Exclusive: Why India’s Growth Is At Risk? Gita Gopinath On The Devastating Costs Of The Iran War

Added: 2026-05-05

[00:00:00]Joining me now, Gita Gopinath, Harvard University Professor and former Deputy Managing Director at IMF. Good to have you, Professor Gopinath, on the show. Thank you very much for joining us. When we met 3 months ago in Davos, you were cautious about the disruptions that the US President was causing then in a conflict with Europe. Now we've had an even bigger disruption with the war in the Gulf. Are you even more anxious and worried about the direction the economies of the world are going and the impact the war is going to have on economic growth?

[00:00:39]Rajdeep, just like back then, my caution came from the fact that with Trump, nothing everything nothing is totally certain about what's going to happen.

[00:00:48]Let me just give you two examples.

[00:00:50]Tariffs. Remember we had the April 2nd Liberation Day tariffs when average tariffs by the US was going to impose was about 25% on the world.

[00:00:59]And that came down now to 10%. Also because of the Supreme Court ruling on it. So now, for example, India's tariffs have gone from being 50% to being 10%.

[00:01:10]Similarly, that was Greenland when we last talked. And that's not the topic anymore. That ended. That aggression is not happening at this time. And now we have the Iran conflict. This is serious.

[00:01:21]It's the biggest oil shock to the world.

[00:01:23]It's bigger than what we saw during the 1970s. Even if nothing else happens in terms of the restriction in terms of oil and gas coming onto the market, this is the largest shock that the world has experienced. But that said, the world is in a very different place also in terms of the dependence of economies on the source of energy. So the effect right now, if everything gets resolved in the next week or so, which again there's a very good likelihood that could happen. We're talking about global growth being lower by about 0.3 percentage points. I mean that's what is in the IMF's current forecast. But if on the other hand, we end up in a world where instead of oil averaging like $80 or $85 for this year, it goes up to say $100, then we have growth coming down to 2 and 1/2% for the world, which is, you know, in the absence of this conflict, it would have been 3.4%. So that would be really substantial the cut. But as of now, just like when we last talked during the time of the tariffs and during the time of Greenland, that we could see this quite down.

[00:02:31]Even though we're not going to return to $70 of oil that we had before the conflict started. I I think one of the concerns, of course, is the fact that therefore the longer this conflict goes on, the more the world gets disrupted including countries like India which are heavily dependent on oil coming through the Strait of Hormuz. Not just India, but countries like China, Japan, a number of Asian economies. In a sense, what you are saying, and correct me if I'm wrong, is that if this gets resolved in in a in the next week, the impact will be minimal, but if it stretches on and the uncertainty stretches on, one day we're told the strait will be open, next day it's closed, then you are saying the impact could be far-reaching. Am I correct? That is correct. The impact could be much larger. In the case of India, two things offset each other. The Iran conflict was a negative shock for India, but on the other hand, because of the Supreme Court ruling and tariffs coming down from 50% to 10%, that was a positive event. And so the combination was a bit of a wash. And the India's economy is expected to grow at around 6 and 1/2% for this fiscal year. But if there is much more disruption, and it's because India relies on the Middle East so much for oil, also for its fertilizers, if you it's not just about the price effect, but if you just don't have the supply and you have supply disruption, for example, to LPG, that is going to complicate production in India and going to be much much more consequential. But that's going to require a much longer duration for this conflict. So are we I mean is the worst-case scenario a potential triple whammy, which is food, fuel, and fertilizer? I mean the Indian government has kept fuel prices in check. We don't know what'll happen once elections are over at the end of the month. And there's the fear that there could be this triple whammy of food, fuel, and fertilizer. Is that something that you believe could actually be the real concern going ahead? In the matter of fuel, I don't think it's sustainable for the Indian government to continue to subsidize fuel prices for a very long time It's not sustainable.

[00:04:36]>> It's not sustainable. I just given the impact on the fiscal deficit. So at some point they will have to pass through some of that into what prices consumers pay.

