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In an exclusive interview with India Today Consulting Editor Rajdeep Sardesai, Harvard University professor and former IMF Deputy Managing Director Gita Gopinath discussed the economic implications of the ongoing Iran conflict.
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00:04Joining me now Geeta Gopinath, Harvard University professor and former deputy managing director
00:11at IMF. Good to have you, Professor Gopinath, on the show. Thank you very much for joining us.
00:17When we met three months ago in Davos, you were cautious about the disruptions that the U.S.
00:25president was causing then in a conflict with Europe. Now we've had an even bigger disruption
00:30with the war in the Gulf. Are you even more anxious and worried about the direction the
00:37economies of the world are going and the impact the war is going to have on economic growth?
00:43Rajdeep, just like back then, my caution came from the fact that with Trump, nothing is totally
00:51certain about what's going to happen. Let me just give you two examples. Tariffs. Remember,
00:56we had the April 2nd Liberation Day tariffs when average tariffs by the U.S. was going to impose
01:02was about 25 percent of the world. And that came down now to 10 percent also because of the Supreme
01:08Court ruling on it. So now, for example, India's tariffs have gone from being 50 percent to being
01:1410 percent. Similarly, that was Greenland when we last talked. And that's not the topic anymore.
01:19That ended. That aggression was not happening at this time. And now we have the Iran conflict.
01:24This is serious. It's the biggest oil shock to the world. It's bigger than what we saw during the
01:301970s, even if nothing else happens in terms of the restriction, in terms of oil and gas coming onto
01:37the market. This is the largest shock that the world has experienced. But that said, the world is in a
01:43very different place also in terms of the dependence of economies on the source of energy.
01:49So the effect right now, if everything gets resolved in the next week or so, which, again,
01:55there's a very good likelihood that could happen. We're talking about global growth being lower by
02:00about 0.3 percentage points. I mean, that's what is in the IMF's current forecast. But on the other
02:07hand, we end up in a world where instead of oil averaging like $80 or $85 for this year,
02:13it goes up to, say, $100. Then we have growth coming down to two and a half percent for the
02:18world, which is, you know, in the absence of this conflict, it would have been 3.4 percent. So that
02:23would be really substantial, the cut. But as of now, just like when we last talked during the time of
02:30the tariffs and during the time of Greenland, that we could see this quietened down, even though we're
02:36not going to return to $70 of oil that we had before the conflict started.
02:40I think one of the concerns, of course, is the fact that, therefore, the longer this conflict goes on,
02:46the more the world gets disrupted, including countries like India, which are heavily dependent
02:51on oil coming through the Strait of Hormuz, not just India, but countries like China, Japan,
02:56a number of Asian economies. In a sense, what you're saying, and correct me if I'm wrong,
03:01is that if this gets resolved in the next week, the impact will be minimal. But if it stretches on
03:09and the uncertainty stretches on, one day we're told the Strait will be open, next day it's closed,
03:15then you're saying the impact could be far-reaching. Am I correct?
03:19That is correct. The impact could be much larger. In the case of India, two things offset each other.
03:24The Iran conflict was a negative shock for India. But on the other hand,
03:29because of the Supreme Court ruling and tariffs coming down from 50% to 10%, that was a positive
03:35event. And so the combination was a bit of a wash. And India's economy is expected to grow at around
03:406.5% for this fiscal year. But if there is much more disruption, and it's because India relies on
03:47the Middle East so much for oil, also for its fertilizers, it's not just about the price effect,
03:53but if you just don't have the supply and you have supply disruption, for example, to LPG,
03:58that is going to complicate production in India and going to be much more consequential. But that's
04:04going to require a much longer duration for this conflict.
04:06So are we, I mean, is the worst case scenario a potential triple whammy, which is food, fuel,
04:13and fertilizer? I mean, the Indian government has kept fuel prices in check. We don't know what will
04:18happen once elections are over at the end of the month. And there's the fear that there could be
04:22this triple whammy of food, fuel, and fertilizer. Is that something that you believe could actually
04:29be the real concern going ahead?
04:31In the matter of fuel, I don't think it's sustainable for the Indian government to continue
04:36to subsidize fuel prices for a very long time.
04:40It's not sustainable.
04:41It's not sustainable, just given the impact on the fiscal deficit. So at some point,
04:46they will have to pass through some of that into what prices consumers pay. May not be the full
04:52amount, but certainly more than what's happening at this moment. With fertilizer prices, they have some
04:58long-term contracts that helps in the interim. But again, depending upon what, if there's going
05:03to be just this blockage of the straight-of-home moves, then you're not even going to get the
05:07supplies. And I think that's the bigger damage. And if this continues for much longer, it's usually
05:13not just food, fuel, and fertilizers. The problem is financial conditions could tighten much more than
05:19what we've seen right now in the world, including the pressure on the rupee, which has been there for a
05:24little while. But you could see much more, not just on the rupee, but on many other currencies.
