January 13, 2025

Owing to the protracted Israel-Palestine imbroglio, India finds itself grappling with a host of economic vicissitudes, most notably the inexorable escalation in oil prices, a surge in inflationary pressures, and pronounced volatility in the stock market. These perturbations, exacerbated by an overarching atmosphere of global uncertainty, are beginning to cast long shadows over the contours of India’s financial edifice. India’s energy security remains precariously poised, heavily dependent as it is on the volatile currents of Middle Eastern oil. As of August 2024, a formidable 44.6% of India’s crude oil imports emanate from this region, rendering any disruptions in pivotal maritime corridors such as the Strait of Hormuz or the Red Sea potentially catastrophic. These choke points, which  are narrow channels along widely used global sea routes that are critical to global energy security are not merely geographical features but lifelines of global energy, facilitating the movement of over one-fifth of the world’s oil. A blockade or even the rerouting of tankers via the Cape of Good Hope would significantly elongate transit times and concomitantly escalate transportation costs. Such an upheaval portends a ballooning of India’s oil import bill, with projections for FY 2024-25 placing it between a daunting US $101 billion and US $104 billion, a marked increase from the US $96.1 billion of the preceding fiscal year​. The repercussions of these inflated crude oil prices reverberate directly through India’s inflationary landscape. This will result in substantial price rise across the board with a significant challenge for our  economy and policy makers. With oil imports constituting about 90% of the total domestic demand, with major sourcing from Saudi Arabia, Iraq, the UAE, Russia, USA and Kuwait, the domestic economy is heavily reliant on oil import for its energy requirements. The Reserve Bank of India (RBI), which had previously entertained the possibility of trimming interest rates, now faces a bleak scenario wherein spiralling fuel costs are likely to perpetuate inflationary pressures. From transportation to manufacturing, the escalating costs of fuel ripple across the economy, culminating in heightened consumer prices across an array of goods and services. The stock markets, as ever susceptible to global tremors, have not remained insulated from the escalating conflict. Not even a week ago, on October 3, 2024, the Sensex witnessed a precipitous fall of over 1,700 points, while the Nifty nosedived by 546 points, reflecting investors’ palpable anxiety over the oil-induced inflation spectre. The India VIX, colloquially dubbed the “fear index,” soared by nearly 10%, a stark manifestation of the market’s growing unease. Compounding this turmoil is the exodus of foreign capital from Indian equities, as investors pivot towards ostensibly safer havens such as bonds and gold. This exodus has disproportionately impacted sectors such as real estate, automobiles, energy, and finance, all of which have seen substantial declines across their respective indices. The maritime arteries of India’s trade, particularly through the Red Sea, are now beset by soaring insurance premiums due to the conflict-induced risks. This aggravates shipping costs and jeopardises India’s ability to efficiently export goods to key markets in Europe and North America. With approximately US $120 billion in trade traversing these waters annually, the economic consequences of such disruptions are far from trivial. To be sure, India’s foreign reserves, standing at over $700 billion – a first for the nation, provide some respite in cushioning immediate external shocks. However, should the Middle Eastern conflict persist, it threatens to sap investor confidence and, more alarmingly, derail India’s broader economic trajectory. To sum up, the unfolding Israel-Palestine war has amplified the already considerable vulnerabilities in India’s economic framework. The spectre of surging oil prices, inflationary pressures, stock market volatility, and disrupted trade routes loom large, with the magnitude of their impact hinging largely on the conflict’s duration and the ever-evolving global milieus, with a concurrent fallout on the domestic economic velocity.

