Raghuram Rajan on the Middle East war and its economic impact on India and the world?

本站添加: 2026-05-15

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[00:01:28]Hello and welcome to a special interview for the wire 70 days after it started.

[00:01:34]How should we view the Middle East war?

[00:01:36]What opinion should we form of President Trump's behavior and comments? How appropriate has been India's response?

[00:01:42]And what is the impact on the world's economy? and indeed on India's own economy. Finally, if hostilities resume, could we face serious stagflation?

[00:01:53]Those are some of the issues I shall raise with Ragu Ram Rajan, professor of finance at the University of Chicago, former chief economist of the IMF and former governor of the Reserve Bank of India. Dr. Rajan joins us live from Chicago. Rahulam Rajan before we talk about the economic impact of the war let me ask how you view what's happened how do you see the situation in the Middle East roughly 70 days after the war started >> well I would say that at this point it looks like a miscalculation uh a serious miscalculation by uh the US and Israel that uh the initial belief was it would be a short war that uh Iran would be essentially um willing to peace quickly and uh I think the notion that the straight of Armos would be blockaded was uh not really a big part of their expectation. I think as things go forward, one, you have a more militant leadership in uh in Iran, partly because the more moderates have been taken out by the Israelis and the Americans. And uh you have uh the possibility of serious disruption in the global economy if this continues without without end.

[00:03:20]And the Iranians know that and they also know that uh you know this is their last best chance to get a an agreement that they can live with going forward. So uh positions are uh not so flexible uh on either side. Uh Gideon Rose from uh u foreign affairs has has a very nice description of what's going on. There's a game called the dollar game where uh two sides bid for a dollar and they have to pay whatever whoever wins has to pay whatever the second guy sort of bid and uh it seems like a easy thing but as you start bidding and uh you soon find that you can't stop you because you have to pay what the second guy bid and so for that initial dollar you suddenly see people bidding $30 $40 until they realize there's no end to this game. You will continuously keep bidding to avoid being the second guy. To that extent, what you see in the bargaining that's going on is neither side wants to see itself, uh, both domestically as well as globally as the weak side that gave in.

[00:04:31]And so, uh, you know, it's becoming really hard to get a reasonable outcome.

[00:04:36]And we're seeing that. The analogy you drew of the dollar game is very interesting because at the moment both sides believe that they actually have the upper hand, the advantage is with them. But as you perceive it, who do you think is on top or is it very difficult to say?

[00:04:54]>> I think both sides lose. Uh actually neither side is on top here. From the US's perspective, uh, uh, the longer this lasts, the less the US is immune because of its own supplies of energy.

[00:05:09]Uh, the prices from the rest of the world feed back into the United States, but also the shortages from the rest of the world feed back into the United States. I mean you must remember one of the biggest supports to the US economy so far has been the immense investment in AI in chips in data centers and so on to the extent that helium which is a big input into semiconductors is interrupted and we run out of supplies of helium in some of the big semiconductor manufacturers. It feed it feeds back fairly quickly into that that kind of investment. But this is true of of everything. Uh agriculture in the US dependent on fertilizers. Fertilizer prices going through the roof. Uh it's so what is hitting the rest of the world and will hit really hard is also feeding back into the US. The US will not win.

[00:06:02]Of course, Iran has already seen so much of its economy uh demolished uh by the bombing. U inflation is through the roof in Iran. uh people who are already um sort of hurt, depressed, angry uh and the economy is going to suffer. It's it's just going to increase. So both sides are losers.

[00:06:26]>> Let me at this point ask you, what is the opinion you formed of President Trump's conduct since the 28th of April?

