India’s economy is spiraling. The rupee is sinking like a stone, dragging with it a mix of trade deficits, shrinking capital inflows, and uncertainty. The country’s economy has quickly become so important that if it plummets, the global economy will be at stake.
Thursday is the seventh straight session of bad news, with the rupee plummeting to 85.2525 per U.S. dollar, which was an all-time low.
The currency has already lost 1.74% of its value since October and is on track for its worst quarterly performance since late 2022. Behind this collapse is a sobering reality. India’s trade deficit expanded by 18.4% from April to November.
Capital markets have not been kind either, with $10.3 billion in outflows this quarter compared to $20 billion in inflows just three months ago. Economists predict the balance of payments will hit a deficit of $20 billion to $30 billion this fiscal year, a sharp decline from last year’s $60 billion surplus.
The dollar is crushing everything in its path
Donald Trump’s election victory has supercharged the dollar, with markets expecting his policies to fuel growth and inflation.
The dollar index is riding high, and Federal Reserve officials have already announced fewer rate cuts next year. Investors are flocking to the dollar, leaving currencies like the rupee gasping for air.
India is particularly vulnerable. IDFC First Bank estimates the rupee will weaken further to 86 per dollar by September 2025. The Reserve Bank of India (RBI) has tried to stem the bleeding with interest rate hikes since May 2022, but inflation and a slowing economy are keeping the central bank’s hands tied.
Economic growth is projected at 6.8% this fiscal year, a drop from last year’s higher base. And while that number might still sound decent, the cracks are visible.
India’s investment crisis is a ticking time bomb
Government spending on infrastructure has been a lifeline for India’s economy. Roads, housing projects, and energy infrastructure are all getting a boost. But here’s the problem: private investments, which are supposed to carry the torch, are stuck at the starting line.
They make up about 37% of India’s total investment but haven’t rebounded as expected. The reasons are complicated. Corporate tax cuts and the government’s Production Linked Incentive (PLI) scheme have given companies the tools to expand, though the momentum hasn’t spread across sectors.
Electronics and pharmaceuticals are thriving, but broader industries are lagging. Solar panel manufacturing and advanced battery technologies are expected to join the winners, but those gains are still years away.
India’s government debt is sky-high—86% of GDP—leaving little room for more public spending. The Union Budget for 2024–25 allocated a 17.1% increase in capital expenditures.
Import duties on essential raw materials have been slashed to encourage domestic production. But these measures won’t solve the larger problem: private investors are still hesitant to put their money on the line.
Without stronger private investment, the government’s efforts might not be enough to pull the economy out of its slump.
Global risks are piling up
India is incredibly important to the global economy. The country is set to double in size economically, from $3.6 trillion in 2023–24 to over $7 trillion by 2030–31, making it the third-largest economy in the world. At the same time, its share of global GDP is projected to climb from 3.6% to 4.5%.
But these numbers don’t mean much if the foundation crumbles. Right now, India is standing between being a global powerhouse and a massive liability. The country’s integration into global supply chains has grown over the years, with huge exports in services, pharmaceuticals, and manufacturing.
For instance, its pharmaceutical industry plays a key role in global healthcare, while tech services power companies far beyond its borders.
A severe slowdown or policy misstep in India will affect these industries, raising costs and creating bottlenecks worldwide.
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