[00:04:46]May not be the full amount, but certainly more than what's happening at this moment. With fertilizer prices, they have some long-term contracts that helps in the interim. But again, depending upon what if there's going to be just this blockage of the Strait of Hormuz, you're not even going to get the supplies. And I think that's the bigger damage. And if this continues for much longer, it's usually not just food, fuel, and fertilizers. The problem is financial conditions could tighten much more than what we've seen right now in the world, including the pressure on the rupee, which has been there for a little while, but you could see much more, not just on the rupee, but on many other currencies. That tightening of financial conditions has not happened at this time. So what what's the biggest concern? Is it that there could be an in in that the inflationary pressures now continue to grow? Is it that our current account deficit continues to take a hit?

[00:05:40]Is it the rupee which continues to decline?

[00:05:43]How where do you believe is the real pressure point at the moment? Because the government over the last 11 years has done reasonably well on handling inflation. Suddenly there's a fear that inflation, if this conflict goes on longer, will become will reach a stage where it will start genuinely impacting other sectors of the economy, even possibly domestic demand. Do you believe India is in a better position than some of the emerging markets or we also are really caught in the crosshairs of what's happening in West Asia?

[00:06:13]>> I think the immediate impact for the Indian economy is what's happening with the current account, the balance of payments.

[00:06:20]The pressure in terms of the impact on the rupee, that's where it's most impactful and you've seen the RBI put measures in place to try to contain the effect on on the exchange rate. But given that India is a big importer of oil, that's the number one category, it's going to affect the size of current account. And given that there's not that much appetite for foreign capital coming into India at this current moment, that's where the pressure is. The second piece is where is on inflation. As of now, because there's no increase that we're seeing in the at the pump in terms of fuel prices because of the government basically subsidizing it, I don't expect that that will last forever. This is going to go up. So we will see more of an effect on inflation.

[00:07:07]The good news is that because inflation expectations have come down in India, they are well-behaved, the RBI has some leeway to wait and see that maybe if there is a resolution of this conflict and gas prices come down, the effect on inflation will not be that big. So they they can they have some space to wait and see. The plus for Indian economy is that it is it a large domestic market.

[00:07:31]And so a lot of its growth actually comes from domestic demand. 2025 was good year in terms of domestic demand for the Indian economy. That's The monsoon was very good last year, too.

[00:07:41]That helped. Monsoon is less good this year. That's a bit of a of a negative.

[00:07:47]But again, another source of concern which also affects, in a sense, the balance of payments and the current account, is what's happening with AI and the consequences of that for call centers, you know, for BPOs more generally, because I think that's going to be a source of pressure, too. Because the IMF projections certainly seem to suggest that India will still continue to grow in that 6.4, 6.5% growth rate 2026-2027. Will that, in your view, have to be revised if this conflict stretches into May, June, and beyond? If this conflict stretches, absolutely, into May, June, we are talking about a much more serious impact on all economies.

[00:08:30]>> How serious is the impact in your view?

[00:08:32]So as a in a rule of thumb, right now the expectation is that the price of oil is going to be around between 80 and $85 for the rest of the year, right? On average. On average. If that number gets to about $100, we're talking about growth for the world economy, which is right now projected at 3.1% dropping to 2 and 1/2%. So in that scenario, you know, that's that's that's a case when economies like India that rely on the Middle East heavily will have a much severe impact on their growth. Is there also the possibility that the central bank also runs out of ammunition if oil remains at elevated levels? If oil continues to climb well over $100 a barrel, then the central bank also is running out of ammunition.

[00:09:21]The fear, of course, is debts are going to be mounting, fiscal headspace reduces. Are these all concerns that every economy, not just India, across the world? Just look across our border with Pakistan. Playing the role of a mediator, but the economy is in a complete mess at the moment. So are you saying that every country now will have to be very, very cautious on where we spend our money? We'll have to look very closely at energy diversification. That this is in a moment also a challenge, but an opportunity. Supply shocks are not good news for anybody. And in that environment, there will be there is pain. So, it's not one of those things that you can just, you know, fix easily. So, when it comes specifically to the Central Bank, allowing the exchange rate to adjust is in the in the face of a real supply shock, which this is, is would be the right course of action. Now, India has a sizable amount of foreign exchange reserves, and that's great. But, that doesn't mean one should be using those reserves to be to intervene heavily in the case of the currency. It's only in extraordinary circumstances when it looks like there's some non-fundamental noise happening that you would want to intervene in the currency. But, otherwise, you really are uh you know, you should be letting the the currency adjust because that's the source of resilience also for the country. There are consequences in terms of inflation, but that's a trade-off that countries will have have to deal with. So, so for countries like India, what then is the real strategy to de-risk in a way?