[00:06:33]During the last 70 days, he's given multiple explanations for starting the war, and each of them differ with each other. He's issued crew threats to annihilate Iranian civilization. He's agreed to an open-ended if fragile ceasefire. But he keeps insisting that the war is as good as one. And at the same time, he insists he's going to step up the bombing as well. So, what do you make of all of that? Well, I think that the um sense of the current US administration is that it uh it didn't enter this war with uh with deep reflection on uh what the possible scenarios might be which might evolve past uh the first few days. I think it was seen as an opportunistic attempt to get rid of the Iranian leadership, possibly fueled by Israeli advice. And uh what we've seen is it's easy to get into a war. The old chakra sort of analogy in India, you get into a war but very very hard to get out. And that's what uh what is being seen. I mean uh I think with more reflection with more uh sort of sense of how this would play out longer term and the impact on the US remember the US had a flourishing economy uh on February 28th. Uh a sense that everything was going uh reasonably well. uh labor markets were picking up that uh uh you know we had this tremendous EI investment and even though there was a worry about the K-shaped recovery in the US also the poor uh middle class uh sort of suffering a little more than the upper class benefiting from high stock prices uh that was thought of as manageable now with the uh middle class lower middle class being hurt by higher oil prices uh there is a genuine K-shaped recovery and put on top of that anxiety about AI and jobs and so on and you have the makings of a really serious political u sort of push back uh certainly for the Republican party in the elections.

[00:08:44]>> Has President Trump been poorly advised by the people closest to him? People like Marco Rubio, people like his chief of staff, people like his chief or head of the department of war. or did he get the right advice but simply refused to listen?

[00:09:00]>> I think that in um sort of more authoritarian structures like we have in the US like we have in other countries in the world today um people don't really want to offer the truth uh the unmarnished truth uh they tend to see which way the wind is blowing and and offer their advice accordingly. So it's very hard uh you know to actually um pin blame here. Is it the recipient who is basically averse to any kind of advice which uh conflicts with the opinions they have formed? Uh is it the communicators who aren't giving uh a sense of what they truly believe? uh something gets lost uh maybe in in communication but but uh but perhaps just in the structure which is why again and again I say authoritarian regimes can make make big mistakes including India's own >> tell me at this point how do you view the Indian government's response to the war it hasn't criticized the US Israel strikes on Iran and it was particularly late in condoling the death of Ayati Do you see that as strategic real polity or a thinly disguised attempt to side with America and Israel which many in India believe may have undermined India's traditional foreign policy?

[00:10:29]>> I I I I think we've been uh sort of shifting uh foreign policy grounds uh for quite some time and and it's largely been on what what seems almost a transactional approach to foreign policy. uh we will take whatever uh sort of position uh suits us at that moment and fits with India's broader needs at that point. It certainly is uh thought of as in the national interest but I think what it does is precisely what you said which is that it doesn't pay sufficient heed to our traditions our values and our old relationships and uh obviously relationships change the need to maintain relationships changes all the time but if there is no underlying basis of values behind those kinds of relationships people have no idea what to expect and then we tend to be a little peripheral to all kinds of discussions because we are chameleons.

[00:11:29]We are what we are at that moment based on how it plays out uh for our interests. So I think this move towards transactional foreign policy has been a mistake. It uh it tends to make us uh less relevant because nobody really trusts us in the moment and uh it uh it uh sometimes leads to the kinds of things you're talking about. We're we're running with the hairs on one hand and we're hunting with the hounds uh on the other and uh it it just shifts.

[00:12:01]>> Is it your impression that this hasn't won us any cudos points with the Trump White House? Do they simply take us for granted? Well, I don't know the inner workings of the Trump White House, but you can see it in the fact that we're not central to any of the negotiations that are taking place, even though we are friendly with uh with both sides ostensibly both with Iran uh because of our long tradition of of friendship with Iran as well as with the United States.

[00:12:30]>> Against this background, let's come to the impact of the war on the world's economy. It's not just 20% of world oil and gas that passes through the straight of Hormuz as you mentioned. It's fertilizer, it's sulfur, it's helium, and it's all the other petrochemicals that are produced.

[00:12:48]What do you believe has been and what do you believe could be the impact on the world economy?

[00:12:54]>> Well, uh I I think there's an American saying, you ain't seen nothing yet. Uh that's sort of the problem, right? The longer this lasts, the more it moves from uh just higher prices anticipating that things will get hairy to actual shortages. And that becomes a problem uh uh globally starting first with Asia because we were the recipients of uh of much of what is flowing through the straight of Hormos but then to the rest of the world as we start bidding up the prices of everything even more. So let let me just uh explain what I mean. When the war started, there was plenty of oil uh and gas in in ships. Uh some on the way, some because of sanctions were sitting on the high seas. Uh Iranian oil, Russian oil etc. Um over time uh those have been bought and re are reaching their destinations also uh whatever buffer stocks countries have India has about 50 days of various forms of energy whatever commercial stocks there are those have been uh eaten into and uh you know depending on country are more or less depleted. Now comes the time when you're uh dependent on just the flows and as you said if 20% now 20% I think is is too high a number because that was what is originates from uh from the Middle East but then through the Red Sea pipeline through uh other sources the Fujer uh port in UAE some of that is making its way out. So my sense is the overall sort of stock of energy that uh overall flow of energy that will be disrupted is about 12%.

