Raghuram Rajan Warns India: Build Oil Reserves and Diversify Trade

Former RBI Governor Raghuram Rajan has issued a critical wake-up call to Indian policymakers, warning that geopolitical tensions and disrupted trade routes are reshaping the global economic landscape. As the world absorbs shocks from the Strait of Hormuz crisis and shifting tariff regimes, Rajan argues that India must move beyond headline growth figures to address underlying structural vulnerabilities.

Strengthening Energy Security and Strategic Reserves

A central pillar of Rajan’s warning concerns India’s energy vulnerability. The Strait of Hormuz remains a critical artery for India's imports of crude oil, LNG, and LPG. Rajan emphasized that even a potential US-Iran peace deal would not eliminate the fundamental risks exposed by recent disruptions.

To mitigate this, he urged India to build significantly larger strategic oil reserves. Furthermore, he suggested that India needs flexible backup energy options—citing China’s ability to rapidly ramp up coal production as a model—while simultaneously pushing for a long-term renewable energy transition. However, he cautioned that the renewable shift itself carries supply-chain risks, as India remains heavily dependent on imported solar cells and wind components. He called for the Indian industry to take a more proactive role in developing domestic manufacturing alternatives.

On the trade front, Rajan noted that while India's position is more stable than it was earlier this year, new challenges loom. He flagged an incoming 12.5% tariff tied to forced-labor concerns, noting it is slightly higher than the ~10% rates faced by Bangladesh and Pakistan. A more significant threat, however, is a potential "excess capacity" probe that could impose additional tariffs on Indian goods.

The solution, according to Rajan, is aggressive diversification. India must reduce its exposure to any single shock by diversifying both its import sources and its export markets. He also warned that the next major vulnerability might not be energy, but the supply of pharmaceutical inputs essential for India’s massive generic drug industry.

Addressing the Rupee and Investment Gaps

Rajan also addressed the structural issues contributing to the rupee’s 14% depreciation against the US dollar over the last two years. He argued that the currency's slide is not merely a result of oil prices but reflects a deeper issue: India is failing to attract sufficient Foreign Direct Investment (FDI).

While remittance inflows remain high, Rajan pointed out a disconnect between India's strong headline GDP growth and its domestic investment levels—a gap he described as the difference between "the walk and the talk." He suggested that if global oil prices stabilize around $85 per barrel, the current account position remains manageable, implying that some recent policy responses to capital inflows might be overreactions.

Key Takeaways