Trump’s unilateral imposition of tariffs and the US-Iran war leading to the blocking of the Strait of Hormuz have given a big shock to the world economy and global trade particularly. Two pillars of the international trading system have been knocked down — the international consensus on tariff rates and the free moment of goods along the seaways. India needs to address the immediate problems which can worsen if the war continues. Even if a settlement is reached, we cannot rule out such episodes recurring. India’s development strategy must be changed to incorporate such eventualities.
Global trade is thus experiencing a major structural change — the earlier emphasis on barrier-free multilateral trade is being replaced by fragmentation of trade and proliferation of tariff and non-tariff barriers. The ratio of global trade to global GDP, which was about 25% in 1970, had progressively increased to about 61% in 2008. Since then, it has stagnated at an average of about 57% of global GDP during 2009-2024. In volume terms, global exports of goods and services increased on average by 5.3% during 2021-2025. This growth is estimated to fall sharply to 2.9% according to the International Monetary Fund.
The Indian economy is likely to suffer a setback in terms of both growth and inflation in 2026-27, as also higher fiscal and current account imbalances. Several adverse factors are lining up. These include higher crude prices as well as uncertain crude supplies and shortages of gas, other energy products, and some primary commodities. Remittances to India are also being adversely impacted with disruptions in the Gulf countries. We must address these issues. However, for keeping India’s long-term growth story intact, we need to recalibrate our development strategy.
Recalibration of strategy
Until the 1990s, India’s industrialisation strategy was characterised by import substituting and inward-looking policies, which led to considerable inefficiencies. This was progressively changed by the reforms brought about since the early 1990s.
The recently introduced Aatmanirbhar strategy needs to be interpreted correctly. It should be seen as “Make in India for the world” and not just “Make in India”. The emphasis on efficiency should not be forgotten. The recent events have, however, highlighted the need to reduce dependence on imports of certain critical goods.
The new strategy must address some of the vulnerabilities that have come to the fore in the context of the West Asian war and the changing contours of the world economic order.
Priority sectors
Sectors that should receive higher priority under the recalibrated strategy for domestic production are defence goods; new technologies (including artificial intelligence) covering space technologies, medical technologies, robotics, and ocean technologies; higher domestic crude production including accelerated exploitation of domestic finds and much greater emphasis on alternative energy sources (solar, wind, bio, nuclear, including thorium-based production and green hydrogen); domestic production and processing of rare earth materials; building of dual use infrastructure to cater to unanticipated nuclear and biological threats; and pharmaceuticals and critical medical equipment. The shift towards electric vehicles should be undertaken at a much faster pace.
Recasting strategic reserves
India has done well in maintaining adequate stocks of food grains. Similarly, we need to maintain suitable strategic reserves for a set of other commodities including crude oil, liquefied petroleum gas, fertilisers; processed and unprocessed rare earth materials, and basic medicines and critical medical equipment. In each case, there is a need to work out optimum reserves and a path towards achieving the desired levels. India has been building crude oil reserves for some time, but its achievement so far has been quite limited. India’s strategic crude oil inventories, estimated at about 24.6 million barrels, are sufficient for only about four-five days of domestic consumption as compared to China’s reserves at 1,397 million barrels—70 times as large and sufficient for covering about more than 90 days of domestic consumption.
Japan’s strategic crude oil reserves are also comparatively much higher at 263 million barrels, covering consumption of more than 75 days. India’s daily consumption of crude oil is estimated at 5.5 million barrels. India has done well to diversify its sources of crude oil to about 40 countries. According to a PIB release, share of crude oil coming through the Strait of Hormuz has come down to 30% as compared to an earlier share of 45%. Holding commodity reserves means a big one-time cost. We also need to build up foreign exchange reserves to meet emergencies. India’s current level of foreign exchange reserves is a good buffer. But we must note these reserves are not helpful in times of supply disruptions.
The world is in a flux. Many far-reaching changes are happening. The introduction of AI will have an impact on the entire production process. Its impact on employment is unclear at the moment. India’s strategy of development must take into account all of these changes.
But our focus is on changes needed to overcome the problems thrown up by the recent shocks to the world trade. These are compelling us to become self-sufficient in the production of certain critical inputs. This we should do without sacrificing efficiency. Efficient import substitution may be a compulsion with respect to certain products.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express. The authors: C Rangarajan is former Chairman, Prime Minister’s Economic Advisory Council, and former RBI governor; and DK Srivastava is former Director, Madras School of Economics.