05:28That tightening of financial conditions has not happened at this time.
05:32So what's the biggest concern? Is it that there could be that the inflationary pressures now
05:39continue to grow? Is it that our current account deficit continues to take a hit? Is it the rupee,
05:45which continues to decline? Where do you believe is the real pressure point at the moment? Because
05:53the government over the last 11 years has done reasonably well on handling inflation.
05:57Suddenly, there's a fear that inflation, if this conflict goes on longer, will become,
06:02will reach a stage where it will start genuinely impacting other sectors of the economy,
06:07even possibly domestic demand. Do you believe India is in a better position than some of the
06:12emerging markets? Or we also are really caught in the crosshairs of what's happening in West Asia?
06:18I think the immediate impact for the Indian economy is what's happening with the current
06:23account, the balance of payments, the pressure in terms of the impact on the rupee. That's where
06:30it's most impactful. And you've seen the RBI put measures in place to try to contain the effect on
06:35the exchange rate. But given that India is a big importer of oil, that's the number one category,
06:42it's going to affect the size of current account. And given that there's not that much appetite for
06:48foreign capital coming into India at this current moment, that's where the pressure is. The second
06:53piece is where it's on inflation. As of now, because there's no increase that we're seeing at the pump
07:00in terms of fuel prices because of the government basically subsidizing it, I don't expect that that
07:06will last forever. This is going to go up. So we will see more of an effect on inflation. The
07:12good
07:12news is that because inflation expectations have come down in India, they are well behaved. The RBI
07:18has some leeway to wait and see that maybe if there is a resolution of this conflict and gas prices
07:25come
07:25down, the effect on inflation will not be that big. So they have some space to wait and see. The
07:32price for
07:32Indian economy is that it is a larger domestic market. And so a lot of its growth actually comes
07:38from domestic demand. 2025 was good year in terms of domestic demand for the Indian economy. That's
07:44the monsoon was very good last year, too. That helped. Monsoon is less good this year. That's a bit of
07:50a
07:50negative. But again, another source of concern, which also affects, in a sense, the balance of payments
07:57in the current account is what's happening with AI and the consequences of that for call centers,
08:05for BPOs more generally, because I think that's going to be a source of pressure, too.
08:09Because the IMF projections certainly seem to suggest that India will still continue to grow
08:16in that 6.4, 6.5 percent growth rate, 26, 27. Will that, in your view, have to be revised
08:23if this conflict stretches into May, June and beyond? If this conflict stretches absolutely
08:29into May, June, we are talking about a much more serious impact on all economies. How serious
08:35is the impact, in your view? So as a rule of thumb, right now the expectation is that the price
08:44of oil
08:44is going to be around between $80 and $85 for the rest of the year, right, on average, on average.
08:49If that number gets to about $100, we're talking about growth for the world economy, which is
08:56right now projected at 3.1 percent, dropping to 2.5 percent. So in that scenario, you know,
09:03that's a case when economies like India that rely on the Middle East heavily will have a much
09:10severe impact on their growth. Is there also the possibility that the central bank also runs out
09:16of ammunition if oil remains at elevated levels? If oil continues to climb well over $100 a barrel,
09:22then the central bank also is running out of ammunition. The fear, of course, is debts are
09:28going to be mounting, fiscal headspace reduces. Are these all concerns that every economy, not just
09:35India, across the world, just look across our border with Pakistan, playing the role of a mediator,
09:40but the economy is in a complete mess at the moment? So are you saying that every country now
09:46will have to be very, very cautious on where we spend our money? We'll have to look very closely at
09:51energy diversification, that this is in a moment also a challenge, but an opportunity?
09:57Supply shocks are not good news for anybody. And in that environment, there is pain. So it's not one
10:05of those things that you can just, you know, fix easily. So when it comes specifically to the central
10:12bank, allowing the exchange rate to adjust is in the face of a real supply shock, which this is,
10:20would be the right course of action. Now, India has a sizable amount of foreign exchange reserves,
10:26and that's great, but that doesn't mean one should be using those reserves to intervene heavily in the
10:32case of the currency. It's only in extraordinary circumstances when it looks like there's some
10:37non-fundamental noise happening that you would want to intervene in the currency. But otherwise,
10:42you really are, you know, you should be letting the currency adjust, because that's the source of
10:48resilience also for the country. There are consequences in terms of inflation, but that's a
10:53trade-off that countries will have to deal with.