[00:10:56]Critical imports that we have at the moment like fertilizers, like energy, that 50% of our oil, for example, comes through the Strait of Hormuz, 80% of our LNG comes from the Strait of Hormuz. In that environment, how does one India How does a country like India de-risk? Is it simply look for alternative sources?

[00:11:14]China seems to have managed by looking at renewables as a major source of their energy needs.

[00:11:21]In that sense, is this an opportunity?

[00:11:23]And is there going to is there going to be a big time lag before we can really catch up? And that's the real worry that we should have over the next 12 months, 18 months.

[00:11:31]>> Energy independence is going to be very critical for India. The good news is that India already is relying more and more on renewables for its energy and pushing harder on that front, especially solar, where there's plenty of that.

[00:11:46]Reducing the cost of it, efficient batteries, and so on. That's going to be very important because the more that you can de-risk from having to rely on imported energy, the better it's going to be for India. And again, continuing more broadly the reforms, including infrastructure build-out, which you know, sitting in Mumbai, we were just talking about that. It's pretty remarkable. The infrastructure that has been built in the city. I think that's the kind of action that will help sustain growth and keep up growth in India. There's a fear though that the this could also be a moment that will widen inequalities once again. That you've got this the African economies, emerging market economies, which are going to find it far more difficult to handle this this situation. And indeed, the weaponization of uncertainty because with Donald Trump, we just don't know what happens next even on trade. Uh we don't know whether the trade deal will actually materialize in the end between India and the United States. Do you therefore see a widening divide first between uh the emerging market economies and uh the Western economies in in the year ahead? This shock is absolutely generating greater inequality between the developed world and the developing world.

[00:13:03]The developing world relies a lot on also on food imports. With fertilizer prices going up and the shortages in fertilizers, we're not we're not seeing it right now because it takes about 6 months or so before it shows up in food prices. That effect is going to be there. And countries that suffer from food insecurity are the low-income countries. So, the effect on them is uh is really consequential.

[00:13:27]We have to get used to living in this world of uncertainty. We've had it 2025 was a terribly uncertain year, but you can go back even further back to 2020. I mean, we've had the we had the pandemic, then we had the war in Ukraine, which caused energy prices to shoot up. You know, you had the Silicon Valley Bank problem in the US, which created ripples in terms of financial conditions, tariffs, and now uh the Iran conflict. So, I think we are certainly in a more volatile world, more uncertain world, and everybody, including companies, policy makers, have to learn to live with this level of uncertainty. You know, because even on tariffs, 3 months ago, we were talking about the weaponization of tariffs. Uh are you confident now that the that the United States or this Trump administration will not once again use tariffs as a weapon to uh as part of their foreign policy agenda? Is that a concern that we could go back or or do you believe that this war in the sense will be a wake-up call that you can't now use tariffs to to once again unhinge the world in the in the way it was unhinged a few months ago? I think the constraint that has come is come from the US Supreme Court. The Supreme Court recently ruled that the tariffs that Trump was had implemented, which was a part of this of a very particular IPA, uh you know, procedure, that was illegal.

[00:14:52]What does that mean? That basically means that it's going to be much harder for any president in the United States to just on a whim wake up and say that we're going to put tariffs of X amount on a country. There are other rules that they can rely on.

[00:15:06]There are other laws that they can rely on, other section 3.1, for example. But, that requires some procedure, which is you have to do some assessment about the damage that's occurring to your industry. So, that tool exists in terms of what being able to use it, but it's going to be have to be, you know, less on a on a instantaneous basis. It's going to require some more time to be able to implement. Now, China has imposed Professor Gopinath export bans on diesel, gasoline, jet fuel since March 12th, while also reinforcing its dominance on clean energy supply chains. So, the it almost seems as if China is in some way actually the net net gain many believe from the war. That the United States finds itself in a difficult situation.

[00:15:57]There's a fear of of inflation growing in in the US, and China finds itself relatively insulated from what's happening. Do you go along with that?

[00:16:07]No, not really because firstly, in the case of the US, the US, in terms of the economic impact, is quite minimal.

