Economically and geopolitically, the wheel has turned.
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Four years ago – not long after we moved from Delhi to Cairo – I wrote about how, from the global lens, India appeared to be occupying a ‘sweet spot’, both geopolitically and economically.
The world was “wooing India,” said the Hindustan Times. This was the “golden era” of Indian foreign policy, said another international observer. Deutsche Bank called India the “shining star” of the global economy. You can “feel India’s superpower potential being realised” said Citibank.
Even at the time, there were plenty of questions about how much that economic performance was just a post-Covid mirage, and how long New Delhi could walk the ‘multipolarity’ tightrope. But as recently as March 2025, it was being said that “just about everyone it seems (apart from maybe China and a few South Asian neighbours) needs more of India.”
Now, as our four-year stint in Egypt is coming to an end and as we prepare a shift to Brussels this summer (get in touch if you will be there or have recommendations of whom to meet!) the wheel appears to have turned completely.
A few recent headlines, covering foreign policy and the economy:
· ‘India missed out on AI and now its run as market darling may be over’
· Indian economy faces perfect storm with oil above $100, rupee in freefall, inflation back
· Indian Central Bank intervenes as rupee drops to record low
· India’s weak currency reflects deeper problems than the Iran war
· Winter is coming for Indian inflation
· Iran War and India’s diplomatic failures
· India’s diplomats are hosting the world, but what is getting done?
Look first at the economy, where the government – having attempted to ignore the West Asian crisis while elections were ongoing has now pivoted to top-down demand destruction.
“Prime Minister Narendra Modi has appealed to Indians to revive working from home, buy less gold and limit foreign travel to deal with a surge in global energy prices because of the continuing crisis in the Middle East.
Modi said the austerity measures, reminiscent of the Covid era, would reduce India’s fuel use and help save foreign exchange.
“Patriotism is not only about the willingness to sacrifice one’s life on the border. In these times, it is about living responsibly and fulfilling our duties to the nation in our daily lives,” Modi said.
Menaka Doshi and Preeti Soni write:
“Modi’s advice comes two months too late. Many Asian peers began conservation measures in March whereas in India, which imports well over 90% of its oil and gas requirements, state-owned fuel retailers have held local prices steady despite higher import costs since the start of the Iran war… Had Modi’s government allowed for a gradual pass-through of higher import costs, it would have helped curtail domestic demand and conserve fuel for essential purposes… [Now] With no election in sight for months and global energy leaders warning of a long oil market disruption, Indians should expect local fuel prices to climb... quickly.”
The West Asian crisis has caused severe pressure on the country’s balance of payments, the rupee and, as the headlines above indicate, the broader India story.
Ajit Ranade explains:
“There are moments when a currency tells a story more honestly than official statements do. The Indian rupee is doing exactly that. It has lost more than 12 percent against the US dollar in 12 months and has been sliding relentlessly even though India’s macroeconomic fundamentals are not in obvious crisis territory. Growth is still respectable. Inflation is not runaway. The current account deficit, at least in headline terms, is manageable. Forex reserves remain robust. This is not 1991.
But that is precisely why the rupee’s fall is worrying. If a currency weakens sharply despite decent growth and contained inflation, it is telling us that the problem lies elsewhere: in the balance of payments, capital flows, investor confidence, oil vulnerability and the structure of India’s external dependence.”
(In his full post, Madhusudhan does spell out his reasons to be ‘long India’, but his reference to the level of pessimism here is the relevant bit)
Here is Surjit Bhalla, long a pro-Modi voice on economic matters:
“No matter how one slices the data, it is time to dispense with the moniker of the fastest-growing major economy. India has also moved from being one of five “Fragile Five” economies in 2013 to possibly becoming one of just two (along with Turkey).”
The US-Israel war on Iran, and the subsequent blockade of Hormuz, may be the immediate trigger, but as numerous analysts have pointed out, there are structural issues at hand. Here is JP Morgan’s Sajjid Chinoy:
"Pressures have long pre-dated the West Asia conflict. For the first time in more than three decades, the Balance of Payments has been in deficit for two consecutive years and we are on course for a third consecutive deficit. There is a more chronic phenomenon underlying these pressures that we have to address...
In turn, a collapse in FDI is at the heart of the capital flow story, with net FDI — which used to average 1.5 per cent — completely drying up since 2024. What’s driving this? Between 2010 and 2025, India’s net FDI is strongly correlated with US 10-Year Treasuries — a proxy for global financial conditions. When yields are low India tends to get a gush of FDI; when yields harden — like the last two years — net FDI has completely dried up. Recall, FDI is typically governed by both (global) “push” and (country-specific) “pull-factors.” What India’s FDI trajectory suggests it has largely been governed by push factors since 2010. The last time it was driven by pull-factors was in 2005-10 when a strong corporate capex cycle catalysed strong FDI.”
