As the ceasefire between India and Pakistan eases immediate tensions, ironically brokered by Trump himself, the bigger question remains: What next for India’s economic momentum? Geopolitics may have quieted for now, but four interconnected economic headwinds continue to gather force- rising oil dependence, hostile tariff regimes, shaky trade rebalancing, and an increasingly hesitant private investor class. This is India’s four-way test.
Oil Dependence: A Chokepoint Economy
India’s energy dependence is deepening. Crude imports rose 4.2% in FY25 to 242.4 MT, driving the oil bill to $137 billion. With 89% of domestic demand met through imports, India remains acutely exposed to external shocks.
The threat today isn’t just price- it’s logistics. The Red Sea crisis forced tankers onto longer, costlier routes, inflating freight and insurance costs. With over half of India’s crude routed through volatile Gulf waters, any escalation could destabilize the current account and stoke inflation.
Estimates suggest a $10-per-barrel increase could widen the CAD by $12–15 billion and nudge inflation up by 30 basis points. Russian crude offers short-term relief—but overdependence is a vulnerability, not a strategy.
Trump Tariffs: Friction in the Fast Lane
Trump may have brokered peace, but weeks earlier, he reignited a trade war. In April 2025, the U.S. imposed a 10% universal tariff and a steep 27% levy on Indian exports. Electronics ($14B) and gems/jewellery ($9B) were hit hard; pharma was spared, but auto parts, textiles, and footwear felt the squeeze.
Over 17% of India’s goods exports go to the U.S., making it a critical trade partner- and a potential vulnerability. Indian policymakers have so far responded with restraint, but the twin task ahead is clear: reignite stalled trade talks with Washington and reduce overdependence on the American market.
For perspective, Vietnam and Indonesia faced tariffs of 46% and 32%, respectively. India may have escaped the harshest end, but relative relief is little comfort when exporters face squeezed margins and disrupted supply chains.
Trade Diversification: Alliances Over Reliance
In the wake of the tariff shock, India has gone into trade diplomacy overdrive. Over the past year, it signed the India–UK FTA in May 2025- its first with a G7 nation- while trade agreements with the UAE (CEPA) and Australia (ECTA) came into force. Talks with the EU have entered their 11th round, and negotiations with the GCC, Canada, Chile, and Israel remain actively underway.
The UK deal slashes tariffs on 99% of Indian exports- including textiles and jewellery- and cuts whisky duties from 150% to 40% over a decade. Officials expect a $34 billion trade boost by 2040.But trade pacts don’t guarantee gains. Past FTAs, like ASEAN, saw imports surge while exports lagged. Without stronger MSME support, logistics, and quality standards, FTAs risk becoming open doors for others- not launchpads for Indian industry.
Private Investment: The Missing Spark
Perhaps the deepest challenge is internal. In FY24, private investment slumped to a 10-year low, accounting for just 33% of India’s total capex- well behind China (~50%) and Vietnam (~41%). Net FDI fell to $10.6 billion, the weakest since FY07, despite record gross inflows- driven down by rising outflows, reform fatigue, and regulatory overhang.
Borrowing remains expensive, rural demand tepid, and policy signals unpredictable- from abrupt Quality Control Orders (QCOs) mandates to digital taxes and windfall levies. Businesses remain wary. Even in electronics, where PLI schemes show promise, the impact is narrow. Manufacturing still clings to ~17% of GDP- far from the 25% target set for 2025.
Currency and Credibility
The rupee has depreciated by nearly 2% in 2025, hitting a record Rs.85/USD before stabilizing post-ceasefire. Though India’s forex reserves remain robust at $686 billion, the recent drawdown (~$2.1 billion in early May) shows how quickly confidence can waver.
More worryingly, if investor perception of India as a “stable policy” destination erodes further, even record reserves won’t prevent capital flight.
Where We Go From Here
India’s path forward demands discipline, not reinvention. Energy policy must prioritize reserves, domestic production, and renewables. Trade pacts must be matched with on-ground competitiveness- better logistics, skills, and product quality. Investment recovery hinges on regulatory clarity, fewer reversals, and smarter capital deployment. And for currency stability, policy must project credibility, not short-termism.
India stands at a critical inflection point- poised to be a China-plus-one hub and capital magnet. But that potential must translate into performance; diplomacy alone won’t do. The ceasefire may have quieted the borders, but economic tensions remain live. Oil, tariffs, trade, and trust- this four-front test will shape FY26 and define the 2047 vision.
Rajesh Mehta is a leading international affairs expert and Jayant Singhal is a researcher on geopolitics and trade