The re-election of Donald Trump as the President of the United States in November, 2024 is a geopolitical event with profound implications for India. As the world’s largest democracy, India has enjoyed a multifaceted relationship with the U.S., and Trump’s return to power signals both challenges and opportunities for India’s economic and strategic trajectory. Through a data-driven lens, the impact of Trump’s policies on India’s debt markets, exports, and geopolitical alliances is poised to reverberate across various sectors. Under Trump’s administration, policies favouring tax cuts, deregulation, and increased borrowing could lead to an escalation in U.S. interest rates. India’s bond market, which witnessed an inflow of $18 billion in foreign portfolio investments (FPI) in FY2023, stands to lose its sheen in the face of a more lucrative U.S. market. This shift would trigger significant capital outflows from India, causing a depreciation of the Indian rupee. In 2023, the rupee averaged ₹82 per U.S. dollar, but Trump’s policies could push it closer and closer to ₹85 per dollar, increasing India’s external debt burden, which stood at $682 billion in June 2024. India’s equity market, the fifth largest globally, may encounter volatility with a possible 15-20% correction in sectors heavily reliant on U.S. exports, such as IT and pharmaceuticals. India’s IT sector, which contributes $194 billion in export revenues, could be hit by potential restrictions on H-1B visas – a policy Trump championed during his first term, with a continued thrust in the second term. India’s trade with the U.S., valued at $128 billion in FY23, might face hurdles under Trump’s protectionist stance. However, his continued emphasis on curbing China’s economic hegemony presents an opportunity for India to emerge as a preferred alternative in global supply chains. Sectors such as electronics manufacturing, which grew at a CAGR of 13%  FY23, are likely to benefit from the relocation of U.S. companies out of China to India, especially under initiatives like the Production Linked Incentive (PLI) scheme. Moreover, India’s pharmaceutical exports to the U.S., valued at over $8.7 billion in FY24, are vulnerable to stricter U.S. Food and Drug Administration (FDA) regulations, which could affect the sector’s profitability. A rise in U.S. tariffs could also adversely impact India’s textiles sector, with the US accounting for approximately 27% of India’s total textiles export in 2023. Trump’s re-election reignites the strategic dimension of the U.S.-India relationship, particularly in countering China’s influence in the Indo-Pacific. The Indo-Pacific region, which accounts for 40% of global GDP, remains critical to India’s maritime and defense strategy. With the U.S.-China trade tensions intensifying, India’s role in the Quadrilateral Security Dialogue (Quad) is expected to gain prominence, bolstering defense ties with the U.S. In FY24, India allocated approximately $75 billion to its defence budget, and with U.S. defence exports to India standing at $20 billion since 2008, Trump’s aggressive stance on China could further solidify Indo-U.S. defence collaboration. However, Trump’s unpredictable foreign policy could challenge India’s delicate balance with Russia, especially concerning energy security. Russia accounted for 42% of India’s crude oil imports between January and September 2024, and any pressure from a Trump-led U.S. on India to reduce its ties with Russia may strain bilateral relations. The return of Donald Trump to the White House heralds a period of economic and geopolitical recalibration for India. While the U.S. market offers opportunities for India’s strategic positioning in global trade and defence, protectionist trade measures and financial volatility may pose significant challenges. India must navigate this evolving landscape with astuteness to safeguard its economic interests while bolstering its global standing as a counterweight to China.

Artificial Intelligence (AI) has emerged as a transformative force, influencing sectors ranging from healthcare to finance. Recognising the profound implications of AI, the European Union (EU) has pioneered a comprehensive regulatory framework – the AI Act – to ensure ethical development and deployment of AI technologies, as mentioned in my last article. This particular article examines the EU’s AI Act and assesses its applicability to India, considering the unique socio-economic and technological landscape of the country. It also explores what mechanisms a few other nations have laid out for AI regulation. In July 2024, the EU enacted the AI Act, marking the first major legal framework for AI regulation globally. The Act categorises AI applications based on a set of risk levels mentioned below:   Unacceptable Risk: AI systems that pose significant threats, such as social scoring by governments, are prohibited. High Risk: Applications in critical sectors like healthcare and transportation are subject to stringent requirements, including transparency, accountability, and human oversight. Limited Risk: Certain AI applications, such as chatbots, must adhere to transparency obligations, ensuring users are aware they are interacting with AI. Minimal Risk: Most AI systems, including video games and spam filters, are exempt from regulatory requirements.   