India - Bhutan Customs Union :- A Possible Checkmate Move In Himalayas

India - Bhutan relations

Context -

South Asia is one of the most populated regions of the earth. The sub contiental region consists of countries like India, Pakistan, Bangladesh, Bhutan, Nepal, Myanmar, Sri Lanka, Maldives & even China to a geographical extent. The total population of this sub continental region, is around 2.2 billion, which is around 1/3rd of the world's population. Coming from this region, has also resulted in a lot of geopolitical competition between the countries, which has often resulted in tense millitary faceoffs between these nations. One of the 21st century sub regional geopolitical rivalry driving the South Asian Indian subcontinent is undoubtedly between India & China.

One of the tense battlegrounds in this rivalry is in Bhutan. Bhutan and North East India especially Arunachal Pradesh has been a tense battleground between the 2 Asian supergiants. Over the past years, tense faceoffs have occured in Doklam in 2017, the building of dams over Brahmaputra Mahabahu river by both millitary powers, Galwan faceoff of 2020, banning of Chinese apps in 2020 & claims over Indian state of Arunachal Pradesh by China. The one country, that has recieved a lot of attention, between this geopolitical tug of war is Bhutan. 

India - Bhutan Relations background :

Bhutan is a peculiar nation state and is the textbook definition of a country, which is sensitive to its own culture & does not involve itself massively into global affairs of the world. Bhutan enjoys the status as a protected state to India, under a treaty signed between the Kingdom of Bhutan & British India back in 1910, which has still continued today. This had happened after the Chinese expedition of Tibet in 1910 and post the 1962 India - China war which also occured due to the Tibetan issue, between the 2 countries, the ties between India and the Buddhist Himalayan kingdom have further deepened. In the past years, Bhutan's king has also visited many Indian states routinely.

However, since 1972 the countries had a massive change in relationship, including a review of the friendship treaty of 2007 which allowed Bhutan to decide on its own arms imports & Bhutan also ended up joining the UN in 1972 in this time. Prime Minister Narendra Modi was also honored with the Order of Druk Gyalpo in 2025, which shows that despite changes in bilateral relations, the relationship between the 2 countries, extends more than just economic & millitary benefits. The list of visits between different Indian delegations like that of president, prime minister, chief ministers etc.can be found here. 

Trade relations have prospered between the countries in this period from 1972 onwards. The India - Bhutan, Agreement on Trade & Commerce established a free trade framework that laid the institutional foundation for bilateral trade. The overall trade between these 2 countries, rose to around US$ 1,777.44 million which is more than triple since 2014.India due to its superior economic size, enjoys a trade surplus with Bhutan. Since, 2014, India - Bhutan has had a CAGR of around 13.9%. The biggest trade contributor between these countries, is undoubtedly hydropower & infrastructure funding, which has led to a solid economic growth in both these countries. For starters, Bhutan, also grew at 4% in FY 2024, which is impressive given the troubled geopolitical waters of the Indian subcontinent since the coronavirus pandemic.

Customs Union Idea - 

All of this coupled with India - Bhutan friendship treaty of 1949, where Bhutan has allowed India to "guide" its foreign policy creates an opening which many Indian diplomats & bureaucrats are not thinking about. This pertains to formalising the India - Bhutan relationship into a customs union, which will bring in massive economic & diplomatic benefits to both the countries. 

Now, for starters, customs union is a trade agreement between countries that eliminates internal tariffs on goods & establishes a common external tariff for imports from non member countries. The customs union promotes free trade between the members while adopting a uniform policy against external countries. Countries, usually adopt this policy  to improve their economic standing while teaming up with "like minded" parties to corner a bigger power. In a customs union, multiple things come under the agreement, like a common currency, common trade policy, harmonized indirect tax mechanisms amongst other features.

Now, maybe customs union can be seen as a hindrance to multilateral trading system, however, this system has been widely practiced by many countries. The best example of customs union is between Switzerland & Leichtenstein, which has a single currency (swiss franc) & has adopted a common trade policy since many decades now.

In fact, the economic relations between India & Bhutan, has been said to be a part of quasi customs union, as, Bhutan's 90% trade is with the Republic of India, Indian rupee is a legal tender in Bhutan, BHIM UPI is accepted in Bhutan, the only thing missing between the 2 countries is the presence of a unified trade policy & a harmonized VAT system which can be a big diplomatic success for India. Given, India has been on a spree of signing free trade agreements with different countries over the past 3 years with major examples being - Australia, New Zealand, the USA (tentatively), UK, EFTA, EU & UAE being the best mirror of the FTAs that India has signed.

Furthermore, given, the historical proximity  between India & Bhutan, along with the similar cultural proximity with respect to trans Himalayan Buddhism, a proper customs union arrangement will also be accepted sans hostility between the 2 countries. Additionally, geographically, Bhutan can act as a critical refuelling point for Indian armed forces, which can also pave way for additional infrastructure project in the Himalayan country, which can not only prove to be a startegic masterstroke for India but would also enhance connectivity between mainland India & Northeast India, while diversifying the startegic importance from the critical "Chicken Neck" coridoor. Given, that India guides Bhutan in its foreign policy decisions and trains the Royal Bhutan Army via the Indian Millitary Training Team, a customs union formalisation should not be a major challenge

Also, given, that, Bhutan has also recently introduced a single taxation system of VAT in 2022, while replacing Sales Tax & Customs Duty. Bhutan adopting the GST regime of India with some minor changes should also not be a major bottleneck, between the 2 neighbours. Furthermore, to incentivise & deepen  the bilateral relations, between both the countries, Bhutan must be advertised as a tourism spot, by the Indian government & content creators which can prove to be a massive gamechanger for beautiful Bhutan's economy, where tourism contributes to around 6% of the overall GDP.

