Raghuram Rajan Urges India to Build Oil Reserves and Diversify Trade

Economist Raghuram Rajan has issued a critical warning to India, suggesting that recent geopolitical disruptions like the Strait of Hormuz crisis serve as a "wake-up call" for economic resilience. He argues that the country must move beyond reactive policies and focus on building long-term strategic buffers to withstand global shocks.

Strengthening Energy Security and Strategic Reserves

A central pillar of Rajan’s warning concerns India's energy vulnerability. Given that the Strait of Hormuz is a vital artery for India's crude oil, LNG, and LPG imports, any disruption poses a systemic risk. Rajan emphasizes that a potential peace deal between the US and Iran is not a permanent solution to this underlying vulnerability.

To mitigate this, he advocates for a dual-track approach:

However, Rajan cautioned that the renewable shift has its own risks. India remains heavily dependent on imported solar cells and wind components, and he noted that the domestic industry has yet to play a sufficiently large role in manufacturing these critical components.

On the trade front, Rajan highlighted the evolving landscape of global tariffs. While India is currently in a stronger position than earlier this year, new challenges loom. He pointed to an incoming 12.5% tariff tied to forced-labor concerns—slightly higher than the ~10% rates faced by Pakistan and Bangladesh.

A more significant threat, according to Rajan, is the potential "excess capacity" probe, which could lead to additional stacked tariffs. To defend against such moves, he insists that India must diversify both its import sources and its export markets to ensure that no single geopolitical event can cripple its trade balance.

Addressing the Rupee and Investment Gaps

Rajan also touched upon the structural issues affecting the Indian Rupee, which has depreciated nearly 14% against the US dollar over the last two years. Interestingly, he attributes this slide less to volatile oil prices and more to a lack of Foreign Direct Investment (FDI).

While remittance inflows remain robust, Rajan noted a disconnect between India's high headline GDP growth and its actual domestic investment levels. He described this as a gap between "the walk" and "the talk," suggesting that policymakers need to investigate why domestic investment is not keeping pace with economic growth.

Beyond Oil: Preparing for Future Supply Shocks

Looking forward, Rajan advises a three-to-five-year strategic view on commodity exposure. He warned that the next major vulnerability might not be energy, but rather the pharmaceutical sector—specifically the raw inputs required for manufacturing generic drugs. He urged the government to build strategic buffers and strengthen supply chains with "friendly" nations to ensure long-term economic stability.

Key Takeaways