In a television speech to the nation, Indian Prime Minister Narendra Modi urged his people to make sacrifices by spending less on fuel, fertilizer, and travel. He also asked them not to buy gold for a year. “To save foreign exchange, we must accept the challenge of patriotism,” he said. It appears that India's problems do not just stem from the effects of the US-Iran war; India's problems started well before that. Flight of foreign capital has put the Indian currency under tremendous pressure, with the Indian rupee falling nearly 10% in recent months. Many analysts believe that the Indian IT services exports could fall significantly as the artificial intelligence (AI) models begin to replace the IT workers. It could create a balance of payments crisis that could force India to seek the IMF bailout in the not too distant future. Already, the Indian economy has slipped to the sixth-largest economy by nominal GDP, dropping from previous projections that had it at fourth.
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| Indian Economy Drops From 4th to 6th Rank. Source: IndMoneyApp |
Energy Crisis:
India is facing a serious energy crisis driven by the closure of the Strait of Hormuz that has disrupted global oil and gas supplies. While the government has assured citizens that there are no immediate shortages of petroleum or natural gas, the escalating costs of imports are putting extreme pressure on the nation's foreign exchange reserves.
AI Challenge:
Indian IT firms are cutting staff to prepare for the expected disruption from the adoption of AI. For example, the IT services firm Cognizant is planning major workforce reductions that could impact between 12,000 and 15,000 employees globally, with India expected to account for the majority of the cuts, according to a report.
A US-based investment research firm Citrini Research is forecasting a significant disruption to India's traditional IT services sector by 2027-2028, driven by the collapsing cost of AI coding agents. Here's an excerpt of the Citrini research report:
"The country’s IT services sector exported over $200 billion annually, the single largest contributor to India’s current account surplus and the offset that financed its persistent goods trade deficit. The entire model was built on one value proposition: Indian developers cost a fraction of their American counterparts. But the marginal cost of an AI coding agent had collapsed to, essentially, the cost of electricity. TCS, Infosys and Wipro saw contract cancellations accelerate through 2027. The rupee fell 18% against the dollar in four months as the services surplus that had anchored India’s external accounts evaporated. By Q1 2028, the IMF had begun “preliminary discussions” with New Delhi".
Stocks Selloff:
Sensing the growing crisis, Indian stock market investors are selling off their holdings. IN particular, foreign investors have accelerated their exit from Indian equities in early 2026, selling over $20 Billion in the first four months, driving 14-year low ownership levels. Triggered by Middle East conflicts, rising oil prices, and rupee depreciation, this record exodus—marking the worst quarterly selloff in March—was driven by outflows in banking, financial services, and IT.
Investors see the writing on the wall. The Indian economy has already dropped from the 4th to the 6th rank in the world. The Indian currency is under a lot of pressure. India's current account deficit will worsen with the loss of IT services exports.
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No .India is adjusting to the results of the blockade that are impacting countries.
ReplyDeletethe PM is wise and his advice is valid.
Porus: "No .India is adjusting to the results of the blockade that are impacting countries"
ReplyDeleteIndia's problems pre-date the US-Iran war and the Strait of Hormuz closure.
The Indian rupee has been falling for more than a year.
Foreign capital has been fleeing India since well before the current Hormuz crisis.
AI adoption has been cutting IT services jobs for a year and it will hurt India's services exports which help offset its large goods trade deficits.
all three items mentioned are correct.
ReplyDeleteIndia is preparing for a reverse migration of foreign graduates and this influx of young qualified individuals from Western Countries will be good for a changed India.
As of mid-2026, the Indian Rupee (INR) has hit record lows, falling to over 95 per US Dollar (USD), driven by high oil prices, massive foreign institutional investor (FII) outflows, and intensified geopolitical risks in the Middle East. The currency has been Asia's worst performer, depreciating significantly over the past year.
India races to shield economy from Iran war-driven oil shock, capital stress | Reuters
ReplyDeletehttps://www.reuters.com/business/energy/india-races-shield-economy-iran-war-driven-oil-shock-capital-stress-2026-05-13/
MUMBAI, May 13 (Reuters) - A sustained spike in energy prices triggered by the Iran war has clouded India's macroeconomic outlook, spurring crisis-era measures from policymakers to shield Asia's third-largest economy from external headwinds.