Furthermore, in a customs union agreement, agricultural export tariffs from Bhutan can be completely slashed to zero, which will allow for controlled competition for products like rice, horticulture & wheat in certain states of Northeast India, which will allow for major productivity boost for India's agricultural sector. Finally, Bhutan's cricket team should be allowed to be a part of India's domestic system like Ranji Trophy, SMAT etc. which will improve the sporting relations between the countries, also as a goodwill gesture, the Faridabad cricket ground in Haryana which has been used for very few matches can be given to Bhutan under a revenue sharing agreement as a home ground, this will be seen as winning over critical optics for the country.

Formalising, a customs union agreement between India & Bhutan, can bring in multiple optical victories for India. India has long been seen as the king of tariffs and the upgrade from a quasi customs union to customs union, will allow India to negotiate more confidently in the plurilateral agreements at conferences such as the MC - 14, which will be a major gamechanger for multiple Indian sectors. A customs union agreement between India & Bhutan, will additionally allow the RBI to internationalise the rupee which is already a legal tender in Bhutan. Such an agreeent will also help, India to strengthen the rupee in today's super charged currency markets, while protecting the Ngulrum from further volatile changes in the currency markets. In fact, India can assist, Bhutan in developing as a financial tax heaven like how Leichtenstein is for Switzerland in today's day & time. India can in fact, even try to lure, international organisations from cities like Geneva, by using Bhutan & Northeast India as a front. Such a customs agreement will further cement India's Act East policy, which has been in existence since 1990s.

Overall, a customs union between the 2 countries is a win - win agreement for the both and the Indian establishment needs to look at this seriously, not only from a trade perspective but also from a perspective of national security, economic security & diplomacy, which is very crucial for the 21st century for the developmental journey of South Asia. This kind of customs union formalisation, will also checkmate the ambitions of an expansionist China & an unpredictable USA in the great long game of Himalayas.

Sectors Which Can Be Big Winners From Budget 2026

The Indian union budget 2026 is around the corner and as always, the talks are on about which sectors can benefit massively from the upcoming budget. The budget in India, unlike other countries is still very important, because, it is one of the mechanisms that links monetary policy to fiscal policy in the country. This article seeks to analyse, which are all the sectors that can benefit from the upcoming union budget in the country.

(1) Trade sector - One of the sectors,which should logically benefit is the trade sector of India. Trade in the country has been hit hard, with multiple geopolitical shifts that have occured in the past year and with the threat of 500% Trump tariffs looming high. Coinicidentally, this sector has also performed well in the past year, while posting decent trade surpluses and closing out multiple trade deals like the India - Oman FTA & India - NZ FTA, while having a good pace of progress on the India - EU FTA. However, given that USA is India's biggest trading partner, measures like - ECLGS for the exporters, along with possible hikes in customs duty over agricultural imports which has been a bone of contention between India & USA in ongoing trade talks, along with increased budget allocations for the INSTC, restarting of ITS service which has  been a demand from many & maybe Chabahar Port can be the big reforms that the trade sector can see in this particular budget. Many articles have already been authored over this blog for this particular sector.

Its critical for the government to also invest big in the trade sector to first stabilise the rupee's constant depriciation against almost all the major trading currencies of the world & to also assuage concerns of the constant FII outflow which has occured in the past 3 quarters, which is concerning for a country like India, which still requires foreign capital to aid its development.

(2) Dairy sector - Dairy sector in the NSE is led by an unlisted AMUL which has increased its brand presence in USA & EU countries over the past year. Dairy is an interesting sector for India, as per the recent comments by NDDB chief Manesh Shah, India is poised to produce 33% of world's dairy needs by the next decade and to the sector's credit, India is already the largest producer of dairy related products in the world. In fact, the India - New Zealand FTA was criticised recently by ministers in New Zealand, primarily because, India refused to give any concessions over dairy industry which is India's direct competitor. The sector contributes around 4% to India's 4.5 trillion$ GDP & supports 80 million rural households, which is also a massive figure considering India's agricultural population. 

The output of the dairy industry shows that, it remains a productive agricultural industry in the country. Dairy productivity in the sector is really low when compared to other countries like the USA, which this union budget should ideally try to introduce mechanisation measures for this particular industry. Increased allocations for schemes like Rashtriya Gokul Mission can also be thought of in this particular budget. The budget for this ministry in the last 3 budgets was roughly around 4000 crore INR, which can see an increase in this particular budget. Marketing related reforms for the smaller dairy companies or schemes like ECGLS for the weaker dairy companies can also be thought about in this particular budget.

Additional reforms in this sector can be of, employing young professionals, consultants along with probably solving the decades long issue of double regulation for cooperative banks, which are increasingly at a risk of being insolvent, possibly under the RBI, which can bring much needed benefit for this sector which can be a sunrise sector for the country.

(3) Defence - Defence is all set to be  the biggest winner in this union budget. The past year, India has faced multiple geopolitical challenges. The Indian Air force led Operation Sindoor, the constant commissioning of new ships by the Indian Navy & the increasing need for modernizing the armed forces is one of the biggest reasons why the capital expenditure over this sector can be around 10 lakh INR for this particular year. The bigger reform in an ideal world, would be however, to reduce the pensions component for the defence ministry which subsumes 40% of the budget every year, possibly introducing the UPS scheme for the retired officials, can help in better managing the fiscal resources, given the time has come to increasingly modernize the 3 forces.

Given, India also aims to get around 10% of defence exports in the global arms market by 2030, possible reforms can be - reintroducing defence coridoors in states like Madhya Pradesh, Uttar Pradesh, Rajasthan, Bihar, Odisha & Andhra Pradesh, which are in dire need of expanding industrial manufacturing in their states, this reform used to be a highlight in union budgets up until 2022, but since then has gone quite in the last 4 budgets in the country.

Additional, reforms in this sector can include - home production of nuclear submarines post the SHANTI bill, home production of fighter jets, concluding deals like Rafael jets and FII related reforms with respect to the IDEX program can be big winners. Furthermore, we can see an increase in budget for hiring Young professionals & consulants for this sector.

