In today’s globalized world, geopolitical risks are increasingly shaping the economic landscape of nations. For a growing economy like India, these risks have far-reaching implications, influencing everything from trade to investment, energy costs, and overall economic stability. As one of the largest and fastest-growing economies, India is particularly vulnerable to shifts in global political dynamics. In this blog, we’ll explore how specific geopolitical risks are currently impacting India’s economy and highlight the challenges and opportunities India faces.

 

Ripple Effects of the U.S.-China Trade War on India

Global trade has been significantly impacted in recent years by geopolitical tensions and the COVID-19 pandemic, with the U.S.-China trade war being a key example. The tariffs between the two largest economies have forced companies to diversify supply chains, though this has not always benefited India. On the positive side, the U.S. customs duties on Chinese imports have opened opportunities for Indian exporters to the American market, as higher prices on Chinese goods make space for Indian products. However, India must also address the challenge of cheap Chinese goods flooding its market, which threatens domestic manufacturing.

There is concern that with the European Union potentially raising tariffs on Chinese electric vehicle imports, low-cost EVs could be redirected to India, undermining local businesses. Similarly, Chinese products like lithium-ion batteries and semiconductors facing U.S. tariffs might be diverted to India. With China being India’s largest trading partner, accounting for $101.7 billion in imports in FY24, Indian authorities need to be vigilant and act strategically to protect the domestic market while seizing export opportunities.

 

Russia-Ukraine Crisis Impact

The Russia-Ukraine crisis has significantly impacted Indian businesses, causing supply chain disruptions, increased input costs, and reduced export demand. The conflict has driven up commodity prices, especially wheat and energy, leading to inflationary pressures. It has also weakened the rupee, raised import costs and reduced global competitiveness. With heightened uncertainty and volatility in the global economy, businesses face challenges in planning and investment. The war’s long-term effects could reshape Indian business strategies, requiring adaptation for sustained success in a post-crisis world.

 

Investment Sentiment and Foreign Capital

The escalating geopolitical tensions between the U.S. and China present both opportunities and challenges for India’s economic interests. As China’s economic slowdown continues and the U.S. moves to decouple its supply chains from China, India has the chance to attract some of the foreign investment being redirected. However, India must navigate its own diplomatic issues, particularly its ongoing border disputes with China, to ensure that investor confidence remains high. Balancing these opportunities with potential geopolitical risks will be crucial for India’s economic growth.

 

Rising Energy Costs and Oil Price Fluctuations

India’s dependence on imported oil makes it highly sensitive to global energy price fluctuations, especially amid ongoing geopolitical tensions. Higher energy prices contribute to the increased cost of living and production, impacting both consumers and businesses, particularly in sectors like transportation and manufacturing.  While India is accelerating its transition to renewable energy, its dependence on imported oil continues to expose it to global price instability, emphasizing the need for strategic energy diversification.

The Russia-Ukraine war has resulted in major disruptions in global oil markets. Following the conflict, Western countries have imposed sanctions on Russia, one of the world’s largest oil producers. While India has capitalized on discounted Russian oil, its energy security remains precarious. The rise in global oil prices—following sanctions and disruptions in oil supply chains—has had a cascading effect on inflation, further straining the Indian economy.

 

Inflationary Pressures

The rise in global commodity prices has put significant pressure on India’s inflation rate. Despite the Reserve Bank of India (RBI) raising interest rates to control inflation, rising food and fuel prices continue to drive up the cost of living, affecting low- and middle-income households the most. Rural areas, dependent on agriculture, are particularly vulnerable to these inflationary shocks.

The January 2025 Consumer Price Index (CPI) data show a slightly positive trend, with both rural and urban inflation rates decreasing, especially in food prices. While sectors like housing, education, and healthcare continue to see price increases, they have been somewhat contained. With a year-on-year CPI of 4.31%, inflation seems to be stabilizing, offering some relief. However, persistent inflation in housing and healthcare highlights the need for ongoing policy efforts to manage inflation and maintain affordability for all.

 

Rupee Depreciation

The Indian rupee is expected to become more volatile, which faces persistent downward pressure from a strong U.S. dollar. The rupee has depreciated by 3% in 2024 and 2% in 2025, with forecasts predicting further weakening. Analysts cite U.S. tariff threats, rising crude oil prices, and foreign investor sell-offs as key factors.

The RBI has allowed a gradual depreciation, though this is contributing to inflationary pressures and slowing economic growth. A weaker rupee benefits exports but challenges remain due to structural inefficiencies and higher import costs, particularly in sectors like automobiles and crude oil. The depreciating rupee also raises concerns about India’s economic stability, with slowing rural demand and external factors like a stronger U.S. economy and geopolitical tensions further complicating the outlook.

 

Future Outlook

Geopolitical risks, from trade wars to regional security tensions, are reshaping India’s economic landscape in profound ways. While India’s economy continues to grow, these external risks can create significant headwinds.

India’s ability to manage and adapt to these global risks largely depends on its domestic policies. The government has introduced initiatives such as the “Atmanirbhar Bharat” (self-reliant India) campaign to boost domestic manufacturing and reduce dependence on foreign imports, particularly in sectors like defence, technology, and critical infrastructure. However, these efforts take time to materialize and face challenges in terms of implementation.

The Reserve Bank of India (RBI) has also taken steps to curb inflation and stabilize the economy by raising interest rates. However, with inflation still a major concern, the government may need to take additional fiscal measures to shield consumers from rising prices, particularly for essential goods. As India faces these challenges, its ability to remain resilient and agile will determine its economic future in an increasingly volatile global environment.