Raghuram Rajan Warns India to Build Oil Reserves and Diversify Trade

As geopolitical tensions reshape global trade routes, economist Raghuram Rajan has issued a critical warning to Indian policymakers regarding energy security and economic resilience. He argues that the recent disruptions in the Strait of Hormuz serve as a vital wake-up call for India to fortify its strategic buffers and reduce dependency on volatile corridors.

Strengthening Energy Security and Strategic Reserves

Rajan emphasizes that the vulnerability exposed by the Strait of Hormuz crisis cannot be ignored, even if a US-Iran peace deal is reached. Given that the strait is a primary artery for India’s crude oil, LNG, and LPG imports, Rajan suggests that India’s current strategic oil reserves are insufficient.

To mitigate future energy shocks, he proposes a two-pronged approach: building significantly larger oil reserves and developing flexible backup options. He specifically highlighted the need for India to possess the capability to ramp up coal production quickly—similar to China’s model—to ensure industrial stability during supply disruptions. While he supports a long-term transition to renewables, Rajan warned that the green transition carries its own supply-chain risks, noting India's heavy reliance on imported solar cells and wind components. He called for the domestic industry to step up and build local manufacturing alternatives.

On the trade front, Rajan noted that while India is currently in a better position than earlier this year, new risks are emerging. He flagged a potential 12.5% tariff linked 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 that could impose additional tariffs on Indian goods.

To hedge against such geopolitical volatility, Rajan's core recommendation is radical diversification. India must expand its pool of import sources and seek a wider variety of export markets to ensure that a single regional conflict or policy shift does not paralyze the national economy.

Addressing the Rupee and FDI 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. He argued that this slide is not merely a function of oil prices but a symptom of a deeper problem: India is failing to attract sufficient Foreign Direct Investment (FDI).

Despite strong headline GDP growth and consistent remittance inflows, there remains a disconnect between India's economic potential and actual domestic investment. Rajan cautioned that while the current account position appears manageable if oil stays around $85 per barrel, policymakers should avoid overreacting with costly capital-inflow incentives like the FCNR(B) proposal.

The Next Vulnerability: Beyond Oil

Looking toward the future, Rajan urged a three-to-five-year strategic outlook. He warned that the next major economic shock might not be energy-related, but could stem from a shortage of pharmaceutical inputs used in generic drug manufacturing. He advocated for building strategic buffers and strengthening ties with "friendly supply countries" to prevent a repeat of recent supply chain crises.

Key Takeaways