If possible, the sector must also look to increase the presence of defence related think tanks in the country to multiple cities, instead of being concentrated only in the India Habitat Centre of Lutyens Delhi, which has become synonymous of control by some retired bureaucrats who are not even graduates in defence related subjects (economics or international relations) & whose only shot to fame is clearing an exam almost 50 years ago. Such kind of control disincentivizes youngsters to undertake any productive research undertaken in this field. This was particularly clear, as seen during the aftermath of Operation Sindoor where it took almost a year to convey to the world that India had won decisively during the war.

The possible reform can be to increase offices of organisations like RIS, MP - IDSA & giving serious financial impetus to defence related magazines in India in the other cities like - Hyderabad, Bengaluru, Mumbai and Ahmedabad and inviting foreign think tanks to set up their offices outside the confines of Lutyens.

(4) Urban Development - Urban development must be a big winner in this budget, given that urban areas in the country have consistently voted in the favour of BJP. Given, the need of reforms in urban governance, the first logical step can be to increase the budget for the sector upto Rs. 15,000 crore. The urban governance area really needs massive infrastructure push, along with  converting tier 2 cities into tier 1 cities, improving satellite cities in the country, rebirthing the Smart Cities mission/AMRUT Bharat scheme/ Swach Bharat scheme & financially supporting states like Andhra Pradesh, Chhattisgarh & Maharashtra, who are investing massively in creating new cities of - Amravati, Nava Raipur & Greater Mumbai area. The government, must also adopt 4, tier 3 cities namely - Bastar, Dimapur, Warangal & Barmer and develop them as model cities in the country.

This would help states to take a conscious decision to upgrade cities can help in the country achieve development priorities. A big reform can be to give greater share of funds via schemes to the states investing in such projects. The metro expansion, bullet train expansion, inland ports & RERA related reforms can also be possible gamechangers for urban development in the country.

(5) Unconventional Sectors - They are a few unconventional sectors which can also benefit from the budget, namely - nuclear energy, insurance & cartography. Nuclear energy has been identified as a big sector which can secure Indian energy needs & the liberalisation done in cartography back in 2023, can also see big investments this time around. Insurance sector can see a big change, because the country has a lot of uninsured people and just making it compulsory before the census can see massive valuations in this sector.

Additionally, the mission to eradicate manual scavenging, covering gig workers under PMJAY scheme & TB can be bigger social schemes which can turn around the lives of people qualitatively.

Overall, the budget presents an opportunity for development for many sectors and can qualitatively change the lives of people for the better.

Indian Rupee As A Regional Hegemon - A Realistic Possibility Or A Far Fetched Dream:- Economic Analysis

Courtesy :- Marketcalls

Introduction -

Indian Rupee has been at a center of debate for many years now. The Indian rupee is the official currency of the fourth largest economy of the world. Indian rupee represents a history of monetary policy and fiscal policy reforms. For many of the starters, Indian rupee as a currency came into existence in the early 16th century and since then has undergone many changes. Today, the rupee stands at an interesting juncture where the Narendra Modi government is looking to internationalise the rupee through interesting means like the UPI, opening of vostro accounts in Russian banks etc. can the efforts of seeing the INR as a regional hegemon a realistic possibility or is it a far fetched imagination, is what the article tries to analyse today.

Confidence behind rupee internationalisation decisions -

Internalisation of the rupee has been a constant chatter in the monetary and fiscal policy of circles since the coronavirus pandemic, where the Indian economy showed massive economic resilience by lodging growth rates which have helped it to be the world's fastest economy since the past 5-6 years.

Even, during the past 4 years, since the start of the Russia - Ukraine war, which has crippled major european economies, including EU, whose overall growth rate for Q2 of FY 2025 was as low as 1.4%, India has maintained an average growth rate of 7.2% which shows that the Indian domestic demand, exports amongst the reform oriented policies are actually helping the economy emerge from the shadows. This is a smart step as India's merchandise trade has constantly increased 

Another reason, why this growth rate becomes important is because, over the past 4 years, the South Asian region has been a geopolitical pandora box. The major changes in this region have been:- Brutal coronavirus pandemic, Taliban takeover of Afghanistan which occured in 2021, Pakistan's ever volatile domestic policies and the dictatorial ironclad policies of the millitary, Sri Lanka's economic crisis which overthrew the Rajpaksha brothers, Nepal deposing off the entire political system dominated by the Communists & Nepal Congress, Bangladesh seeing anti Awami League protests along with the installation of an "interim" PM Md. Yunus by the West who is hestitant in conducting elections, India's successful Operation Sindoor against Pakistan post the Pahalgam terrorist attacks have been some of the events that could have shocked even the world's most resilient economies and India itself has seen many motivated protests.

In the backdrop of so many protests, India maintaining strong growth rate should be rated by the economists as the "21st century miracle".

Hence, the growth that India has recorded over the past 4 years is the credit to major reforms that the country has consistently seen since the 1990s and more specifically post the 2016 demonetisation. Factors like smart monetary policies of the RBI, political stability in India, strong international exports, near elimination of absolute poverty from the country etc. have aided this growth journey. This is the prime reason why the Government of India & RBI are confident enough that now is the right time to internationalise the rupee. The 2 graphs below show about India's external sector in detail.

Source: BIS

 

Source  : BIS

Open Macro logic-

The RBI has taken massive steps in this regard to internationalise the INR over the past few years. One of the steps taken is to increase the rupee invoicing by the exporters. Invoicing in currency is a central force for the trading patterns noticed in the country. The invoicing framework system in open macroeconomics has multiple core intuitions.

Trade prices are set up in 3 broad ways, namely :- Producer currency pricing where an exporter invoices in its own currency. Exchange rate movements affect foreign prices, more than exporter revenues. This tactic or startegy though is rare as to be a PCP country, financial deepening, credible currencies & strongman geopolitical startegies are required. Hence this mechanism is used majorly by countries like - Japan, USA, Switzerland amongst others. 