10:55So for countries like India, what then is the real strategy to de-risk in a way? Critical imports
11:01that we have at the moment, like fertilizers, like energy, that 50% of our oil, for example,
11:07comes through the Strait of Hormuz, 80% of our LNG comes from the Strait of Hormuz in that
11:12environment. How does one India, how does a country like India de-risk? Is it simply look for
11:18alternative sources? China seems to have managed by looking at renewables as a major source
11:24of their energy needs. In that sense, is this an opportunity? And is there going to be a big
11:30time lag before we can really catch up? And that's the real worry that we should have over the next
11:3512 months, 18 months. Energy independence is going to be very critical for India. The good news is that
11:41India already is relying more and more on renewables for this energy and pushing harder on that front,
11:48especially solar, where there's plenty of that, reducing the cost of efficient batteries and so
11:54on. That's going to be very important because the more that you can de-risk from having to rely on
12:00imported energy, the better it's going to be for India. And again, continuing more broadly the reforms,
12:07including infrastructure build out, which sitting in Mumbai, we were just talking about it. It's pretty
12:13remarkable, the infrastructure that has been built in the city. I think that's the kind of action that
12:18will help sustain growth and keep up growth in India. There's a fear, though, that this could also
12:25be a moment that will widen inequalities once again, that you've got the African economies,
12:32emerging market economies, which are going to find it far more difficult to handle this situation.
12:38And indeed, the weaponization of uncertainty, because with Donald Trump, we just don't know
12:43what happens next, even on trade. We don't know whether the trade deal will actually materialize
12:50in the end between India and the United States. Do you therefore see a widening divide first between
12:55the emerging market economies and the Western economies in the year ahead?
13:01This shock is absolutely generating greater inequality between the developed world and the developing world.
13:07The developing world relies a lot on also on food imports with fertilizer prices going up and the
13:14shortages in fertilizers. We're not we're not seeing it right now because it takes about six months or so
13:19before you shows up in food prices. That effect is going to be there. And countries that suffer from
13:24food insecurity are the low income countries. So the effect on them is is really consequential.
13:32We have to get used to living in this world of uncertainty. We've had it 2025 was a terribly uncertain
13:38year,
13:38but you can go back even further back to 2020. I mean, we've had we had the pandemic that we
13:44had the war in Ukraine,
13:45which caused energy prices to shoot up. You know, you had the Silicon Valley Bank problem in the U.S.,
13:51which created ripples in terms of financial conditions, tariffs, and now the Iran conflict. So I think we are certainly
13:58in a more volatile world, more uncertain world. And everybody, including companies, policymakers have to learn to live with this
14:07level of uncertainty.
14:08You know, because even on tariffs, three months ago, we were talking about the weaponization of tariffs.
14:14Are you confident now that the United States or this Trump administration will not once again use tariffs as a
14:21weapon to as part of their foreign policy agenda? Is that a concern that we could go back? Or do
14:28you believe that this war, in a sense,
14:30will be a wake up call that you can't now use tariffs to once again unhinged the world in the
14:36way it was unhinged a few months ago?
14:38I think the constraint that has come has come from the U.S. Supreme Court. So the Supreme Court recently
14:44ruled that the tariffs that Trump was had implemented, which was a part of this of a very particular IEPA
14:52procedure, that was illegal.
14:56What does that mean? That basically means that it's going to be much harder for any president in the United
15:03States to just on a whim, wake up and say that we're going to put tariffs of X amount on
15:08a country.
15:09There are other rules that they can rely on. There are other laws that they can rely on, other Section
15:133.1, for example. But that requires some procedure, which is you have to do some assessment about the damage
15:20that's occurring to your industry.
15:22So that tool exists in terms of being able to use it, but it's going to have to be, you
15:29know, less on an instantaneous basis. It's going to require some more time to be able to implement.
15:36Now, China has imposed, Professor Gopinath, export bans on diesel, gasoline, jet fuel since March 12, while also reinforcing its
15:48dominance on clean energy supply chains.
15:51So it almost seems as if China is in some way actually the net-net gainer, many believe, from the
15:58war, that the United States finds itself in a difficult situation.
16:01There's a fear of inflation growing in the U.S., and China finds itself relatively insulated from what's happening. Do
16:10you go along with that?
16:12No, not really, because firstly, in the case of the U.S., the U.S., in terms of the economic
16:16impact, is quite minimal.
16:20Being a net energy exporter, it is minimal. Now, yes, the fact that prices are going up, that I think
16:27is actually costly, not just from the economic point of view,
16:29but from the political point of view for the current administration, that is there.
