‘The real shock is going to be from a deficient monsoon.’
In May, the Consumer Inflation (CPI) rose to 3.93%, the highest in 16 months, with food inflation rising to 4.8%, and wholesale prices (WPI) to 9.68%.
Foreign Institutional Investors (FIIs) have pulled out a record ₹2.3 lakh crore ($30 billion) in the first five months of 2026 from Indian equities.
What is the real state of the Indian economy?
Can it bounce back once the war on Iran is over?
Key Insights & Highlights
“The expectation that the rupee will continue to deteriorate needs to be broken,” well-known economist Dr Sudipto Mundle, Chairman, Centre for Development Studies, tells Shobha Warrier/Rediff in the concluding part of a two-part interview.
The war on Iran has ended, and oil prices are falling. How long do you think it will take for the world to recover from the shock, especially India?
If the Strait of Hormuz is opened immediately, oil, LNG, LPG, fertilisers, etc will start moving.
But going back to the pre-war situation will not happen overnight.
I think it will take two-three months for us to be more or less back to where we were before the war, of course with some residual effects.
India was lucky in a way. Some people compared the present situation with that of 1991 when we had a big economic crisis followed by reforms. But we did not go to the 1991 situation.
The difference is that when we went into this present situation, we had buffers to absorb the shocks.
One, our growth was over 7%. Our inflation was very low. The current account deficit was also very manageable.
The critical position was on government debt, but most of India’s government debt is not foreign debt, it is internal debt.
Then, the finance ministry, over the last two years has changed its key target variable for fiscal consolidation.
It used to be the fiscal deficit, now they focus on government debt-GDP ratio. And that one changes much more gradually.
So, the new variable that is the debt-GDP is affected much more slowly.
In other words, the government can deal with the situation as it develops on a day-to-day basis. There is a little more flexibility compared to the earlier times.
But our debt-GDP ratio is actually uncomfortably high. If you take both the states’ debt and the Centre’s debt, it is around 80% to 85%.
Anyway, we’ve dealt with the war reasonably comfortably.
One thing is the government was not passing on the high oil and petrol prices because of the assembly elections.
After the elections, they increased the fuel prices at least four times…
They have started increasing, but that is still not enough.
The oil companies are still bearing the losses. So are the fertiliser companies.
We are subsidising several hundred per ton.
And this is putting pressure on the fiscal situation. Sooner or later, the government will have to pick it up.
The oil companies cannot go on bearing losses, else they will disappear.
Ultimately the taxpayers will have to bear this. So the sooner they raise those prices to a proper level instead of subsidising, whether it’s oil or fertiliser in particular, the better.
To me, that’s the most urgent thing that the government needs to do.
Which is going to be the biggest challenge for the Indian economy? The war on Iran, trade tariffs, El Nino, rising unemployment rate, struggling MSMEs, foreign investment going away, or the falling rupee?
You have listed a whole set of problems! Yes, these are all the problems that India is facing now.
But you have to break them up which require urgent solution, and which will require solutions over medium to long term.
The most urgent, of course, is the rupee declining.
In fact, the net flow of FDI had actually turned negative. It has become positive now, in the last couple of months.
It turned negative because of the repatriation of profits by foreign investors plus outward bound Indian foreign investment. That added up to more than what was coming.
Though foreign FDI was still coming, the outgo was much more. That’s why it had turned negative.
In economic matters, people’s expectations also matter a lot. It’s not only what is happening today but what will happen tomorrow, that matters.
Perception and expectations determine the behaviour. That needs to be changed. The expectation that the rupee will continue to deteriorate needs to be broken.
The measures the RBI has taken recently is very costly like guaranteeing foreign exchange risk from the banks, etc.
Hopefully they will break the expectation that the rupee will continue to go down, and the capital outflows will stop.
Key Insights & Highlights
The other most urgent thing is they should immediately restore prices to their market clearing level.
What I mean is, if the imported price of oil is $100, then we should offer it with whatever markups, to the fuel stations at that price. Not subsidised.
Yes, it will be hardship for all of us. But when problems hit you, you will have to face it. The government can only protect you for some time. Since it’s a delusion, it will catch up with you ultimately.
So it’s better to let it catch up gradually rather than burst like a dam. It’s better to let the water flowing rather than hold it up all together, and suddenly one day let the dam burst.
But that will add to the burden of consumers who are already under stress…
It will. But it’s better to increase the burden in slow, gradual steps.
Inflation will then go up. You cannot permanently postpone all this. So, it is better to do it in steps rather than let the dust accumulate.
It is better to keep the gates of the dam loose so that water keeps flowing slowly. Yes, the water level will go up and there will be some flooding.
Yes, people are already facing hardships. Prices are going up. But you’ll have to face it sooner or later, and it’s better to face it sooner gradually rather than it suddenly falls on you.
These are the two most urgent things we need to do.
Next, Indian businesses and corporates are still not investing. The business cycle is not getting revived.
We have been talking about the private sector not investing and the business cycle not getting revived for almost a decade. But still, they have no confidence to invest. Why?
Yes, we have been talking about it but nothing is happening on the ground.
Why complain about foreigners take their money out when our own people are sending their money abroad?
Instead of going on exhorting people that, private sector is not doing its duty, you need to look why they are not doing it.
You need to find out if there’s something wrong in your governance.
Why is it doing businesses in India is still a very difficult thing?
Foreigners don’t have to depend on you because they can go to Vietnam or some other country. Even Indian money can be invested in those countries.
In today’s globalised world, governments have to fall in line with proper governance behaviour. It means you minimise the burden on people who want to do business.
The endless clearances! The minute you have restrictions, it create room for corruption. It is high time you reduce the need for getting permissions and clearances.
In my judgement, this has been the major problem in getting private investment.
Because of El Nino, we are going to have a deficient monsoon and it is going to affect agriculture adversely. What kind of impact will it have on the economy?
We can’t control El Nino. And it is happening. I’m right now sitting in Goa where the rainfall deficit is nearly 50%.
It is going to affect the whole country, and this will be a severe adverse shock.
The real shock is going to be from a deficient monsoon and not the fertiliser prices.
About half of Indian agriculture is still dependent on rainfall.
And 90% of the fresh water in this country is used by agriculture, and not by human beings for their consumption.
And within agriculture, three crops take up more than 70% of all the water that agriculture uses.
Those three crops are rice, wheat and sugarcane, very water intensive crops.
So it is very important that we diversify away from these water intensive basic crops to low water incentive millets.
It’s important to move up the value chain.
The private sector farmers or business don’t wait for the government. They do things on their own because they have to survive. So, they are already they are doing it.
There’s a lot of diversification to horticulture, fruits, floriculture, fisheries and animal husbandry.
What the government should do is help the process or at least not present any obstructions in the process.
We have to quickly move away from water over-dependent crops like rice, wheat and sugarcane.
Those who produce sugarcane is not just for sugar, they also make ethanol. So, it will be difficult to then move away from sugarcane. I think we will continue to be dependent on sugarcane.