Local currency pricing where the exporter invoices in importer's currency, where exchange rate movements affect exporter revenues over foreign prices. This is a tactic leading to low exchange rate pass through to import prices and muted expenditure. This mechanism is used majorly by countries like Canada & Australia. 

The third mechanism is Dominant currency pricing, most global trade is invoiced in third currency mainly USD today. The reason countries do so, is because it helps in minimising transaction costs, hedging constraints & pricing risk, which in turn causes exchange rate movements of non dominant currencies to have weak effects on trade volumes, but has strong effects on domestic inflation. Hence, the cost of any country importing inflation in a DCP mechanism, especially in the backdrop of geopolitical tensions or interest rate changes is quite real and does not help in insulating the economy. This can be considered as a reason why developing countries over the decades have adopted a DCP mechanism and have seen usually high inflation rates in period of high growth rates.

As. T.Rabi Shankar, pointed out in one of the BISs research, internationalising the rupee would help reduce dependence on foreign exchange reserves & project external stability. He noted in his speech, that, forex reserves of a country using DCP mechanism is borrowed funds. Banks and corporate incur external debt at market rates which are then invested in Government securities issued by advanced economies (AEs). The rate at which external debt is incurred issubstantially higher than the return on reserves. 

In layman's language, India is trying to move from the third mechanism to the first mechanism, by takingh many interesting steps.

Steps for rupee as an international currency -

Vision IAS

The RBI in this regard has taken serious steps over the past 4 years to make rupee as an international currency, as the one factor that keeps away exporters from going away from DCP to PCP is committment based monetary policy that the RBI has adopted ever since the pandemic. The one logical step is, rupee denominated trade settlement where exports have been facilitated in INR.

This has been facilitated even in by easing FEMA regulations when Open INR accounts have been launched for settling all transactions with Indian residents in abroad branches of authorised banks, this is for foreigners. Any NRI also can open their account in special vostro account, on which an excellent explanation can be found here. 

The second step, taken by the RBI & GoI is to expand the reach of UPI services in multiple countries. Today, UPI is a payment mechanism which obviously covers 40%  of the world's digital transactions per minute, but this has been expanded in countries like :- UAE, Singapore, Bhutan, Sri Lanka, France & Mauritius. The rollout does help in expanding the reach of INR in terms of invoicing and maybe even in attracting FIIs but does not help the cause of making INR a regional hegemon, as there needs to be an integration with the financial markets of these countries, which India is currently lacking.

RBI has signed MoUs with other central banks to promote local currency settlement, including rupee. Trade agreements with partners like Sri Lanka designate INR as a foreign currency. Cross border lending in INR has also started.The RBI’s Strategic Action Plan 2024–25 includes allowing persons resident outside India (PROI) to open INR accounts abroad.

All these steps can be considered as baby steps which the RBI has undertaken so far and since the decisions have barely come into force a few years ago, not a lot of analysis can be realistically done in this regard.

Future roadmap -

The success of these steps by the RBI, depend upon a host of factors which not a lot of economists have explicitly mentioned about in the past. The first factor or maybe, risk is that, as noted by T. Rabi Shankar in his speech at BIS in 2022, that India is capital deficient country & needs foreign capital to fund its growth, at this time making rupee as an international currency can be a risk which ends up losing foreign capital. The reason being so, is that, external shocks can become very prudent on the INR and the RBI would need a separate focus wing to stabilise the INR in such circumstances.

The core of this problem is that India is a labor surplus country, while being short on capital, the only possible step in this case is to do 2 things simultaneously - (1) Capital expenditure by the GoI must be increased to around 15 lakh crore in FY 2026 and bring in policies which promotes capital heavy industries & goods like rare earths, semiconductors, AI amongst others. Furthermore, private capital must step in to increase the domestic capital market (2) India must also try to attract massive FDIs in capital intensive industries which generate employment, given the labor surplus in the country, the states can very well absorb the educated youngsters into these capital intensive industries which should set up shop in the country. Furthermore, Startup India & Standup India schemes should promote capital intensive businesses and startups. The reason, why capital intensivity of a country is critical can be found in the economic growth of China, only country which can be compared to Indian economy, had the majorly "failed" cultural revolution of 1960s but the home backyard steel production model, actually helped the country to launch their much famed 1978 reforms which really helped their economy.

The second, factor underrated but very critical in what decides a currency being a regional hegemon is, geopolitical muscle power & soft power. In the inter war years, where different currencies were ruling the roost in many different countries with their own areas of influence, the major reason was imperialism and the biggest benefactor of this was the UK, whose GB Pound Sterling was official currency of as many as 70 years, this helped them to borrow more from treasury bonds. The USA , though not an imperial power, followed the policy of "gunboat" diplomacy, which helped them maintain dollar supremacy in the fiscal markets of Latin America etc.

Now, India cant follow "gunboat" diplomacy, as the USA has done over the years, the main innovation can be done in the FTAs that India has been signing recently, the countries like Oman wanting a FTA with India, must be asked to do a portion of trade (preferably of the largest net trading commodity) in INR, which will increase the net inflows of INR into the country. This can be a start, however, India should also carry out massive defence reforms like - producing more fighter engine jets, stealth submarines, using Indian Navy as a diplomatic arm in troubled Indian waters, increasing nuclear warheads, fulfilling demands like Ahir Regiment/Bengal regiment more reforms like SHANTI bill are necessary in this field. India should also try to make the neighbourhood as its own political "backyard" both in terms of financial & non financial means.