In other words, when cash was plentiful and cheap, it flowed into places like India looking for yields. As conditions tighten, it has flowed back out – since there are no reasons keeping it there. Chinoy says that this wasn’t the case between 2005-10, because businesses were actually investing in India, which they haven’t been doing over the last decade despite the major clean-up of balance sheets and stabilising of macro fundamentals over the last decade.
This is a concern we have flagged for years now, including back during the sweet spot moment (and before when India’s pre-Covid growth had fallen to 4% and the government unveiled what turned out to be spectacularly badly timed corporate tax cuts), and continuously over the last half decade, as the Indian government kept urging and exhorting businesses to invest – never a good sign:
As I read Chinoy’s push/pull analysis, though, it got me thinking of a piece by Kate Sullivan de Estrada that we published on India in Transition a few weeks ago, entitled ‘India’s Foreign Policy Relocations in the Trump Tariff Era.’
“From roughly 2017 until recently, India’s growing international recognition was closely tied to the geopolitical salience of the Indo-Pacific. As External Affairs Minister S. Jaishankar observed in June 2022, the region had moved to “the centre of the geo-strategic and geo-economic discourse,” placing India at the heart of an emerging strategic frame. The Indo-Pacific not only reflected the sharpening rivalry between the US and China, but key regional actors—including the US, Japan, Australia, and India through the Quad—framed the Indo-Pacific as a space defined by shared values of “freedom and openness.”
Against this backdrop, India stood as both a material and an ideological swing state. The Indo-Pacific became a high-yield recognition domain, delivering status, trust, and material benefits, even as India’s leadership interpreted elements of freedom and openness in distinctive ways. It conferred strategic indispensability, elevated India through association with major powers, and created opportunities for India to shape the norms and institutions of an emergent regional order…
But the recognition dividends of the Indo-Pacific frame depended heavily on the strategic priorities of external actors, particularly the US. Under the second Trump administration, advocates describe US policy attention as having gravitated toward the Western Hemisphere, even if more conventional commitments to American primacy persist. The background recognition context that underpinned India’s Indo-Pacific centrality began to shift.”
You should read the whole piece, including an analysis of how India moved its focus from the Indo-Pacific to trade deals, de Estrada noting that “India-as-trade-partner does not strike quite the same note of indispensability as did its role as a key balancer in the Indo-Pacific.”
The analogy here is that the attention on the Indo-Pacific was a push factor, which inflated India’s sense of importance, its ‘vishwaguru’ status and built the idea that its rise was inevitable – fully imbibed at home and translated into domestic messaging. But this was a flawed reading of what was going on.
And Trump, as we have discussed many a time on the newsletter, changed all of that.
Not just because of his affinity for Pakistani generals or his erratic trade wars but also because, at a more structural level, the Indo-Pacific theatre became a less immediate concern, and suddenly India’s stock dropped. The US-Israel war on Iran has added to that, and though the Western Indian Ocean should also be a key theatre for Indian interests, it simply isn’t a space into which New Delhi can project much leverage.
You get the sense from many a policymaker that they expect that the US, once it is done with its ‘Middle Eastern dalliances’, will eventually come to its senses and start focusing (pivoting?) to Indo-Pacific competition with China once again, and then India will return to its rightful place in the order of things. The ‘push’ will come back, while India works on trade deals to shore up the slower process of building a ‘pull’ factor.
Is that a given? There are already those who have argued that the Indo-Pacific and the ‘pivot’ are dead, or worse, ‘zombies’. And then there was the ‘G2’ in Beijing this month. Here’s India’s former foreign secretary Shyam Saran:
“The May 14-15 summit in Beijing between Chinese President Xi Jinping and his US counterpart Donald Trump was a landmark geopolitical event, whose impact will reverberate across the Asian region and the world for years to come. This is an inflection point, and one is not using the term lightly. It is perhaps for this reason that there is a reluctance not only in the US and the West but also in our own region to grasp the full significance of just what happened in those two days of early spring in the Chinese capital.”
It will take time to understand the implications of the US-Israel war on Iran, but perhaps the biggest challenge for New Delhi is to take the right bet on how important the Indo-Pacific will be for its Western partners over the next few decades. Good thing US Secretary of State Marco Rubio is about to visit – from May 23 to May 26 – with, among other things, the question of the Quad hanging in the air.
Source: https://rohanvenkat.substack.com/p/why-has-indias-sweet-spot-turned