[00:16:15]I give being a net energy exporter, it is minimal. Now, yes, the fact that prices are going up, that I think is actually costly not just from the economic point of view, but from the political point of view for the current administration. That is there. But, the overall effect on the economy is really small. China is actually affected more by this conflict than than the US is.

[00:16:36]But, China has other suppliers. I mean, they buy a lot from Russia, so they don't rely that heavily necessarily on the Middle East, and they have a large amount of reserves. So, but this is not but this is definitely costlier for China than it is for the US. One of the concerns in India is also markets. If you look at what what's happening with markets, there's been a FII outflow in this country over the last few months.

[00:16:59]And there's a fear that unless there's greater certainty and predictability in the in the global economy, Indian markets will also continue to to remain uncertain. Do you go along with that?

[00:17:10]That or while we're seeing other markets, uh including the US, perhaps being far more resilient, is the Indian market far more vulnerable to what's happening in West Asia? So, the Indian market has been impacted, like many other markets, by the Iran conflict, by by this fact that you've had this sudden this risk-off environment right now, which is with uncertainty, capital pulling out of all emerging markets, going in back into the US. That is a common factor. But, in addition, India, I think is also being looked at as a country where, especially when you look at equities, just liquid assets, that they are expensive. If you look at it, it's not one of those places where you look at it and you say, "Well, that looks cheap, and I can make a good return on that."

[00:17:56]So, it has been viewed traditionally as being expensive. It continues to be viewed as that. And then, if you look at foreign direct investment, again, everybody I know wants to invest in India, but they still talk about how difficult it is to do that, the ease of doing business, the difficulty with acquiring land. So, in the absence of attractive enough asset classes to put your money in, and the fact that interest rates in the US are likely to high stay higher than, you know, for a longer period of time than was expected before this conflict, I think both of those are weighing against the rupee. So, in a way, is this a challenge again for India to get its act together in terms of actually using this as a moment to ensure ease of doing business, attract investments by by actually showing that you are willing to walk the talk on some of the reforms that have been brought in in 2025? A lot of good reforms have happened, but there was a lot more that needs to be done. This is the moment.

[00:18:56]There was so much interest in India in terms of you know, diversifying out of China, as just as being a good partner to work with.

[00:19:05]But, there are still way too many hurdles. It's also important to have a predictable predictive kind of environment where you not have to worry about retroactive taxation, you don't have to worry about sudden changes in the rule of law.

[00:19:18]I think that is still viewed as being incomplete in terms of making sure that you can have that predictability. But, at the same time, are we staring at a more fragmented, less predictable global economy? And what does that do to economists and their projections? Does that make it just simply far more difficult for the IMF and the World Bank to even look at what happens 3 months, 6 months down the line?

[00:19:42]Well, it fundamentally changes the way these institutions are talking about the outlook. So, when I was there at the beginning, back this was 2019 and 2020, the IMF used to put out what they called a forecast for the world. Now, they don't put out a forecast. They put out what they call a reference scenario, which is one possible outcome, which they think is likely.

[00:20:03]But this time they also put out an adverse scenario. They put out a severe scenario. So, I expect all uh forecasters around the world at this point are basically constructing scenarios because the world is so uncertain. No, because I look at World Bank projections. In the absence of the conflict, GDP growth projected at 7.2%.

[00:20:22]Growth now projected at 6.6% for FY 26-27, uh assuming of course an extended disruption in oil supply till at least the end of the year. How seriously should we take these projections? Are economists also simply un- unable to under- uh having to work with this unpredictability and thereby constantly having to change their predictions? I think economists only know as much about possible scenarios as most people do, right? I mean, at this point it's impossible, for instance, right now to know what's going to be the outcome of the negotiations between the US and Iran on the Strait of Hormuz.

[00:21:04]So, one makes assumptions about it. But yes, but the idea is to remain focused on the scenarios, to build resilience in the economy, to clearly to diversify sources of supply. Energy independence is hugely important. And I think a country like India, which has a large domestic market, strong domestic demand, reforms at home can be a a great source of uh resilience. So, in conclusion, in your assessment, how significant is the risk to the twin pressures that everyone is talking about post this West Asia war for India?