Conclusion -

Later on, India should issue treasury bonds to countries with which India enjoys good relations, possible countries include - Russian Federation, Liechenstein, Afghanistan, Israel, Iran, Ethiopia, Brunei, Maldives, Mauritius, Seychelles, Cayman Islands, Fiji, Papua New Guinea, Saudi Arabia, UAE, Sri Lanka, Nepal, Bhutan, Phillipines & South Africa to name a few. India must also try  to attract FDIs from major countries like Singapore & UAE in INR, instead of US$ which would also allow for capital injection at a cheaper rates. Even timely completion of trade routes like IMEEC & INSTC can help the country massively in this area for India.

Finally, the policy of rupee internationalisation and making it as a regional hegemon currency in troubled geopolitical times, must not be a mere footnote and must be a constant policy decisions which also requires strong fiscal & monetary policy coordination, in which India enjoys a historic stronghold. If India, is indeed able to internationalise the rupee & make it even a regional hegemon, it would be considered as a massive comeback for a country which a decade ago launched demonetisation just to battle counterfeits in its economy. 

Will RBI Trade Independent Monetary Policy To Stabilise The Rupee :- Impossible Trilemma Analysis

INR representation 

Introduction -

Recently, the Indian Rupee traded at 90.58 to the US$, which has weakened the Indian rupee significantly in the global forex markets. In fact, in the last 5 years itself, since the pandemic times, the Indian rupee has significantly depriciated against the US$ from 72 INR to 90 INR, which is a massive 20% in the last few years. Optimists, may point it as a trend that the Indian rupee has observed only against the USA, as USA's inflation has been imported into its currency and particularly, that the American economy has struggled since the pandemic, recording growth rates below its expectations. While, the current Trump tariffs on India, high interest rates in the asset markets are credited for such a weak performance of the Indian rupee against the US$, however, there are some macroeconomic fundamentals, which India is getting it wrong, which is reflected in the currency markets.

For starters, the value of a country's currency in forex markets is determined by factors like - inflation rate, interest rate, trade, net capital inflows amongst others, factors which are heavily linked with the monetary policy that the country takes. Here is where the Trilemma theory comes into play in international macroeconomics.

USD to INR

The Impossible Trilemma Theory -

The trilemma theory is central towards the working of macroeconomics in global markets. The trilemma theory basically says, that, at no point of time, a country can maintain - fixed exchange rates, independent monetary policy and free capital flows. In the ideal situation, a country can maintain only 2 of the 3  conditions, for example - during the gold standard era from 1880s to 1920s, countries maintained free capital flows and fixed exchange rates, but the monetary policies were not strong at all. Similarly, the Bretton Woods system, envisaged a system of independent monetary policies and fixed exchange rates, while curbing capital flows. Now these systems have been impacted massively, by host of factors one of them being geopolitical shocks.

This theory has also applied massively to the Indian context, for example, in the pre 1991 era, India exercised a policy of fixed exchange rates and independent monetary policy, while convinently missing out of international capital flows, while in the post 1991 reforms, India prioritized capital flows and independent monetary policies, despite facing massive economic shocks, which has resulted in India, not keeping a committment towards a peg and has virtually adopted a flexible or a floating exchange rates. This pattern can be seen, more pronounced since the 2000s, which has allowed India to gain massive access to global capital markets and keep inflation in check.

Now, economics 101, suggests that, a devalued currency, should lead to rise in trade markets which should be reflected in the currency markets of the country, however, the rising trade gaps, precisely due to higher import bills due to higher depriciation of INR,has resulted in increasing trade gaps, which is actually a worrying sign for the Indian economy.

INR performance with respect to other currencies -

This trend is worrysome, when compared even to the other currencies namely - the Euro, Swiss Franc, Japanese Yen, Russian Rouble, Britian Pound and Chinese Remnenbi, which are traded massively in the forex markets. The attached graph shows how the rupee has traded against these currencies, over the past 5 years.

A comparative graph of 6 non US$ currencies

As it can be seen from the above graph, almost all the currencies, barring the Japanese Yen have appreciated against the Indian rupee, which means that there is more to the eye than what is being predicted by "experts". The growth rates, average interest rate, inflation rates and trade deficits of all the countries has been given in the next table, to understand a better picture of what's happening with the Indian Rupee at the international market. Even the Russian rouble, has appreciated by a small margin in the last 5 years, despite the India - Russia petroleum trade going to an all time high. The same can be said, even with the currency markets of Switzerland, with whom India has signed an EFTA this year or with EU where, India has progressed ahead with the FTA or with the British Pound Sterling where India has concluded the long pending FTA this year. These factors again point to reasons apart from trade, which is resulting in the continued and to an extent the worrying trend of rupee weakening in the forex markets.

RBI's Powerplay -

The table below, shows the average interest rate in India, the average inflation rate in India, trade deficit as percentage of GDP, the net investments as percentage of GDP and average GDP growth sourced from the International Monetary Fund's World Economic Outlook report. The average data is taken from 2020 onwards. The last 5 years has been taken into account, as, the world economy has experienced significant economic shocks like - the cornavirus pandemic, the parallel expansion of BRICS, Russia Ukraine war, tariff  wars, Taliban's takeover of Afghanistan and the Middle East geopolitical crisis. In this context, it becomes important to see what kind of role did the central banks of these countries played, as majority of these countries, saw the political power of the incumbents being reduced massively.

For example:- In India, the highly popular PM Narendra Modi though is serving his third term, but had to depend on allies to form the central government post 2024 election, which has been separately analysed electorally by me, USA saw 2 different election results in 2 presidential elections in this term, Japan - EU - UK have become absolute symbols of how political instability actually looks like where dramatic events like the assasination of Shinzo Abe or the return of labor party happened in the UK after years or the different corruption scandals that hurt EU during this phase, Brazil has also seen the return of Lula da Silva and Switzerland, has had multiple referendums passed during these 5 years. In this background, it can be safely said, that the central banks of these countries have somehow managed to become the key drivers of economic growth in their countries.