[00:14:48]uh of global oil and about uh 12 to 15% of natural gas. But those are serious numbers because if you uh have the world to adjust to that uh that's a serious shutdown in production because if there's a complete shortage of that amount of oil, that amount of natural gas uh industries have to shut down. You already seeing because of higher prices uh people are being more careful about consumption etc. So about four to five uh million tons per day. Uh you've sort of uh uh seen a demand destruction of that amount. But we probably need to see an equivalent if not a little more demand destruction across the world which means actual production shortages.

[00:15:36]And as you know I mean we call a recession when uh when it goes into negative GDP growth. If you have a country growing at 2 or 3% uh you know this kind of demand shortage can push it very quickly to recessionary conditions.

[00:15:52]Uh the countries areas that are more dependent on imported energy are more vulnerable. India is one of them. So is Europe.

[00:16:00]>> Let me pick up on what you're saying.

[00:16:02]The international energy agency has said quite categorically that this is worse than the oil shock of the 70s. Does the oil price threaten to create both inflation and also an adverse impact on growth? And are we looking at world level stagflation?

[00:16:20]>> We could uh and again uh it all depends on how long this lasts, how much the straight of Hormos is is uh shut. Uh and I I I I say that because it's possible to have a peace where the strait continues to be shut. That's what we've experienced so far, the ceasefire. But it's also possible to see an opening where, you know, everybody's very wary of traversing the straight and very few ships get through. It's possible to see a situation where yes, the straight opens, but uh then the first few sort of uh what flows through is uh is uh goes into panic buying as countries try and replenish some of their reserves etc. and doesn't go through to the countries that are most in need. There are all kinds of scenarios as this reopens and only after a time of complete openness with no fears that it'll close again are we going to see a balance reemerge in the energy market. So uh even if we have supply even if we have a a significant piece breakout today and as you said we've had backs and we have had a back and forth on that. Yes, it's going to happen tomorrow. No, it's not. But even if it does happen, it will take some time for the strait to open up in such a way as to breed global confidence. In the meantime, the likelihood of shortages, especially in the poorer countries, and I want to emphasize this, the poorer countries in Asia, in Africa are going to be most hit. It's the Sri Lankas, the uh Nepals uh that are going to be under deep uh uh difficulty because they neither have the buffers nor do they have the buying power.

[00:18:09]There's one more scenario, Raar Rajan.

[00:18:12]Even though project freedom has been paused for the time being, the possibility that hostilities could resume and might be of a higher intensity than before simply can't be ruled out. I would say it's a pretty high possibility. And Iran has made it clear that if Trump starts to take action in the state of Hormuz, which they don't like, or acts against Iran's own infrastructure, they will directly hit the Gulf country's infrastructure.

[00:18:39]That would have a very damaging impact on the price of oil and inflation and growth.

[00:18:46]>> Yes, that's that's a definite possibility. What you're already seeing is that Iran is trying to pick off the UAE. Uh the UAE has already uh sort of tried to separate itself from the rest of the Gulf countries. Uh as you know it left OPEC uh but it's also um you know benefited from more sort of aid from Israel and uh it remember the Abraham Accords uh with Israel. So um what Iran sees is an opportunity to divide uh the Gulf countries also uh and uh and reduce the kind of united front it faces. At the same time on the other hand uh a point you've made uh why is the United States holding back? Because there is zero appetite within the United States politically for a resumption of the war.

[00:19:41]the war did not have uh popular support even when it started. And with the prices at the pump, you know, you go to the pump to fill up, it's $5. Uh and the again, poorer segments of society already, you see, are not filling up as much as they used to fill up. The richer guys are filling up their tank. The poorer guys are moving to lower grades of of petrol and filling up half a tank in the hope that this comes to an end.