The Act also establishes a European Artificial Intelligence Board to oversee implementation and ensure consistent application across member states (European Commission, 2024). India’s engagement with AI regulation has been evolving. In 2018, NITI Aayog, the government’s policy think tank, released the National Strategy for Artificial Intelligence, focusing on sectors like healthcare, agriculture, education, smart cities, and smart mobility. Subsequently, in 2021, NITI Aayog introduced the Principles for Responsible AI, addressing ethical considerations for AI deployment in India. In 2023, the Indian government enacted the Digital Personal Data Protection Act, which addresses some privacy concerns related to AI platforms. The Ministry of Electronics and Information Technology (MeitY) has issued advisories requiring platforms to obtain explicit permission before deploying unreliable AI models and to label AI-generated content, especially those vulnerable to misuse in deepfake technologies. Despite these initiatives, India lacks a comprehensive, AI-specific regulatory framework akin to the EU’s AI Act. The absence of a dedicated AI regulatory body and reliance on existing agencies for AI-related policies indicate a need for a more structured approach. While the EU’s AI Act presents a commendably robust regulatory paradigm, its complete transplantation into the Indian context confronts a constellation of formidable challenges. Foremost among these is India’s vast and heterogeneous populace, which demands a regulatory framework nuanced enough to accommodate regional disparities and the nation’s kaleidoscopic diversity. Moreover, the breakneck pace of AI innovation necessitates a governance structure endowed with the agility to adapt to rapid technological evolution. Equally significant is India’s imperative to cultivate innovation and accelerate economic growth, which may necessitate a more malleable regulatory regime, lest overly rigid rules stifle the burgeoning ecosystem of AI startups. Furthermore, while the Digital Personal Data Protection Act mitigates some privacy concerns, the absence of an overarching and coherent data governance architecture leaves room for improvement in ensuring responsible AI deployment. Finally, the successful enforcement of AI regulations hinges upon India’s ability to bolster its institutional expertise and infrastructure – an endeavour requiring sustained investment and capacity building. The EU’s AI Act represents a pioneering effort in AI regulation, emphasising ethical considerations and public trust. However, India’s unique socio-economic context, technological landscape, and economic priorities necessitate a tailored approach to AI regulation. While adopting the EU model wholesale may not be feasible, India can draw valuable insights from the Act to develop a framework that balances innovation with ethical considerations, ensuring that AI technologies benefit society at large. We must, albeit briefly, also cast our gaze upon the AI regulatory paradigms established across other parts of the globe. It is seldom a misstep to assimilate commendable elements from international frameworks into India’s prospective AI regulatory edifice, whenever it emerges from the labyrinth of deliberation and sees the light of day. The United Kingdom, though yet to unveil a comprehensive AI regulatory framework akin to its continental neighbour, the EU, has made significant strides in this domain. It has instituted the Office for AI, an independent authority within the AI Policy Directorate of the Department for Science, Innovation, and Technology. This body champions a context-sensitive and balanced strategy, leveraging extant sector-specific laws to guide AI governance. In March last year, the UK government unveiled a white paper elucidating its vision for a pro-innovation domestic AI regulatory approach. With over £2.5 billion invested in AI since 2014, Britain stresses the pitfalls of an overzealous and inflexible regulatory posture that risks stifling innovation and impeding AI adoption. Instead, it prioritises regulating AI applications based on their contextual deployment, adopting a judicious calculus of benefits versus risks. To this end, the UK has delineated essential characteristics for its AI regulatory architecture: enabling responsible innovation, maintaining proportionality to avoid undue burdens, fostering trust through risk mitigation, ensuring adaptability to technological evolution, providing clarity for stakeholders, and encouraging collaborative efforts among government, regulators, and industry. These principles aim to regulate AI usage rather than the technology itself, reflecting a nuanced approach. A phased implementation strategy, commencing with regulator discretion and evolving toward statutory obligations, further brings to fore this iterative approach’s adaptability. Indian policymakers can derive two pivotal insights from the British model. First, a context-sensitive, pro-innovation framework can catalyse responsible AI proliferation without hampering innovation, focusing on applications rather than the technology’s architecture. Second, the articulation of cross-sectoral principles, coupled with the flexibility accorded to sector-specific regulators, ensures coherence and dynamism in addressing the evolving AI landscape. Switzerland, in its 2021 position paper, laid the merits of a technology-neutral approach, advocating the judicious adaptation of existing data protection standards. Meanwhile, the United States, despite lacking a unified regulatory framework, boasts over 80 federal guidelines governing AI, reflecting a pragmatic, case-by-case governance ethos that eschews excessive precaution. Canada’s AI and Data Act (AIDA) places a premium on safeguarding human rights, curtailing high-risk AI applications, and promoting responsible innovation – a perspective Indian policymakers would do well to emulate. Intriguingly, Japan’s laissez-faire approach offers yet another paradigm, relying on sector-specific laws such