September 16, 2025

In most countries, GDP data releases are routine. In India, they spark controversy. A decade after the new GDP series was introduced, questions over its credibility remain, leaving both analysts and policymakers unsure about the economy’s true health.

According to the latest data release, the economy grew at a staggering 7.8 percent rate in the April-June quarter of 2025-26, far above the forecasts arrived at by economists based on all the other data available. Unsurprisingly, the release has reignited a wave of skepticism and debate.

There are several issues with the GDP series.

The first problem concerns nominal GDP. For organised manufacturing and services, the NSO (National Statistical Office) relies heavily on firms’ financial filings with the Ministry of Corporate Affairs (MCA), collating data from firms that file regularly, and scaling up those numbers to take account of the firms that haven’t filed. However, many non-filing firms are defunct, loss-making, or mere shell companies that do not produce anything on a regular basis, but serve as conduits to hide profits or circumvent regulations. In such cases, inflating the data from filing firms to cover non-filers risks overstating GDP.

An NSSO (National Sample Survey Office) survey of these MCA firms, conducted in 2016–17, found that nearly a quarter of the 35,000 firms surveyed either refused to share data, had shut down, or were untraceable. Its 2019 report confirmed major gaps in the pool of non-filing firms. Yet these firms continue to be included in GDP estimation. This implies that India’s nominal GDP suffers from measurement issues that can worsen depending on which firms’ are sampled in a given quarter. 

Measuring the unorganised sector is another weak spot. With no fresh data, the NSO extrapolates this sector’s growth from a 2011–12 survey, assuming that it tracks the growth of the private corporate sector. At one point, this assumption seemed reasonable. But the correlation between the unorganised and organised sectors broke down after 2016, when demonetisation, GST, and Covid hit the unorganised sector firms disproportionately harder. This has led to a further upward bias in GDP growth.

Finally, there are serious issues with the GDP deflator. Once the NSO has calculated nominal GDP, it has to convert these figures into real GDP. To do this, it needs to use price indices, so that it can deflate away any increases in nominal GDP that were caused by inflation. This task is simple in concept, but complicated in practice. That’s because the NSO needs to choose an appropriate price index for each of the sectors that go into GDP. Then, it needs to deflate the inputs that go into the production of all these items, separately from the outputs.

Why is all this work necessary? Essentially, because prices do not move together. Take air travel: deflating airline revenues (a nominal figure) by the economy-wide price index does not tell us anything about the real increase in air travel in a quarter. What’s needed instead is a proper measure of ticket prices to capture the real growth in the sector. 

Unfortunately, many of the sectoral deflators in India are not appropriate. The most problematic case is the service sector, the largest sector of the economy, where the wholesale price index (WPI) is used, even though it barely tracks service prices. If instead, in the April-June quarter, this sector had been deflated using the service component of the CPI—which grew at a faster pace than the WPI—the calculated service sector growth would have been far lower than the 9.3 percent recorded.

Another deflator related issue in the first quarter was the divergence between input and output prices. As commodity prices slumped, WPI inflation dropped to 0.3 percent while (output-measuring) CPI inflation stayed near 3 percent. This difference may seem small, but it can have significant distorting effects. This is because cheaper inputs like oil push up manufacturing profits without boosting actual production. The only way to strip out this illusion is through ‘double deflation’—separately deflating inputs and outputs.

Unfortunately, unlike most G20 peers, India doesn’t follow this procedure for bulk of the GDP estimation. Instead, it deflates nominal values only once. Even more problematic, it often uses as its single deflator, the commodity-heavy WPI, which measures the price of inputs. This means nominal gains aren’t stripped out; to the contrary, they get amplified, counted once in rising profits and again through a falling deflator. The result: manufacturing growth gets overstated.

Why does this matter? Because GDP growth is the number everyone watches, especially policymakers. Yet, even as GDP data claims the economy is booming, policymakers have recently rolled out new GST measures to boost demand— an implicit admission that they themselves are not sure whether the economy is really as buoyant as the GDP numbers suggest.

The good news is that the statistics ministry is aware of all these issues and are working on fixes, with a new GDP series due in February 2026. Until then, everyone will need to continue to look at a wide variety of data in order to gauge economic activity.