16:33But the overall effect on the economy is really small.
16:36China is actually affected more by this conflict than the U.S. is.
16:41But China has other suppliers. I mean, they buy a lot from Russia, so they don't rely that heavily necessarily
16:47on the Middle East, and they have a large amount of reserves.
16:52But this is definitely costlier for China than it is for the U.S.
16:55One of the concerns in India is also markets.
16:57If you look at what's happening with markets, there's been an FII outflow in this country over the last few
17:03months.
17:04And there's a fear that unless there's greater certainty and predictability in the global economy, Indian markets will also continue
17:12to remain uncertain.
17:13Do you go along with that?
17:16While we are seeing other markets, including the U.S., perhaps being far more resilient, is the Indian market far
17:22more vulnerable to what's happening in West Asia?
17:24So the Indian market has been impacted, like many other markets, by the Iran conflict, by this fact that you've
17:31had this sudden risk-off environment right now, which is with uncertainty, capital pulling out of all emerging markets, going
17:40back into the U.S.
17:42That is a common factor.
17:44But in addition, India, I think, is also being looked at as a country where, especially when you look at
17:51equities, just liquid assets, that they are expensive.
17:55If you look at, it's not one of those places where you look at it and you say, well, that
17:58looks cheap and I can make a good return on there.
18:01So it has been viewed traditionally as being expensive.
18:04It continues to be viewed as that.
18:05And then if you look at foreign direct investment, again, everybody I know wants to invest in India, but they
18:13still talk about how difficult it is to do that, the ease of doing business, the difficulty with acquiring land.
18:19So in the absence of attractive enough asset classes to put your money in and the fact that interest rates
18:27in the U.S. are likely to stay higher than, you know, for a longer period of time than was
18:33expected before this conflict, I think both of those are weighing against the rupee.
18:37So in a way, is this a challenge again for India to get its act together in terms of actually
18:43using this as a moment to ensure ease of doing business, attract investments by actually showing that you are willing
18:51to walk the talk on some of the reforms that have been brought in in 2025?
18:56A lot of good reforms have happened, but there is a lot more that needs to be done.
19:00This is the moment. There is so much interest in India in terms of, you know, diversifying out of China
19:07as just as being a good partner to work with.
19:10But there are still way too many hurdles.
19:12It's also important to have a predictable, predictive kind of environment where you don't have to worry about retroactive taxation.
19:19You don't have to worry about sudden changes in the rule of law.
19:23I think that is still viewed as being incomplete in terms of making sure that you can have that predictability.
19:30But at the same time, are we staring at a more fragmented, less predictable global economy?
19:35And what does that do to economists and their projections?
19:39Does that make it just simply far more difficult for the IMF and the World Bank to even look at
19:44what happens three months, six months down the line?
19:46Well, it fundamentally changes the way these institutions are talking about the outlook.
19:51So when I was there at the beginning, back this was 2019 and 2020, the IMF used to put out
19:58what they call a forecast for the world.
20:00Now they don't put out a forecast. They put out what they call a reference scenario, which is one possible
20:06outcome, which they think is likely.
20:08But this time they also put out an adverse scenario and they put out a severe scenario.
20:12So I expect all forecasters around the world at this point are basically constructing scenarios because the world is so
20:19uncertain.
20:20No, because I look at World Bank projections. In the absence of the conflict, GDP growth projected at 7.2
20:26percent.
20:27Growth now projected at 6.6 percent for FY26-27, assuming, of course, an extended disruption in oil supply till
20:37at least the end of the year.
20:38How seriously should we take these projections? Are economists also simply unable to understand, are having to work with this
20:47unpredictability and thereby constantly having to change their predictions?
20:52I think economists only know as much about possible scenarios as most people do, right?
20:57I mean, at this point, it's impossible, for instance, right now to know what's going to be the outcome of
21:02the negotiations between the U.S. and Iran on the Strait of Hormuz.
21:08So one makes assumptions about it. But yes, the idea is to remain focused on the scenarios, to build resilience
21:15in the economy, to clearly to diversify sources of supply.
21:19Energy independence is hugely important. And I think a country like India, which has a large domestic market, strong domestic
21:26demand, reforms at home can be a great source of resilience.
21:31So in conclusion, in your assessment, how significant is the risk to the twin pressures that everyone is talking about
21:38post this West Asia war for India, higher oil import bills and exchange rate volatility?
21:43These are the two twin. Are these the twin pressures that actually need to be looked at and monitored very
21:50carefully?
21:50The pressure on India's current account and on the rupee is meaningful.
