Director's Desk

The re-election of Donald Trump as the President of the United States in November, 2024 is a geopolitical event with profound implications for India. As the world’s largest democracy, India has enjoyed a multifaceted relationship with the U.S., and Trump's return to power signals both challenges and opportunities for India's economic and strategic trajectory. Through a data-driven lens, the impact of Trump’s policies on India's debt markets, exports, and geopolitical alliances is poised to reverberate across various sectors.

Under Trump's administration, policies favouring tax cuts, deregulation, and increased borrowing could lead to an escalation in U.S. interest rates. India’s bond market, which witnessed an inflow of $18 billion in foreign portfolio investments (FPI) in FY2023, stands to lose its sheen in the face of a more lucrative U.S. market. This shift would trigger significant capital outflows from India, causing a depreciation of the Indian rupee. In 2023, the rupee averaged ₹82 per U.S. dollar, but Trump's policies could push it closer and closer to ₹85 per dollar, increasing India's external debt burden, which stood at $682 billion in June 2024.

India’s equity market, the fifth largest globally, may encounter volatility with a possible 15-20% correction in sectors heavily reliant on U.S. exports, such as IT and pharmaceuticals. India’s IT sector, which contributes $194 billion in export revenues, could be hit by potential restrictions on H-1B visas - a policy Trump championed during his first term, with a continued thrust in the second term.

India's trade with the U.S., valued at $128 billion in FY23, might face hurdles under Trump’s protectionist stance. However, his continued emphasis on curbing China’s economic hegemony presents an opportunity for India to emerge as a preferred alternative in global supply chains. Sectors such as electronics manufacturing, which grew at a CAGR of 13%  FY23, are likely to benefit from the relocation of U.S. companies out of China to India, especially under initiatives like the Production Linked Incentive (PLI) scheme. 

Moreover, India's pharmaceutical exports to the U.S., valued at over $8.7 billion in FY24, are vulnerable to stricter U.S. Food and Drug Administration (FDA) regulations, which could affect the sector's profitability. A rise in U.S. tariffs could also adversely impact India's textiles sector, with the US accounting for approximately 27% of India’s total textiles export in 2023.

Trump’s re-election reignites the strategic dimension of the U.S.-India relationship, particularly in countering China’s influence in the Indo-Pacific. The Indo-Pacific region, which accounts for 40% of global GDP, remains critical to India's maritime and defense strategy. With the U.S.-China trade tensions intensifying, India’s role in the Quadrilateral Security Dialogue (Quad) is expected to gain prominence, bolstering defense ties with the U.S. In FY24, India allocated approximately $75 billion to its defence budget, and with U.S. defence exports to India standing at $20 billion since 2008, Trump's aggressive stance on China could further solidify Indo-U.S. defence collaboration.

However, Trump's unpredictable foreign policy could challenge India’s delicate balance with Russia, especially concerning energy security. Russia accounted for 42% of India's crude oil imports between January and September 2024, and any pressure from a Trump-led U.S. on India to reduce its ties with Russia may strain bilateral relations.

The return of Donald Trump to the White House heralds a period of economic and geopolitical recalibration for India. While the U.S. market offers opportunities for India’s strategic positioning in global trade and defence, protectionist trade measures and financial volatility may pose significant challenges. India must navigate this evolving landscape with astuteness to safeguard its economic interests while bolstering its global standing as a counterweight to China.

Artificial Intelligence (AI), once the stuff of science fiction, is now the fulcrum upon which the global economy pivots. As AI capabilities exponentially evolve, governments are scrambling to enact regulatory frameworks that ensure its ethical use while reaping its manifold benefits. India, as one of the world’s fastest-growing economies, stands at a critical juncture. Establishing a robust AI regulatory framework will not only safeguard societal interests but also bolster economic growth by fostering trust, innovation, and global competitiveness.