Country	Avg Interest Rate (%)	Avg Inflation (%)	Current Account (% of GDP)	Net investment  (% of GDP)	Average GDP growth
India	5.2	5.4	-1.6	4.2	6.2
USA	3.6	4.2	-3.2	7.8	2.2
China	3.1	2.1	+1.4	2.5	4.8
Japan	0.1	1.2	+2.9	3.6	1.1
EU	1.5	3.1	+2.2	4.5	1.4
UK	2.8	3.7	-4.0	9.2	1.3
Brazil	9.3	6.0	-1.3	5.1	2.4
Switzerland	0.4	1.4	+4.6	6.0	1.6

As it can be seen from the above table, the average central bank interest rate in India has been at 5.2% which is almost 1.6% percentage points higher than the Fed. The average inflation rate in India over the past 5 years has been at 5.4%, which means the RBI's policy has transmitted quite successfully to the Indian economy over the past 5 years. From, the first 2 columns, it can be very safely concluded, that the RBI pursued a committment based monetary policy, towards inflation control, which proved to be successful, as reflected in the average GDP growth that the country has recorded which is almost 2% points higher than China and has stabilised inflation well, which was critical during the above mentioned period as the country could have rapidly spiralled into a zone of hyperinflation, which is not good for the Indian economy.

However, too much independent autonomy for the RBI has ended up hurting the net investment, as India trails economies like - USA, UK, Brazil and Switzerland, in attracting capital inflows (both FDI & FII), which is majorly because of the high interest rates. Monetary tightening usually, has an inverse impact on net investments as, investing in the country becomes expensive with low yields which acts as a point of negative perception for the global capital markets. In this regard, from the above table, it can be interpreted that, those countries who have had lower interest rates have ended up benefitting in terms of net capital inflows which is even more critical in today's era of open macroeconomics, where concepts like global supply chains have picked up steam.

The higher growth rates of Indian economy can be explained due to the other factors like - good management of economy during the pandemic, good diplomatic practices, high capital expenditure and an uptick in domestic consumption, which has led to the 6.2% points figure which can be seen in the economy. However, to maintain the consistent economic growth, its extremely critical that, India, exceeds the output gap, which can be possible only through increased capital flows and the widening trade gap with high import bills due to a depriciated rupee(partly due to high interest rates) is not helping the cause of the Indian economy.

Hence, the carefully thought policy of Indian government and more specifically the RBI, to keep independent monetary policy and high capital flows, while not really bothering about the fixed exchange rates is ending hurting up even the high capital flows due to a super powerful central bank which can be seen via the 2 columns of average interest rates and average investment flows.

This can end up creating a mess like, what happened during the collapse of Bretton Woods, where the capital eventually flowed into countries despite a strong affection of countries towards the peg & an independent monteary policy, this resulted in the rapid emergence of emerging economies in the world with a fledgling downfall of the advanced economies, since 1970s which accelerated even more in 2000s. To avoid, losing the current economic edge that India, has, its extremely critical, that the external sector policies are changed. The first change can be perhaps, to give back importance to fiscal policy, so that, the RBI can focus on stabilising the rupee.

Plausible Steps -

Now, Indian policymakers over the years, has avoided taking knee jerk reactions and have instead always looked for a delicate balance between the monetary policy mechanisms and fiscal policy mechanisms. Furthermore, also because the RBI, is answerable to the parliament, the government system in our country, has always stuck a good balance between fiscal and monetary policy. This was primarily seen during the pandemic, where the government adopted a classical economics approach and the RBI also responded with monetary tightening, which is a textbook example of coordination between monetary and fiscal policy interactions.

Additionally, given, how the government system, behaves in India, sacrificing the independent monetary policy may seem to be a very big ask from the RBI. Even during the 1991 LPG reforms or during the response in pandemic, the government improves fiscal policy over the monetary policy, which results in different results. 

The only possible change that can happen, is changing the budgetary outlook, something which is still considered sacred in our country. The government of India, should perhaps consider, again increasing the capital expenditure to around 11 lakh crores (something that helped during the pandemic) and again starting the process of divestment of sick PSUs like Container Corporation of India, restarting the SEZs to boost exports something that I advocated in this blog long back and concluding the trade deals as quickly as possible for which the now out of favour idea of Indian Trade Service must be reintroduced in a massive scale by the UPSC and finally, the government, must allow 75% FDI into sectors like civil aviation, telecom, steel and maybe one or two, manufacturing based industries, which can really increase the job creation capacity of the economy. Moreover, the government should really speed up the 2 proposed projects of the INSTC route and Chennai Vladivostok logistics deal, which should also provide significant impetus to the economy and to the rupee in general.

The government, can take these steps, because of 2 factors - (1) The humungous scale of victories of the BJP in Bihar, Maharashtra, Delhi  & Haryana, which has again increased the political power of Narendra Modi, who is  the most reform oriented prime minister in Indian history and (2) The government has been cutting its fiscal deficits in a big manner since the last 2 budgets, which gives a fantastic legroom for the finance ministry to again increase capital expenditures, which can give massive boost to the economy. 

Finally, the RBI, should really considering steps like, cutting down the interest rates and maybe, selling of forex reserves which are at an all time high right now, to stabilise the rupee in international markets, adopting the dirty float by not allowing the rupee to depriciate below 85, as prolonged weakness of any currency ends up hurting factors like - investors confidence, export competitiveness which cumulatively, dents, the perception of the Indian economy. 

Conclusion -

While a tradeoff for independent monetary policy for the fixed exchange rate, seems very unlikely in India, the least we can do, is to maybe, empower the fiscal policy more and maybe, adopt a dirty float for like 2-3 years, to just stabilise the rupee from taking further geopolitical risk hits, while continuing on the path of reforms.

India Vs South Africa, G20 declarations — Geoeconomic Repeat Or Reset ?

