Raghuram Rajan Warns India to Build Oil Reserves and Diversify Trade

Renowned economist Raghuram Rajan has issued a critical warning to Indian policymakers, emphasizing that geopolitical volatility requires a fundamental shift toward economic resilience. Following the disruptions in the Strait of Hormuz, Rajan argues that India must bolster its strategic reserves and diversify its supply chains to protect against future global shocks.

Strengthening Energy Security and Strategic Reserves

Rajan highlighted that the vulnerability exposed by the Strait of Hormuz crisis remains a significant concern for India, regardless of any potential US-Iran peace deals. Given that the strait is a vital artery for India's crude oil, LNG, and LPG imports, Rajan stated that the country's current strategic oil reserves are insufficient.

To mitigate these risks, he suggested a dual-track approach:

On the trade front, Rajan noted that while India is currently managing US tariff threats better than earlier this year, new challenges are emerging. He flagged an incoming 12.5% tariff tied to forced-labor concerns, which is slightly higher than the 10% rates faced by neighbors like Pakistan and Bangladesh.

However, a more significant threat lies in potential "excess capacity" probes, which could result in additional tariffs on top of existing rates. To safeguard against these developments, Rajan urged India to aggressively diversify both its import sources and its export markets to reduce exposure to any single geopolitical or regulatory shock.

Addressing the Rupee and Investment Gaps

Rajan also addressed the structural issues affecting the Indian rupee, which has depreciated nearly 14% against the US dollar over the last two years. He argued that this slide is not merely a byproduct of oil prices but a symptom of a deeper issue: a lack of sufficient Foreign Direct Investment (FDI).

Despite strong headline GDP growth and steady remittance inflows, Rajan pointed out a disconnect between India's economic potential and actual domestic investment. He suggested that if global oil prices stabilize around $85 per barrel, the current account position remains relatively manageable, implying that policymakers might be overreacting with costly capital-inflow incentives.

Future Vulnerabilities: From Oil to Pharma

Looking beyond energy, Rajan warned that the next major vulnerability could be the supply of pharmaceutical inputs used in generic drug manufacturing. He urged the government to take a three-to-five-year view on commodity exposure, advocating for the creation of strategic buffers and stronger ties with "friendly" supply nations to ensure long-term stability.

Key Takeaways