The European Union’s (EU) landmark legislation, the EU Artificial Intelligence Act, 2024, serves as an instructive blueprint. As the first comprehensive regulatory framework of its kind, it categorises AI applications into different risk levels - ranging from low to unacceptable - and implements measures to address each level accordingly. The legislation is aimed at protecting individual rights, ensuring transparency, and mitigating risks associated with AI, such as biased algorithms or invasions of privacy. India's challenges are distinct, but the EU's approach exhibits the necessity for a robust framework to govern AI while avoiding stifling innovation.

With over 1.4 billion people, India is not just a populous country; it is a diverse and dynamic one. AI has the potential to transform key sectors of the Indian economy - agriculture, healthcare, education, and manufacturing, to name a few. In agriculture, for instance, AI-powered tools can help predict crop yields, optimise resource allocation, and improve supply chain management. In healthcare, AI can bridge the gaps in rural healthcare by providing diagnostic tools and telemedicine solutions. The unchecked proliferation of AI in these critical sectors carries its own set of risks. Left unregulated, AI systems could exacerbate existing societal biases, particularly those rooted in caste, class, or gender. Algorithms trained on biased datasets may make skewed decisions, deepening social inequalities rather than ameliorating them. Furthermore, as India's economy and critical infrastructure become increasingly reliant on AI, the country could become more vulnerable to cybersecurity threats. AI systems, if inadequately protected, may serve as entry points for malicious cyberattacks, potentially compromising everything from financial systems to national security.

A regulatory framework is thus not only necessary for mitigating the inherent risks of AI but also for unlocking its immense potential in alignment with India's developmental aspirations. Take, for example, the use of facial recognition systems in law enforcement. While these systems undoubtedly enhance public safety, they carry the peril of infringing upon individual privacy and disproportionately affecting minority communities. A well-structured AI regulatory framework, one that integrates global best practices, will ensure that India's AI innovations are not only groundbreaking but also just and equitable.

In this context, it is important to note that India has already taken preliminary steps toward such a framework. NITI Aayog, the Indian government’s apex public policy think tank, unveiled the National AI Strategy in 2018, which laid the foundation for the country’s AI development roadmap. Following this, it released a series of discussion papers on Responsible AI (RAI), highlighting the ethical considerations in AI deployment. However, despite these efforts, what remains missing is a robust and enforceable regulatory structure that goes beyond mere recommendations, ensuring that AI technologies are governed by strong ethical and legal standards.

Such a regulatory framework is not just an ethical imperative but a strategic one. A well-calibrated structure would enable India to maintain its competitive edge on the global stage. According to Nasscom's report "AI Adoption Index 2.0: Tracking India’s Sectoral Progress in AI Adoption," the Indian AI sector is poised to contribute approximately US $500 billion to the economy by 2025, with an anticipated compounded annual growth rate (CAGR) of 25-35% by 2027. The report further states that AI adoption in key sectors - Consumer Goods and Retail (CPG), Banking, Financial Services & Insurance (BFSI), Energy & Industrials, and Healthcare - could account for 60% of the potential value addition AI will bring to India's GDP over the next four years.

This optimistic projection comes with the caveat that Indian AI enterprises must adhere to globally recognised ethical standards to attract international investment and foster strategic partnerships. A transparent, well-regulated AI ecosystem would inspire confidence among foreign investors and multinational corporations, thereby consolidating India’s position as a leading global hub for AI innovation. The economic benefits of such a framework are undeniable, but its success depends on India’s ability to create a regulatory environment that balances innovation with accountability. Ergo, India's need for a comprehensive AI regulatory framework is both a safeguard for ethical governance and a catalyst for sustainable economic growth.

Moreover, India's burgeoning AI ecosystem has been thriving largely due to its human capital - its 1.5 million engineers, over 2,00,000 data scientists, and entrepreneurs galore who have made significant inroads globally. However, this talent pool requires a nurturing environment where ethical standards guide innovation. A regulatory framework that balances innovation with accountability will foster responsible entrepreneurship, empowering India’s tech industry to lead the global AI revolution without compromising on ethical integrity.