The most severe disruption of global energy supplies in history, which began in late February, is stressing India's external sector by making imports significantly more expensive while keeping overseas investors away from local assets.
Economists have marked down growth forecasts for the economy, lifted inflation projections and are forecasting persistent pressure on the rupee with India staring down the barrel of a third consecutive year of a balance of payments deficit.
India’s heavy reliance on oil imports leaves the currency particularly vulnerable among emerging markets if the Iran crisis drags on. The country imports about 90% of its oil needs and about 50% of its gas requirements.
Managing the current account credibly, financing it, and preventing further currency depreciation are big imperatives for India this year amid the Gulf crisis, Chief Economic Advisor V. Anantha Nageswaran said on Tuesday.
The energy shock from the U.S.-Iran conflict is forecast to widen India’s current account deficit to 2.5% of GDP in the fiscal year ending in March 2027 from 0.9% in the previous year.
Looking to manage the strain, policymakers have turned their attention to crisis-era measures including exhorting citizens to cut down on consumption that uses up foreign exchange.
Indian Prime Minister Narendra Modi on Sunday urged a range of measures to conserve foreign exchange reserves while late on Tuesday night the central government hiked tariffs on precious metal imports as a way to curb demand and cushion the rupee.
ReplyDeleteForeign investors’ exit from India at record high
https://www.ft.com/content/b64c331b-76f3-4326-807c-3513e6d862b6?syn-25a6b1a6=1
Billions of dollars pulled from stocks
Portfolio investors have pulled out Rs2tn ($21bn) from Indian stocks in the last two months, making this the worst year thus far for foreign flows since the markets were opened to overseas investment in 1993. The Rs2.06tn sold this year builds on the Rs1.66tn offloaded during the last calendar year. A report by brokerage firm JM Financial shows that aggregate foreign holdings in Indian stocks have now fallen to a 14-year low of 14.7 per cent.
Is the worst over?
A Goldman Sachs report published on Saturday, titled Outflows Fade, But Re-entry Waits, suggests that the bulk of the selling may be behind us, and the downside risk from incremental foreign portfolio investor selling is probably capped at another $4bn-$5bn.
However, it also cautions that this does not imply the likelihood of a quick reversal. When oil prices corrected in early April following a US-Iran ceasefire agreement, foreign investors did not use the opportunity to re-enter India. Any hope that a broader de-escalation in the Middle East will trigger a resurgence of inflows is, therefore, misplaced.
Indian market valuations remain unattractive, and allocations to emerging markets are flowing predominantly into South Korea and Taiwan, where semiconductor giants are capitalising on the AI boom. Though concentrated in a handful of companies, their market weight and strategic influence in the AI industry are considerable. The Indian market is significantly stymied by the lack of any prospects of prominent AI plays at the moment.
The sell-off in stocks is not confined to foreigners. Retail ownership in Indian stocks has declined 9.2 per cent since March 2025. However, the one cohort that is holding steady is domestic mutual funds, which have hit record highs. As volatility has risen, retail investors have increasingly chosen to channel money into markets through systematic investment plans from mutual fund houses, which are monthly, fixed-sum contributions that function as a form of forced saving. Persuaded by the logic of paying an average price over a longer term, investors have stayed the course even as returns have languished. The benchmark Nifty 50 index is down 8.4 per cent this year.
The question now is where will Indian markets go from here. It looks like it will mostly be sideways. The floor may be in place, but the ceiling looks pretty fixed. The market will continue to be propped up by the quiet discipline of the domestic retail investor — people dutifully feeding their funds each month, largely indifferent to the mayhem unfolding around them. Unfortunately, that is not a foundation for a rally, it is just a holding pattern.
Riaz Sb,
ReplyDeleteWe have been discussing at length about India's "growth story", its inflated GDP numbers etc. Meanwhile, has Pakistan managed to create a "growth story" of its own? Or is it still busy stabilizing its economy under IMF watch and waiting for the long overdue CPEC eggs to hatch?
Anyways, back to the topic..
- "Already, the Indian economy has slipped to the sixth-largest economy by nominal GDP, dropping from previous projections that had it at fourth."
Indian economy did not actually contract or "slip". The problem was that the govt overestimated the size at first with its use of an earlier baseline year and outdated methodologies. I would consider the new numbers as a "correction" rather than a decline or contraction. It was never really the 4th largest. And of course, the recent fall in the value of INR against USD would have also impacted the valuation of its size in USD terms.