[00:21:35]Higher oil import bills and exchange rate volatility. These are the two twin Are these the twin pressures that actually need to be looked at and monitored very carefully? I The pressure on India's current account and on the rupee uh is meaningful. Like I said, this is an actual fundamental shock of a supply shock. Even if the war ends tomorrow, we're not seeing oil prices going back to the pre-war level. It's going to be higher. There is going to be some pass-through into inflation. That's certainly the case. Ensuring that India's able to continue to maintain the good macro stability that it has gotten to, which has been able to keep inflation within the band, while at the same time also ensuring that fiscals deficits, which are doing well at the central government level, but not at the state level, so certainly need more action on that front. And the more broad-based reforms, uh including judicial reforms, including in terms of continuing the infrastructure build-up, land reforms, all of that is what it will take. So, Professor Gopinath, if you were advising the Modi government, 1 2 3, what are the three things you would tell them that they need to do for 26 FY 26-27 that will give a sense that India is on the right track?

[00:22:52]I would say >> Given given this extreme volatility that we are seeing around us, how do you how do you in a way uh mitigate the current account deficit without sacrificing, compromising on growth targets?

[00:23:08]I would first just be just recognize the fact that this is a negative shock for the Indian economy.

[00:23:14]There's no getting around the fact that when you are a large importer of fuel and prices have gone up as much as they have, there will be a deterioration in the current account. That requires accepting that there will be pressure on the rupee to depreciate. I don't see an argument to go and use up very expensive foreign exchange reserves to go and defend the currency. This is a shock that has to be in a sense borne.

[00:23:37]On the fiscal front, at some point they will have to let prices at the pump go up by some amount because otherwise the effect on the on the fiscal deficit is going to be very is going to become very consequential. But I think what India has done well, like I said, is in the macro stability, in terms of macro stability, which is keeping inflation within the inflation band.

[00:23:57]Fiscal at the central level has been well managed, not so much at the at the state level, so somehow incentivizing the states to be able to keep their deficits small, super important. And continuing to engage with the world, and I think India's doing that nicely on the trade front, too, which is having deals with the European Union, uh you know, with South Korea recently, but more generally working with other countries, creating more trade agreements with them, uh building economic relations with them will all be very positive.

[00:24:26]>> So, in in a way what you are saying is build your bilateral trade deals. Don't just rely on multilateral trade trade arrangements anymore.

[00:24:34]Uh don't rely on the United States uh anymore, presumably. Uh a piece of advice for Donald Trump that you would give, since he's at the center of it all. What I mean, this weaponizing of uncertainty surely is the last thing the world needs. Yeah.

[00:24:48]So, firstly, I do think India and the US should absolutely work together. They're both important, large economies, and it's good for both of them and for the world that they remain engaged. In the case of Trump, I mean, he's somebody who likes to have low interest rates because as you know, he he keeps pushing for that. He's going to get that if he's able to prevent inflation from going up.

[00:25:12]That is now a concern in the US. And so, the more he can do to keep because he wants to keep prices low, and he wants prosperity and abundance in the US economy. I think less less of this high levels of volatility and uncertainty would be would be very valuable. You know, Professor Gopinath, the last time you were interviewed by India today, you went viral because of your comments on environment and the climate, in particular pollution, which you had said was in integral to ensuring the ease of doing business. You needed to ensure clean air. You still stick by that. That Are you uh Is is the air that you are breathing in Mumbai a bit better than what you breathe in Delhi? And do you believe that's again I mean, these are going to be the future challenges, presumably, not just to India, but other countries in the region as well. Oh, no, absolutely I believe that uh at- addressing pollution in India will give you a great bang for the buck. The economic consequences are meaningful. Obviously, depending upon the time of the year, it's worse. Winters in Delhi, when I was there, it was really, really bad. I mean, it's just that's again a solvable problem, uh and the government should certainly address it.

[00:26:25]I'm going to leave it there. You've been more diplomatic this time when you've spoken about the climate crisis. At that time you were seen as someone who was making very clear, if you don't get that right, then you're not going to attract the kind of investments that India really needs at the moment. But I appreciate you joining us again at a time, as I said, of great global uncertainty. Three months ago it was Greenland. Now it's even uh more uh worrying with what's been happening in Iran. Thank you very much, uh Professor Gopinath, for joining me on the show today.

[00:26:55]>> Thank you, Rajdeep.

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