India must move swiftly yet thoughtfully to establish a regulatory framework for AI that is both comprehensive and flexible. By doing so, the country can harness the transformative power of AI, ensuring it serves not just as an economic multiplier but also as a tool for inclusive and sustainable development. India’s approach to AI regulation should not just be reactive, but proactive - setting a precedent for how emerging economies can navigate the promises and perils of AI.

Owing to the protracted Israel-Palestine imbroglio, India finds itself grappling with a host of economic vicissitudes, most notably the inexorable escalation in oil prices, a surge in inflationary pressures, and pronounced volatility in the stock market. These perturbations, exacerbated by an overarching atmosphere of global uncertainty, are beginning to cast long shadows over the contours of India's financial edifice.

India’s energy security remains precariously poised, heavily dependent as it is on the volatile currents of Middle Eastern oil. As of August 2024, a formidable 44.6% of India’s crude oil imports emanate from this region, rendering any disruptions in pivotal maritime corridors such as the Strait of Hormuz or the Red Sea potentially catastrophic. These choke points, which  are narrow channels along widely used global sea routes that are critical to global energy security are not merely geographical features but lifelines of global energy, facilitating the movement of over one-fifth of the world’s oil. A blockade or even the rerouting of tankers via the Cape of Good Hope would significantly elongate transit times and concomitantly escalate transportation costs. Such an upheaval portends a ballooning of India’s oil import bill, with projections for FY 2024-25 placing it between a daunting US $101 billion and US $104 billion, a marked increase from the US $96.1 billion of the preceding fiscal year​. 

The repercussions of these inflated crude oil prices reverberate directly through India's inflationary landscape. This will result in substantial price rise across the board with a significant challenge for our  economy and policy makers. With oil imports constituting about 90% of the total domestic demand, with major sourcing from Saudi Arabia, Iraq, the UAE, Russia, USA and Kuwait, the domestic economy is heavily reliant on oil import for its energy requirements. The Reserve Bank of India (RBI), which had previously entertained the possibility of trimming interest rates, now faces a bleak scenario wherein spiralling fuel costs are likely to perpetuate inflationary pressures. From transportation to manufacturing, the escalating costs of fuel ripple across the economy, culminating in heightened consumer prices across an array of goods and services.

The stock markets, as ever susceptible to global tremors, have not remained insulated from the escalating conflict. Not even a week ago, on October 3, 2024, the Sensex witnessed a precipitous fall of over 1,700 points, while the Nifty nosedived by 546 points, reflecting investors’ palpable anxiety over the oil-induced inflation spectre. The India VIX, colloquially dubbed the “fear index,” soared by nearly 10%, a stark manifestation of the market’s growing unease. Compounding this turmoil is the exodus of foreign capital from Indian equities, as investors pivot towards ostensibly safer havens such as bonds and gold. This exodus has disproportionately impacted sectors such as real estate, automobiles, energy, and finance, all of which have seen substantial declines across their respective indices.

The maritime arteries of India's trade, particularly through the Red Sea, are now beset by soaring insurance premiums due to the conflict-induced risks. This aggravates shipping costs and jeopardises India's ability to efficiently export goods to key markets in Europe and North America. With approximately US $120 billion in trade traversing these waters annually, the economic consequences of such disruptions are far from trivial.

To be sure, India’s foreign reserves, standing at over $700 billion - a first for the nation, provide some respite in cushioning immediate external shocks. However, should the Middle Eastern conflict persist, it threatens to sap investor confidence and, more alarmingly, derail India’s broader economic trajectory.

To sum up, the unfolding Israel-Palestine war has amplified the already considerable vulnerabilities in India’s economic framework. The spectre of surging oil prices, inflationary pressures, stock market volatility, and disrupted trade routes loom large, with the magnitude of their impact hinging largely on the conflict’s duration and the ever-evolving global milieus, with a concurrent fallout on the domestic economic velocity.