- "Many analysts believe that the Indian IT services exports could fall significantly as the artificial intelligence (AI) models begin to replace the IT workers. It could create a balance of payments crisis that could force India to seek the IMF bailout in the not too distant future."
Don't you think your imagination is going a bit overboard here? I think the statement you have made reflects more of your own ardent desires than the reality on the ground. India's economy isn't a one-trick pony to go bankrupt due to AI disruption in IT. I may be repeating what I stated in my earlier comments when I say that though India may not be a China in industrial manufacturing, its manufacturing ecosystem and exports is far more developed than Pakistan's. As an example, take a look at the kind of motorcycles and cars that are domestically manufactured and exported from India backed by a large component supplier ecosystem and compare them to the state of auto industry in Pakistan that is still largely characterized by CKD assembly of dated Japanese or Chinese models.
- "The rupee fell 18% against the dollar in four months as the services surplus that had anchored India’s external accounts evaporated. By Q1 2028, the IMF had begun “preliminary discussions” with New Delhi"
"Preliminary discussions" about what? An IMF bailout? :-) Last I checked, India's forex reserves still stand at nearly $690 bn (compare Pakistan's $20 bn). That sort of buffer isn't going to evaporate overnight.
https://www.google.com/amp/s/www.moneycontrol.com/news/business/economy/india-s-forex-reserves-can-cover-more-than-eight-months-of-imports-13916508.html/amp
This is not to say that the Indian economy isn't under stress or facing looming troubles, but its not on a scale that you imagine (or wish) it to be. Its fundamentals are still strong in comparison to Pakistan's and I haven't yet heard of any reputed economist talk of a remote possibility of a balance of payments crisis or sovereign default any time soon of the sort Pakistan has been facing cyclically. Structurally, Indian economy is better equipped to handle the ongoing crisis than it was back in the early '90s.
PS: Meanwhile, last month (April 2026) the Indian auto market saw sales amounting to 23 times as many cars and 10 times as many two-wheelers as Pakistan (even as its population was only 5-6 times larger). These numbers may or may not sustain in the coming months when the effects of the fuel crisis or "AI crisis" begin to bite the consumers, but they are worth keeping in mind when we compare the economies of the two countries and the size of their markets.
https://www.thenews.pk/print/1415351-passenger-car-sales-surge-117pc-in-april-on-robust-demand
https://profit.pakistantoday.com.pk/2026/05/13/pakistans-auto-sales-jump-107-in-april-as-lower-financing-costs-drive-demand/
https://www.google.com/amp/s/www.autocarindia.com/car-news-amp/april-2026-car-retail-sales-12-percent-yoy-growth-7-percent-mom-decline-439666
https://www.google.com/amp/s/www.autocarpro.in/news/india-two-wheeler-registrations-rise-129-in-april-2026-jato-132524%3famp=1
Riaz sb.
ReplyDeleteIf India does well economically then it starts bullying the neighbors, if does bad then it starts picking fights with neighbors to distract public from real issues. So, smaller countries in S. Asia are stuck between a rock and hard place.
The only solution to the problem is disintegrate India into smaller countries. That is the only solution for peace and prosperity in South Asia.
G. Ali
I agree with you. Even China is stuck between a rock and a hard place about India, because South Tibet (so-called Arunachal Pradesh) is still occupied by India. So, breaking up India is not the only solution for peace and prosperity in South Asia, but for China as well.
DeleteWe are talking about S. Asia here, not about Central Asia, not about Africa and definitely not about Mars or Jupitor.
DeleteLast time I checked China was not in S. Asia nor was it a smaller neighbor.
G. Ali
Too Little, Too Late? PM Modi's Austerity Plan Won't Stop The Crisis | T...
ReplyDeletehttps://youtu.be/dTcGWYhFrn0?si=DOl1bCIXefHhORn5
Prime Minister Narendra Modi has urged the citizens of India to adopt some Covid era-like measures in light of the continuing West Asia crisis, including limiting the use of fuel and cooking oil, working from home, avoiding gold purchases and foreign travel, and reducing the usage of chemical fertilisers. Meanwhile across India’s industrial belt, reports of MSMEs freezing production and workers losing their jobs have been coming in. Jahnavi Sen is joined by Dr Himanshu, an economist at Jawaharlal Nehru University, and independent researcher and senior journalist Sukumar Muralidharan to discuss these issues.