G20 nations list

Introduction -

Over the past month, in the world of cricket, India vs South Africa games have dominated the headlines. Let it be the finals of the ICC women's world cup or the ongoing India - South Africa test series in India, cricket has been the major talking point between the 2 fastest growing economies of the world's most populous continents. Adding to the talking points between the 2 economies, is also the fact that, the G20 summit of year 2025 is being conduted in South Africa.

For starters India had conducted the G20 summit in 2023 which saw the adoption of the New Delhi declaration which saw a rare consensus in a body which has multiple complex geopolitical rivalries shaping the group. South Africa conducted the G20 summit in 2025 which was overwhelmed by the news of the USAs peace deal to end the Russia - Ukraine war, additionally, the group adopted the Johannesburg declaration, sans consensus as the Trump administration had virtually boycotted the event.

Before analysing the 2 reports, its critical to understand the geopolitical contexts behind the 2 meetings, which have shaped this group.

Geopolitical background -

The G20 events have always been historically influenced by geopolitical events. The G20 is an organisation that was formed in 1999, post the aftermath of the brutal Asian Financial crisis which had rocked the economic boat of many emerging economies. To put in brief, the prime objectives of G20 are - Promoting international economic and financial stability, enhance policy and dialogue coordination, making global governance more inclusive & over time it has covered agendas like trade,climate, health, development amongst others.

The initial meeting of G20 was conducted in Berlin. Given agendas like economic & financial stability, global governance and trade are heavily influenced by geopolitics, hence every major G20 meet is always held in the background of geopolitical shocks which affect these factors in a massive manner. With this context, its important to just revise some geopolitical factors that were starkly different in 2023 & 2025. For starters, G20 is undoubtedly the biggest economic grouping of the world, which directly controls almost 80% of the world's economy and has many powerful countries as the members of the grouping.

In 2023,major geopolitical events were the prolonged Russia Ukraine war, the non availability of Russia & China in the G20 event, sluggish economic growth, recent BRICS expansion along with the positioning of global south were the major geopolitical factors that impacted the world's geoeconomics in a major manner.

Whereas,in 2025,major geopolitical events have been:- Prolonged russia ukraine war, Israel - Hamas war and its spillovers, tensions related to democratic values in emerging countries like Nepal & Bangladesh, Trump tariffs, political changes in European union, increasing tensions between USA & China along with the reformation of RIC grouping have impacted geopolitical events of the past 2 years which have given a very different shape to the Johannesburg G20 declaration. Though the growth rate of the world's GDP has remained stable around 3.2% of the GDP, but the rising AI disruption, along with the renewed debate on critical minerals may lead to a massive change in output gaps. 

While, the geopolitical uncertainities have been tense during the time of both the events, it can be confidently said, the uncertainities prevailing in 2025 are much more than what existed in 2023. Additionally, it can be said that the nature of geopolitical uncertainities have become directly more focused into economic aspect in 2025 prior to the  Johannesburg declaration.

New Delhi Declaration Economic Outcomes -

The New Delhi declaration had a salient economic outcome plan, which pushed for the creation of the India Middle East Economic Coridoor, which was announced in the presence of all the G20 nations. This was also historic as, it literally meant providing a new route from the world's fastest growing economy to one of the world's most advanced economic regions, though in the last couple of years due to the Israel - Hamas war , the 3 day war between Israel and Iran, along with multiple economic factors in the middle east have casted doubts over the viability of the IMEEC. Nevertheless, IMEEC was an attempt by the G20 to actually push for greater financial and economic linkages between the global north and global south, which can still be a gamechanger in today's day and age. 

The biggest highlight was the expansion of the group to G21, with the inclusion of African Union as a permanent member, which marked the G20 as one of the world's biggest grouping in terms of the number of nations covered. The New Delhi declaration worked on a full consensus basis, which meant that every point made in the G20 declaration was fully supported by each and every member country, with little opposition.

Sustainable economic transformation was undoubtedly one of the biggest promises of the New Delhi G20 leaders declaration. A detailed roadmap on including private sector to create accessible & inclusive global supply chains, urging for the safe transportation of grains in the ports of Russia & Ukraine, announcing the formation of the International Big Cats Alliance (IBCA) and establishment of the Startup 20 engagement group were the salient features under this important agenda in 2023. Accelerating progress on the sustainable development goals was a separate section in the declaration, which included the vision of implementation of G20 2023 Action plan to progress on SDGs. The LiFE program was also heavily focused upon during the New delhi meet of G20.Furthermore, G20 sustainable finance roadmap was also put into motion during New Delhi which included noting that developing countries needed almost 6 trillion$ in the pre 2030 period to fulfill emission targets to reach net zero by 2050. The organisation further recomitted itself to implementing the global biodiversity fund within the Global Environmental Facility.

The other critical talking point in the New Delhi declaration were the provisions related to debt frameworks and sustainability. The 2023 declaration called for urgently and effectively addressing debt vulnerabilities in developing countries and committed to pursue reforms for better, bigger and more effective systems for MDBs.  Though the meet had taken note of the need of regulating crypto assets, no major steps were announced in that direction, additionally, CBDCs were also given a special mention in emerging fintech solutions. Similarly, digital inclusion of MSMEs, female digital litreacy etc. were also included in bits and pieces in the declaration.

Furthermore, the 2023 declaration made significant strides in digital public infrastructure(DPI), which endorsed the toolkit for financial inclusion and G20 policy recommendations for advancing financial inclusion and productivity gains through digital public infrastructure. In this meeting, India had promised to buld and maintain a global digital public infrastructure, which would be shared voluntarily by G20 members. G20 toolkit on cyber education and awareness on youth was also passed during the meeting.

In hindsight, it can be safely concluded that the New Delhi declaration, actually ended up operating on 1 world and 1 financial system agenda, as it lacked plans for any particular geographical region in particuar which became a key highlight in the immediate next meeting, The second bigger change, was that, the New delhi declaration gave more priority towards sustainable development over macroeconomic issues which marked a significant change of public opinion for the G20, which has long been pointed out as an organisation focusing only on the hardcore economics. These steps, while will increase public participation in G20, but it may end up diluting the core agenda of "financial stability" for which the G20 was formed in the first place 26 years ago.