[00:20:11]it's really eating into their consumption. And so, um, I think the unpopularity of this war in the US ties the US's hands. And so, if the war resumes, almost surely it'll be on the Iranian side rather than the US side. Of course, modulo uh, as you've put it before, a president who uh, takes his own advice.

[00:20:36]>> Against this background, let's go one step further. Let's talk about what this war means for India and what it means for our economy. I believe before the war started 50% of our oil and 90% of the LPG that we imported came from the Gulf. A lot of that is now denied to us.

[00:20:56]What would the impact be for our economy?

[00:20:59]>> Mounting shortages unfortunately. And and and that again uh we have buffer stocks. we have the ability to shift uh you know some of our domestic production towards uh places where you know the the shortages will be more meaningful for the economy. As you know uh you know for some time we tried to push cooking gas towards the households and away from the restaurants and so on. But any of these choices has costs for the economy. you start denying cooking gas to the restaurants, you have a whole lot of workers who work in the restaurants whose livelihood is at stake and uh also I mean if you have COVID style shutdowns of restaurants then where do these workers go? They go back to their village hard to get them back uh into the urban areas and uh and that has long-term consequences also. So um I think uh the worry is the longer this lasts because of our dependence on imported uh uh fuel of various kinds uh the shortages spread through the economy and and hit production. So yes uh it is a combination of inflation and stagflation uh I mean it is a combination of inflation and slow growth which we call stagflation. But there is also uh you know the worry that uh on the external side uh for some time we have uh seen inflows of foreign capital very limited outflows especially portfolio outflows larger and that has put uh uh weight on the rupee. The rupee has depreciated some and it is possible that we could also on the external front um you know have some difficulty. Uh thus far we haven't uh had serious difficulty but it is an issue to keep in mind because we import so much and if the prices of our imports also go through the roof uh a doubling from here to you know $170 $180 a barrel which people aren't ruling out as a possibility uh we uh will have to uh manage very very deafly to get through that. So uh there are worries going forward. I I think it's uh one shouldn't get overwhelmed by doomsday scenarios but we should prepare for worse outcomes which means that we have to start managing demand much more carefully right now I'll come to that in a moment's time but the adverse impact of the rupee presumably is a double whammy for us because on the one hand the price of oil and gas is increasing on the other hand the diminishment of the value of the rupee means that the amount we pay for each dollar of gas goes up. So it's a double whammy for us, isn't it?

[00:23:47]>> It's a double whammy, but it's it's sort of related, right? The the whole idea be behind a depreciating rupee uh in a situation where you have an expanding current account deficit is to make you buy less. So it is a way of forcing the adaptation to uh buying less uh uh you know competing less for the oil that is uh that is still managing to make its way uh and and that would mean serious demand effects uh in India that is you're going to uh see industries sort of slow down their production some shut down in the face of these very very high rupee prices for energy.

[00:24:31]But presumably demand for oil and gas would only be reduced if the government were to allow the increased price to be communicated and transferred to consumers. At the moment the government has refused to raise the price of diesel and petrol. Although consumer uh commercial cooking gas has increased pretty considerably. It's gone up from 1,700 per cylinder before the war to over 3,000. Do you see the government being forced to increase the price of petrol, the price of diesel? Otherwise, demand will not diminish.

[00:25:04]>> Right? You cannot see the way it works usually is you keep the price where it is. The oil marketing companies absorb the loss. At some point, the government makes up the loss to the oil marketing companies perhaps by letting the price stay high even when the global price falls. But there is no guarantee that that will happen in near time. And so as the losses in the oil marketing companies increases uh the pressure to uh sort of save the fiscal because ultimately it's uh it's fiscal support which will have to come in. Uh you will have to pass it on uh to uh ordinary households. I understand what was preventing this was the elections. Now the elections are over. it is uh going to be increasingly uh clear to the government that it has to pass on. The longer this lasts, the more you need demand to be reduced in a balanced way rather than uh all the brunt being borne by commercial establishments. So to put it in easy simple terms, if this war continues or this empassis we have at the moment continues for another 10 days, 20 days, the government is going to be forced to raise the price of petrol and diesel. It can't carry on threatening the fisk.

[00:26:24]>> Absolutely. So the the the point is you're you're always hoping uh I presume when you're in government that this this gets resolved quickly and you don't have to take the unpleasant decisions but it it may be important to start taking the unpleasant decisions as a precaution for the fact that you know uh if things get worse uh at least you've you've got a glide path which allows you to manage.