OpenAI, Anthropic move into services: What this means for Indian IT | Industry News - Business Standard
ReplyDeletehttps://www.business-standard.com/industry/news/openai-anthropic-ai-services-impact-tcs-infosys-india-126050600723_1.html
The new model: From manpower to machine-led execution
Traditional IT services relied heavily on large teams and long project cycles. The new AI-native model flips that equation.
Dhillon explains this stark contrast: “The second model costs the client less. It costs the vendor fewer people. And it leaves almost no room for the 180-person team that used to do this work.”
Instead of hundreds of engineers working over years, a small team can now deploy AI systems that automate a majority of tasks. This model is faster, cheaper, and outcome-driven rather than effort-driven.
Raghu Pareddy, CEO & founder of Bengaluru-based IT consulting and services firm Wissen Technology, notes, “This significantly compresses implementation timelines and begins to shift the value proposition from manpower-led delivery to outcome-led execution.”
However, this transition is not absolute. Enterprises still require governance, integration, and domain expertise, areas where traditional IT firms retain an edge.
What this means for Indian IT
First, the labour-arbitrage model, which relies on large offshore teams, is under pressure. As AI automates coding, testing, and support, the need for large entry-level teams reduces.
Dhillon adds that the traditional staffing pyramid is under strain, with automation hitting entry-level roles while AI-native firms move up the value chain into high-margin consulting and transformation work.
Second, pricing models are evolving. As Viswanathan explains, “The shift away from time and materials toward fixed-fee and subscription pricing is already underway.”
Third, the competitive landscape is becoming more complex. These AI firms are both partners and competitors. Infosys, for instance, has partnered with both Anthropic and OpenAI, even as it competes with them for enterprise budgets.
Pareddy highlights this dual dynamic. “We’ll see more co-opetition. Companies are already partnering with AI firms to accelerate adoption, even as they compete for enterprise budgets,” he said.
Core sector activity contracts 0.4% in March 2026 on West Asia impact, worst in 19 months - The Hindu
ReplyDelete
https://www.thehindu.com/business/core-sector-activity-contracts-04-in-march-2026-on-west-asia-impact-worst-in-19-months/article70884762.ece
The steel sector saw growth slump to an 18-month low of 2.2% in March 2026, while the cement sector slowed to a 17-month low of 4%. | Photo Credit: Getty Images/iStockphotos
Activity in India’s eight core industrial sectors contracted by 0.4% in March 2026, the first month after the war in West Asia broke out, according to data released by the government. This was the poorest performance for the sectors in 19-months
The data on the Index of Eight Core Industries released by the Ministry of Commerce and Industry on Monday (April 20, 2026) also showed that growth in the index stood at 2.6% for the full year 2025-26, the lowest since the COVID-19 pandemic in 2020-21.
In March 2026, the data showed that four out of the eight sectors measured in the index contracted over their levels in March last year.
“While an adverse base weighed on electricity generation, a shortage of inputs amidst the West Asia crisis curtailed the fertiliser output, which plunged by an unprecedented 24.6% year-on-year in the month,” Aditi Nayar, Chief Economist at ratings agency ICRA said.
The fertiliser sector ended the year 2025-26 with a contraction of 0.1% as compared to a growth of 2.9% in 2024-25, which itself was the lowest since 2021-22.
The electricity sector contracted 0.5% in March 2026 on a relatively high base of 7.5% growth in March 2025. Over the course of 2025-26, the sector grew 0.9%, down from 5.2% in 2024-25.
“Besides, the growth in steel and cement output also weakened in March 2026 relative to February 2026, suggesting that construction activity slowed in the month,” Ms. Nayar added.
The steel sector saw growth slump to an 18-month low of 2.2% in March 2026, while the cement sector slowed to a 17-month low of 4%.
The only sector to see relatively robust growth in March 2026 was the natural gas sector, which grew 6.4% as the government pushed oil marketing companies to increase their output in reaction to the constraints brought on by the West Asia crisis.
The crude oil sector, on the other hand, contracted by 5.7% in March 2026, the seventh consecutive month of contraction.
The coal sector contracted by 4% in March 2026, while the refinery products sector grew by 0.1% that month.