21:57Like I said, this is an actual fundamental shock of a supply shock.
22:00Even if the war ends tomorrow, we're not seeing oil prices going back to the pre-war level.
22:06It's going to be higher. There is going to be some pass through into inflation.
22:10That's certainly the case. Ensuring that India is able to continue to maintain the good macro stability that it has
22:16gotten to,
22:16which is being able to keep inflation within the band, while at the same time, also ensuring that fiscals, deficits,
22:23which are doing well at the central government level, but not at the state levels,
22:27because it certainly needs more action at that front, and the more broad-based reforms, including judicial reforms, including in
22:35terms of continuing the infrastructure buildup, land reforms, all of that is what it will take.
22:40So, Professor Gopinath, if you were advising the Modi government, one, two, three, what are the three things you would
22:46tell them that they need to do for FY26-27 that will give a sense that India is on the
22:55right track?
22:58Given this extreme volatility that we are seeing around us, how do you, in a way, mitigate the current account
23:07deficit
23:09without sacrificing, compromising on growth targets?
23:13I would first simply just recognize the fact that this is a negative shock for the Indian economy.
23:19There's no getting around the fact that when you are a large importer of fuel and prices have gone up
23:24as much as they have, there will be a deterioration in the current account.
23:27That requires accepting that there will be pressure on the repeat to depreciate.
23:32I don't see an argument to go and use up very expensive foreign exchange reserves to go and defend the
23:38currency.
23:38This is a shock that has to be, in a sense, born.
23:42On the fiscal front, at some point, they will have to let prices at the pump go up by some
23:47amount,
23:48because otherwise the effect on the fiscal deficit is going to be very consequential.
23:53But I think what India has done well, like I said, is in the macro stability, in terms of macro
23:58stability,
23:59which is keeping inflation within the inflation band, fiscal at the central level has been well managed,
24:05not so much at the state level.
24:07So somehow incentivizing the states to be able to keep their deficits small, super important.
24:12And continuing to engage with the world, and I think India is doing that nicely on the trade front, too,
24:17which is having deals with the European Union, you know, with South Korea recently,
24:22but more generally, working with other countries, creating more trade agreements with them,
24:28building economic relations with them, will all be very positive.
24:31So in a way, what you're saying is build your bilateral trade deals.
24:35Don't just rely on multilateral trade arrangements anymore.
24:39Don't rely on the United States anymore, presumably.
24:43A piece of advice for Donald Trump that you would give, since he's at the center of it all,
24:47I mean, this weaponizing of uncertainty, surely, is the last thing the world needs.
24:53So, firstly, I do think India and the U.S. should absolutely work together.
24:58They're both important large economies, and it's good for both of them and for the world that they remain engaged.
25:05In the case of Trump, I mean, he's somebody who likes to have low interest rates,
25:11because, as you know, he keeps pushing for that.
25:13He's going to get that if he's able to prevent inflation from going up.
25:17That is now a concern in the U.S.
25:20And so the more he can do to keep, because he wants to keep prices low,
25:24and he wants prosperity and abundance in the U.S. economy,
25:27I think less of this high levels of volatility and uncertainty would be very valuable.
25:34You know, Professor Gopidar, the last time you were interviewed by India Today,
25:38you went viral because of your comments on environment and the climate, in particular pollution,
25:42which you had said was integral to ensuring the ease of doing business.
25:46You needed to ensure clean air.
25:48You still stick by that.
25:49Are you, is the air that you are breathing in Mumbai a bit better than what you breathe in Delhi?
25:56And do you believe that's, again, I mean, these are going to be the future challenges,
26:00presumably not just to India, but other countries in the region as well?
26:04Oh, no, absolutely.
26:05I believe that addressing pollution in India will give you a great bang for the buck.
26:12The economic consequences are meaningful.
26:16Obviously, depending upon the time of the year, it's worse.
26:19Winters in Delhi, when I was there, it was really, really bad.
26:23I mean, it's just, that's, again, a solvable problem,
26:26and the government should certainly address it.
26:29I'm going to leave it there.
26:30You've been more diplomatic this time when you've spoken about the climate crisis.
26:35At that time, you were seen as someone who was making it very clear,
26:37if you don't get that right, then you're not going to attract the kind of investments
26:41that India really needs at the moment.
26:44But I appreciate you joining us again at a time, as I said, of great global uncertainty.
26:49Three months ago, it was Greenland.
26:50Now it's even more worrying with what's been happening in Iran.
26:56Thank you very much, Professor Gopinath, for joining me on the show today.
27:00Thank you, Rajdeep.
27:01Thank you, Rajdeep.
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