Trump tariff shock: A wakeup call for India as challenges intensify

Business Standard August 19, 2025

In an unexpected development, India now faces a 50 per cent tariff on its goods exports to the United States, a hurdle higher than that of almost any other country in the world. As a result, the government needs to consider how it should respond. While there are political considerations that it will need to take into account, the objective is clear from an economic point of view: Mitigate the damage, so India can return to rapid growth. Unfortunately, this task is complicated because overseas prospects have dimmed even as the domestic economy has been slowing down.

How severe is this tariff shock? Many analysts have argued that its impact will be limited. They point out that goods exports to the US account for only 2 per cent of India’s gross domestic product or GDP, only two-thirds of which will be affected, since pharmaceuticals, electronics, and petroleum products have been exempted.

However, this line of reasoning overlooks the bigger picture. The US is not just India’s largest export market — it is also a critical economic partner. Consequently, the tariff shock will not only affect trade flows — it will rattle investor confidence, disrupt supply chains, and chip away at India’s long-term export competitiveness. The real risk lies in these ripple effects, which extend far beyond the immediate numbers.

To understand why, consider the plight of three types of firms.

The first and the most obvious are global manufacturers. India has been pitching itself as the next global manufacturing hub, especially for firms exporting to the US or diversifying away from China. This was seen as a potential game-changer for India’s growth path. With a young, increasingly skilled workforce and democratic stability, the advantage seemed clear. However, that edge has now been wiped out by a 50 per cent US tariff. Even at the reciprocal 25 per cent imposed on August 7, India would remain less competitive than most of its Asian rivals who face only 19–20 per cent tariffs on their US exports. If this differential persists, India risks losing out on a once-in-a-generation chance to become the world’s manufacturing workshop. 

It’s not only exporters of goods who stand to lose. The impact could extend to services exporters too. Nearly 60 per cent of India’s 1,700-plus Global Capability Centres are US-headquartered. While tariffs don’t directly touch them, worsening US–India relations could make the parent firms wary of expanding here. That would be a serious setback, since services exports have been a cornerstone of India’s post-Covid growth.

Finally, consider domestic manufacturers. They may not export much but many of them rely heavily on foreign inputs. If India even considers imposing retaliatory measures on the US, to add to those imposed earlier on China, it risks stalling their investment plan further. 

The tariff shock therefore threatens to ripple through the entire economy. Added to this, high-frequency data already point to an economic slowdown. Non-food bank credit growth has slipped to 10 per cent from 14 per cent a year ago, merchandise exports rose just 2 per cent in April–June, GST collections slowed to 6 per cent from 11 per cent, passenger vehicle sales have slumped, indicating sluggish urban demand, and the real estate boom of the past few years has stalled, creating a growing stock of unsold homes in major cities. 

In other words, the US tariff shock could not have come at a worse time.

How should India respond? First and foremost, India must resist the temptation to turn inward. Protectionism has never delivered rapid growth —India’s own pre-1991 record proves it, and no other country has succeeded that way. The US may be leaning protectionist now, but India cannot afford to repeat that mistake.

Instead of turning inward, India should help its exporters by deepening trade ties with multiple other countries. The deal with the United Kingdom is a welcome step, while negotiations with the European Union are vital and must be expedited. India should also pursue agreements with East and Southeast Asia, to integrate more firmly into global supply chains. That will mean lowering its tariff and non-tariff barriers, which remain among the highest in Asia. In today’s interconnected world, a strategy of self-sufficiency would be self-defeating.

At the same time, Indian policymakers must move beyond firefighting and implement reforms that unlock India’s growth potential. Reviving private investment, boosting manufacturing competitiveness, and creating jobs at scale will require cutting red tape, simplifying regulations, improving the ease of doing business, and investing in skills and not just physical infrastructure. Recent announcements — such as rationalising goods and services tax (GST) rates and setting up a Reforms Committee — are encouraging, but the real test will lie in the details and, above all, in implementation.

Finally, this setback must not push India into an anti-US stance. Frictions are inevitable in such relationships, but the US remains far too important an economic partner to sideline. India’s long-term objective should be to strengthen, and not weaken, its economic engagement with the US, by negotiating progressively better and more comprehensive trade deals.

In many ways, this could be India’s second 1991 moment. The crisis may not be as visible this time, but the stakes are just as high: the economy is at a crucial crossroads, and any policy misstep now could trap India in lower-middle-income status for decades to come.