[00:26:52]If you wait until things have really gotten worse, you're you're sort of trolling the bottom of your supplies. Uh at that point, the extent of adjustment can be pretty severe.

[00:27:04]>> So far, Raur Rajan, we've been talking about the impact of oil and gas. But it's not just oil and gas that we get from the Gulf States. We also get fertilizer. We also get sulfur. We get helium. But fertilizer is critical for Indian agriculture. The monsoons as you know are three weeks away from Kerala, 6 weeks away from central India and the monsoon is predicted this year to be a weak one. If the price of fertilizer becomes inordinately high or there's a shortage of fertilizer supply, that's another critical problem for the Indian government and for Indian agriculture.

[00:27:41]>> Uh you're you're absolutely right u on both counts. the the potential weaker monsoon because of El Nino and the uh you know fact that fertilizer price is so high um will uh have a very very adverse effect on our farmers and as you know uh farmers uh are um you know some of the uh more weaker segments of our society at this point. So yes uh almost surely the government will support fertilizer prices with uh with massive subsidies but the real question is what happens if there are shortages which uh you know given uh what we're seeing could emerge and then how does it ration the fertilizer across farmers having subsidized it and so on. I mean these are serious questions which will have to be addressed and they will have to be addressed in the best managerial way possible so as to limit the impact on the economy. You will have to pick uh in a sense where these things uh go when there are shortages because there's not enough for everyone.

[00:28:48]>> As you said there are serious challenges, serious questions that face the government when it comes to managing the economy. In the light of those challenges, how do you view the government's response to the economic situation India has increasingly faced since the 28th of February? Has the government been up to the challenge or do you think that they've ducked some of the issues they should have bitten into more forcefully?

[00:29:12]>> Well, I I think you can explain it with two factors. One, uncertainty about how long the war was will last and hope that your supplies will last till that time.

[00:29:23]and second the political season that uh oh this is not the time to raise prices while we're fighting the elections but I think uh at this point uh it is becoming increasingly clear that even if it ends tomorrow uh the process of unwinding the constraints will take some time and as a result uh you know it may be that the shortages uh certainly for things like fertilizers as you as you point out uh will hit us uh before uh you know things get fully resolved. So with all that in mind, I think it is incumbent on the government to roll out a set of policies. Part of what it also needs to do is is reduce the uncertainty about how this will play out in case I mean offer some thoughts on what if uh the scenario turns uh really adverse how will it ration. I interrupt say none of that has been done by the government. It hasn't rolled out a set of policies. It hasn't shared its thinking about what it will do if the situation gets worse. Is that his responsibility on its part not to do it?

[00:30:29]>> I think it's hope. It's hope and prayer that somehow it doesn't have to uh react. It may be distraction by the elections, but I I do think it's time to to address these issues straight on. I get the feeling you're not impressed by the government's handling. Am I over interpreting you?

[00:30:48]>> Well, let let me put it this way. I'm at some distance, so I don't know what's going on in the inner workings of the government. It may well be that they're formulating a policy that they roll out tomorrow. But but what I would say is that the need to shed some light on this will become increasingly clear for our industry because uh you know industry also needs to plan.

[00:31:12]I presume things won't immediately correct themselves and return to normal when the war ends. The impact of what's happened will last for a lot longer. So what do you expect will be the adverse impact on India's GDP growth for the financial year that started on the 1st of April? We're hoping for 6 and a half% growth. Can we achieve it? Will we come in considerably lower?

[00:31:36]>> Well, um that's the hardest thing to predict at this point, right? I think anybody is just uh throwing a ball in the air when they um when they answer that because it all depends on uh when the war ends and what the uh sort of process by which energy supplies come back on. Without the war, our GDP growth was was estimated between 6 and 7%. Uh with the war clearly it's going to be uh you know lower than that. How much lower depends on when things uh restore to a balance. And I I I would be uh nutty if I if I told you that I have a I I I would be over predicting if I told you I have an answer as to what it would be.

[00:32:23]It it depends on so many um hard to measure and as you said this is a unique circumstance. We haven't been through this uh in the past.

[00:32:31]>> Let me put it like this. Would you agree that the longer the war lasts and the more it intensifies, if it does intensify, the worse will be the impact on our GDP growth?

