India has recently surpassed the United Kingdom to become the world’s fifth-largest economy, an extraordinary achievement that can be attributed to the visionary leadership of the 1990s. However, a complex narrative of currency challenges and trade imbalances currently threatens the country’s economic stability.
Economic Standing and Currency Dynamics
A comprehensive examination of the global GDP rankings for 2024 reveals the true extent of economic disparity among world powers. The gap between India and the foremost economies is substantial, despite India’s achievement in reaching the fifth position. With a projected GDP of nearly $29 trillion, the United States is the leader, with China following at $18.5 trillion. India’s GDP of $3.94 trillion, while substantial, serves as an illustration of the sizable distance it must traverse in order to compete with the world’s most prosperous economies.
India’s position in global currency markets may be more informative than its GDP rankings. The Indian rupee is only 17th among the world’s most traded currencies, trailing behind currencies from much lesser economies such as New Zealand, despite its economic stature. This disparity between economic scale and currency usage significantly impedes India’s international trade operations.
Trade Imbalances and Import Dependencies
A critical analysis of India’s trade patterns reveals persistent structural challenges. Recent data from the country shows a deficit of $29.7 billion in August 2024, indicating a substantial negative balance of trade. This trend has been particularly alarming over the past five years, with the exception of a fleeting period of positive balance during the COVID-19 lockdown.
The composition of India’s imports underscores its vulnerabilities. In 2023, fuel imports, which are primarily oil, account for 33% of all imports, totaling more than $220 billion. Electrical and electronic equipment comes in at 11%, followed by precious metals and stones at 11%, with gold being the most common. The weakening rupee and these import dependencies complicate the economic environment.
Currency Valuation and International Trade
Consistent depreciation is the narrative of the rupee’s performance in comparison to main currencies. Over the past five years, the rupee has depreciated by approximately 20% in relation to the US dollar, rising from 70 rupees per dollar to over 84. The Chinese yuan has experienced an 18.4% depreciation during the same period, which is even more pronounced.
The analysis of trading partners reveals intricate relationships that further influence currency dynamics. India’s biggest trading partner is China, which maintains a substantial trade imbalance: $15.1 billion in exports and $94 billion in imports. Other significant partners, such as the United States, the United Arab Emirates, Russia, and Saudi Arabia, exhibit comparable patterns.
Inflation Pressures and Economic Implications
Domestic price pressures have begun to reflect the currency’s decline. Recent data indicates that inflation significantly outpaced the central bank’s objective rate of 4%, rising to 5.5% in September 2024. Food inflation has reached 9.2%, which poses substantial challenges for the populace. This is of greater concern.
Future Prospects and Challenges
The rupee’s internationalization has to contend with substantial hurdles. Despite the efforts of India’s finance ministry, the absence of reciprocal trade relationships impedes the rupee’s international trade promotion efforts. India’s trade relationships with countries like Russia exemplify this situation, forcing both nations to use third-country currencies like the Chinese yuan and UAE dirham for all transactions. To be blunt, the Indian currency is essentially undesirable to deal with.
India’s services sector presents a promising opportunity, given the country’s persistent surplus in services trade. However, the $240 billion physical goods deficit significantly outweighs the $162 billion services surplus, leading to an overall trade deficit of $78 billion. Simply put, India has been earning substantially from the services sector for multiple decades, but its manufacturing push has failed.
What to Do?
India’s economic trajectory is unique as it blends robust economic growth and progress with persistent challenges related to its currency and commerce. Dealing with multiple pressing concerns is critical for growth.
To become less reliant on a limited variety of goods and services, the country should first work on diversifying its export portfolio. Second, it is critical to work hard to reduce reliance on imports, particularly in key areas such as energy and technology. Third, it is critical to strengthen the currency by implementing sound monetary policy and managing foreign exchange. Fourth, strengthening countries’ economic ties through strategic alliances and trade agreements is crucial for long-term success.
The success of these programs will have a considerable impact on India’s ability to transform its sizable economy into a viable financial force with a stable currency. The rupee appears to be under further pressure based on current developments. Inaction has the capacity to affect inflation and the country’s economic progress.