Comparision Of Johannesburg Declaration Economic Outcomes

In contrast the Johannesburg declaration was different, but it showed a continuity in the G20 agenda that was the main feature of this particular declaration held in Africa this time. The G20 meeting in South Africa was all the more historic as it was the first meeting that was held in Africa.

Disaster resilience was one of the most discussed aspects in the Johannesburg declaration especially in the small island developing countries & the LDCs. This is one point that was in continuation with the New Delhi declaration which institutionalized the G20 Disaster Risk working group as part of the G20 architecture, by arguing that DPR is a permanent G20 priority. The New Delhi version of the meet, also prioritized the support for institutions like CDRI and financing frameworks for DPR, in addition to support for SIDS and LDCs. This is one sub agenda where it can be said that, Johannesburg & New Delhi declarations synced almost perfectly.

A few additions on issues related to disaster management were notable in Johannesburg, which were - G20 Voluntary Principles for Investing in Disaster Risk Reduction, Recovery Readiness Assesment Framework, pushing for universal coverage of UN warning systems by 2027, synergising SFDRR -2030 SDG goals and Paris Agreement, are definitely some of the innovations that have been bought in the Johannesburg decalaraion.

Debt is another topic where the 2, G20 meets showed remarkable continuity, if the 2023 declaration gave the Debt Sustainability Initiative framework, the Johannesburg declaration went a step further by endorsing the G20 Ministerial declaration and supporting the IMF Debt Sustainability Analysis (DSA) for LICs and understanding debt vulnerabilities more effectively. This is a significant addition as the 2023 version had very little mention of the IMF. This maybe possible, due to,the historically amicable relations with the USA. The inclusion of private sector in debt related conversations is also a topic, which has generated significant interest in the Johannesburg declaration this year. The tradition of continuing the conversation on debt is also critical, because, over the past 4-5 years, global debt has increased massively. The more worrying aspect is that the top 5 world economies have significant debt exposure, which can impact global supply chains and financial integration in the longer run. Since, this is a good start, it must be noted that, in the future G20 must also focus a lot more on the kind of debts that the countries are picking up and maybe creating a dedicated taskforce can help in the longer run. The other innovations in finance related stuff in the Johannesburg declaration is the support to FATF in relation with money laundering is a big differentiator from the New Delhi version, which surprisingly did not speak a lot about it during the meet, though terror financing remains a security achilees heel for the Indian government.

Source - Reuters

The third biggest talking point in both the events was definitely about the issues related to sustainable development, which we have covered in the previous section. However, the Johannesburg declaration actually showed more than continuity towards this issue. The issue of critical minerals has gained rapid currency over the past few years now. The recent meeting between Xi Jinping and Donald Trump, Afghanistan allowing Indian access to mine critical minerals in Afghanistan, Balochistan's renewed importance in the critical minerals chessboard, Artic minerals race amongst others can become a very critical reason in the future global supply chains. The critical minerals race, may last longer, as it is a newer commodity that is being used in the economic chains which can play a crucial role for any 1 country to lead a breakthrough and there maybe other countries which can follow suit later on, as suggested in the Schumpeterian trade cycle. The G20 critical minerals framework is a massive step in this direction, though the framework in itself doesn't provide any unique solutions, but its the adoption may pave way for other multilaterals of understanding the importance of critical minerals especially in emerging economies. 

Other points related to sustainable development like - Industrialization labs, G20 food security task force and the addition of recognition of Africa's agricultural potential are some intriguing points that can be great assets towards expansion over this topic. The point to combat land degradation is a very salient & unique feature of the Johannesburg declaration which was not covered in the New Delhi declaration.

Notable Differences

The largest difference between the New Delhi & Johannesburg declarations are the focus areas, while the New Delhi declaration touched on topics that affected the whole of globe, the Johannesburg declaration has focused a little bit disproportionately over African Union related issues, which is understandable as its the first meet conducted in African soil. However, this can give rise to multiple countries starting to raise various sub regional issues in the future G20 meetings, this may end up being unjust towards countries of groupings like BIMSTEC, SCO & ASEAN which have very little representation in the organisation, this would also dilute the "global" image of G20.  

The second difference between the 2 meets, is also, the focus given to job creation, while the New Delhi declaration gave a lot of importance to issues like - skilling & job creation, this is 1 area, which has seen very little mention in the Johannesburg declaration, which maybe slightly disappointing for the academicians. Additionally, in both the declarations, there have been very rare discussions on improving scientific temper, which is becoming a major problem in majority societies today.

Thirdly, the New Delhi declaration had laid  the vision of IMEEC, which has not even found a mention in Johannesburg declaration and neither has the Johannesburg declaration has seen any concrete announcement towards integrating advanced & emerging economies, which should be a massive point of concern for countries of African union, who could have proposed different trade routes in this edition of G20. However, it does seem that, geopolitical issues like Trump tariffs, pushed the African Union leadership to adopt a safer path by not announcing mega deals. Now all eyes, would be towards the USA meet of G20 which would be held sometime in 2027, under the temparamental Trump administration, which may find it hard to get all the 21 partners of G20 on board for a consensus statement, which was done successfully by India and done on a smaller scale by South Africa as a host. 

Overall, the India vs South Africa - G20 declarations were neither a geoeconomic repeat or reset, but was a good example of rare geoeconomic continuity on certain points while have discontinuity on some critical aspects. Now, all eyes of the geoeconomic hawks would shift over to the next round of G20 in the USA. The G20 needs to revisit, recontinue and refurbish some of the critical agendas that are impactful in today's day & world, to make sure that the idea of economic integration is not lost in the forever chaos of geoeconomics & geopolitics, which is the only constant in economics.