Geopolitics driving economic policies
| Photo Credit:
gopixa
The Middle East crisis that emerged at the end of February has added an uncertainty that is far more severe than any other event in the recent past. No one knows how long it will last — days, weeks or months, even after the completion of a fortnight since the eruption of the crisis. India’s economic and political diplomacy and commitment to the ideology of peace with dignity, referred to often as multi-pluralism, is under severe threat.
One of the major consequences of the crisis is that prices of oil will go up and trigger inflation and the expectations thereof. This should worry India since it could disrupt the projections made in February of growth and inflation for the fiscal 2026-27.
Should India merely reset the economic projections or wait for some more time? The best option available is to wait and watch for the oft-mentioned price of oil to spike to $100 and over to even $150 per barrel. This is not something that the world has not experienced earlier.
In fact, the world has seen $100 per barrel and over of the marker oil, the Brent Crude, in at least seven calendar years since the global financial crisis of 2008. In a majority of these years, the main cause of such spikes involved Iran and China.
Supply disruptions
India should be more worried about the supply disruptions in respect of oil as well as critical minerals, and other goods including steel, electronic goods, chips, batteries, and edible oils as well as pulses. Identification of these commodities is not a serious challenge, though. What would be more worrisome is about how to build up inventories of these commodities, in case the crisis stretches for three to six months from now.
Superimposed on this is the need for building up inventories of defence equipment, including radars, missiles and more importantly drones in case the crisis triggers hostile activities from those not well disposed to the country.
India does not have, from most accounts, a sound well-tested inventory policy to take care of such an uncertainty. Trade deals concluded with some of the countries and a cluster of the European Union countries (EU) could help procure the commodities in question to a significant extent.
Will this be enough to take care of inventory costs? And who will bear such costs? Should we construct first a base scenario of maintaining inventories that would last for at least six months and build up more scenarios, if need be, as new developments emerge? As of now, there are no clear answers to these questions. And the opportunity costs could be high if the decisions about the inventory policy and inventory dynamics are not taken expeditiously.
The Indian authorities should not treat the crisis lightly and tinker with the overall situation of supply of goods and services in an ad hoc manner. They should also not hurry to reset the projections of February 2026 for the next fiscal year. Instead, they need to work out fiscal, monetary and governance strategies that necessarily involve a reform agenda, to achieve the projected numbers. This is the only way expectations of economic units (households, corporates, small and informal enterprises and government entities) about India’s economic prospects could be influenced towards achieving the set goals.
Macro policies
This does not mean that there will be no volatilities in our interest rates, liquidity situation, exchange rates of most major currencies, gold and other precious goods, stocks, and fiscal receipts. After all, the uncertainties at the global level are so sharp that none of the economic variables are or can be pre-determinable.
Volatilities have to be managed through coordinated strategies for policy action. And what is important is to ensure that all the tiers of government at the Centre and States are committed to the tasks that lie ahead. The Centre should take the initiative right away.
Hopefully, issues such as the scarcity of cooking gas and fertilizers that are presently the major concerns of commercial kitchens, households and farmers would not overwhelm the governance mechanisms at all tiers of the government and disrupt the commitment to the pursuit of the current macro policy framework.
The writer is a former Executive Director of the RBI and currently an independent economic analyst
Published on March 18, 2026