In our previous column, published on May 25, we argued that the short-term challenge in the wake of the ongoing energy shock is an inability to get two key prices to adjust: Those of energy, historically difficult because of heavy and consistent subsidisation, and the exchange rate because of a repudiation of a long-and successful policy. Could the current crisis also reflect something more fundamental?
One piece of evidence is that the rupee was among the most affected emerging market currencies in the period preceding the war. Figure 1 plots the currency decline of selected countries against the dollar on the y-axis and the extent of intervention by central banks to prevent a downward adjustment.
Since Covid, between January 2022 and February 2026, the rupee declined by over 20 per cent, the highest among comparator countries. And the sting in the tail is that this decline occurred despite central bank sales of over 45 per cent of foreign currency assets, which is also the highest among these countries.
These numbers do not include the Reserve Bank of India’s sizable forward intervention which exceeded $60 billion. Fleeing foreign investors are sending a strong signal at a time of apparently strong growth. Clearly, investors seem to believe that India’s medium-term real growth prospects are less robust than the headline GDP numbers indicate. Why? One engine of long-run growth is labour-intensive manufacturing (including electronics) and India’s performance has been poor in the last 15 years, reflected in a declining global market share from already low levels (Figure 2).
The Trump tariffs and geopolitical uncertainty have only added to that long-term weakness, reinforcing doubts about India being able to exploit the China Plus One opportunity and revive its manufacturing sector. India has managed to reinvigorate its electronics sector on the back of luring Apple but that risks being an isolated case rather than the opening of the floodgate to manufacturing investment. Services have done better but there are mounting concerns about the impact of AI on this successful growth engine.
The iconic companies that drove the early IT boom have been shedding labour. The more recent and dynamic global capability centres seem to specialise in activities, some of which seem eminently replaceable by AI. Of course, even if high-skill services were successful it would not generate inclusive growth. These anxieties about medium-term growth are captured in one key indicator — how much private companies, large and small, actually invest. As Figure 3 shows, this peaked at 17 per cent of GDP in the early 2000s and today is at half that amount share.
There was a brief post-Covid blip but that has faded. Weak private investment is the key problem for the Indian economy and reviving it is the challenge. To its credit, the government has taken action to reduce the costs of doing business. It has enacted a slew of reforms, including labour law simplification, opening up to foreign direct investment (FDI), and above all by negotiating a free trade agreement with the European Union and provisionally agreeing a trade deal with the United States. But investors’ doubts have not been dispelled. Actions that affect the costs of doing business have been taken on paper. The bigger problem is the deeper instincts of the government that affect the risks of doing business on the ground. That is the key distinction to understanding weak private investment.
These instincts include: Tilting the regulatory playing field in favour of a few large corporate houses at the expense of other investors, domestic and foreign; tilting the playing field in favour of some states against others; weaponising the state’s coercive apparatus to target political opponents and businesses; over-zealously and arbitrarily implementing tax laws; and undermining India’s federal decision-making structures.
The government could signal more fundamental change in two ways. First, it must become more open and realistic about acknowledging the ongoing challenges. Second, it must recruit fresh talent, prized for its quality and independence, not loyalty. For instincts to change a pre-requisite is for people to change. Finding competent, credible and fresh interlocutors may be the need of the moment.
(Abhishek Anand is a visiting Fellow, Madras Institute of Development Studies; Josh Felman is principal, JH Consulting; and Arvind Subramanian is senior fellow, Peterson Institute for International Economics. The views are personal)
 "India economy, rupee depreciation, balance of payments, private investment, manufacturing slowdown")