[00:32:43]>> Absolutely. I mean, there's there's no question about that because of our dependence uh which you pointed out earlier. Absolutely.

[00:32:52]>> There's one more area of great interest to the Indian audience listening to you and that is the impact of the war on the economic strategy of the Gulf countries.

[00:33:01]And I ask you a question finally about them because 10 million Indians work there and I'm told 50% of the remittances we receive come from the Gulf. Now these are countries that present themselves as safe havens where people want to invest, holiday and live.

[00:33:19]How badly is that economic strategy damaged by the war? And can it recover when the war ends or is this going to be lasting damage?

[00:33:30]It depends almost entirely on the nature of the peace. If there is a sense that this is a lasting peace that okay we have dealt with the question of Iranian nuclear weapons, we have dealt with the question of uh you know uh this mowing the lawn strategy that Israel has of periodically bombing its its enemies. If all that is dealt with in a comprehensive piece, uh it is possible to reimagine the Gulf uh emerging once again as that uh you know maybe not to the exactly the same extent because once you've uh uh disrupted the peace there's always a fear it could happen again but but to a large extent come back as you know the Singapore of the uh uh of the west uh so to speak of the west of India uh Dubai could reemerge and so on. I think that uh if the peace is a very fragile piece without solving these longerterm questions, if there's a sense that war could break out again anytime soon, certainly the tourism aspect, the um you know even international travelers planning travel through uh with with an interchange in Dubai or or um Abu Dhabi that is going to be under some uh sort of uh cloud and uh you might see that it uh it actually hits these economies hugely uh from those aspects. Now there's no reason to believe that some of the fundamental industries, chemical industries etc won't start up again but as you said until they uh develop alternatives to sending stuff through the straight of hormones and there'll be a lot of incentive to build pipelines in other directions. Uh there will still be a concern will these supplies be disrupted. So somebody who was reliant on fertilizer from there will start looking for alternatives. So yes there will be a lot of uh of pressure on these countries. They could reach back to you know 90% of where they were with a with a long-term peace if the peace is is up in the air for the next year or so or more. Uh they will suffer and and our uh sort of migrants to those countries will suffer.

[00:35:47]>> Let me point this out. The one thing that seems certain, and I'm underlining that word seems, is that the regime in Iran will be surviving. But it could well be an embittered and angry regime for what it suffered. And that means that the Gulf countries will be living with the neighbor just across the water that is angry and embittered and particularly upset with them because Iran believes that American facilities in the Gulf were used by America against Iran even though the Gulf and America deny that. That is no matter what the nature of the peace a consequence they're going to have to live with. Uh it is um now I wouldn't completely rule out the possibility that the Iranian people u you know hit now by economic hardship in addition to the huge inflation etc at some point say enough is enough and look for an alternative regime. Now this regime which is uh has been empowered uh is less moderate by all counts than the previous regime and the previous regime already has a lot of blood of the Iranian people on its hands. So it may be a it becomes even harder to protest against the regime.

[00:36:59]But I would say that that's not a possibility you can completely rule out.

[00:37:03]Now what that what kind of uh of pressure they can put on the regime and what new regime emerges only time will tell but it will it is one of those possibilities once you have a modicum of peace because at this point no Iranian is going to protest against the government. I take it that that possibility is one that the Gulf would passionately hope for. That somehow or the other the regime changes, a new modern democratic liberal government replaces the Ayatollah regime in Iran and relationships with Iran can be rebuilt all over again. That would be the best case scenario for the Gulf, wouldn't it?

[00:37:42]>> In their view, absolutely. But uh I think moving from the current regime to one which is liberal, open, democratic, I think there's a long path for that. So uh I one shouldn't get one's hopes up but you always hope that countries with the kind of uh of tradition uh history uh knowledge intelligence of Iran uh eventually find their way uh so that the people can have uh full expression.

[00:38:14]Rauram Rajan, I thank you for sharing your understanding and analysis of the situation in the Middle East, its impact on the world economy, in particular its impact on India's economy with us. I'm deeply grateful. Take care. Stay safe.

[00:38:27]>> Thank you.

[00:38:29]>> Hi, I'm Karan Taper. Over the last few years, I hope you've been watching my program, The Interview on the Wire.

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[00:39:32]Yeah.