The Impact of International Relations on the Indian Economy
By Sejal Verma, Anirudh Gupta
Abstract
This research paper explores the intricate relationship between international relations and the Indian economy, emphasizing the influence of geopolitical events and evolving global policies. Key events such as the Russia-Ukraine war, Middle East conflicts, and tensions in the Indo-Pacific region are analyzed to assess their economic repercussions for India. The paper also examines the impact of Western protectionist policies and technological regulations on India’s trade, capital flows, and innovation ecosystem. By evaluating trade patterns, energy security, and strategic partnerships, this study identifies opportunities for India to strengthen its economic resilience while addressing vulnerabilities in the globalized world. The findings underscore the need for adaptive policies to navigate the complex interplay of international relations and sustain India’s economic growth.
1. Introduction
In an era of deepening globalization, international relations profoundly influence national economies, shaping trade, investment, and policy frameworks. For India, a rapidly developing nation with ambitions of global leadership, geopolitical dynamics present both opportunities and challenges. Events such as the Russia-Ukraine conflict, escalating tensions in the Middle East, and strategic rivalries in the Indo-Pacific region have disrupted global markets, impacting India’s economic stability. Simultaneously, the rise of protectionism in Western nations and stringent technological regulations pose new hurdles for India’s export-driven sectors. This paper investigates these dynamics, analyzing their implications for India’s trade, currency, energy security, and manufacturing competitiveness. It also explores strategies to leverage India’s strengths in services and diversify trade partnerships to ensure sustainable growth.
2. Geopolitical Events and Their Economic Implications
2.1. The Russia-Ukraine War
The Russia-Ukraine conflict, escalating significantly since February 2022, has disrupted global supply chains and energy markets, with far-reaching consequences for India.
2.1.1. Energy Price Volatility
India’s heavy reliance on imported crude oil, particularly from Russia, has exposed it to global price shocks. The conflict has driven oil prices upward, increasing India’s import bill and straining its balance of payments. According to the Ministry of Commerce, India’s crude oil imports from Russia surged to 40% of total imports in 2023, making it vulnerable to supply disruptions and price volatility (The Hindu, 2025).
2.1.2. Currency Depreciation
Rising oil prices have increased demand for U.S. dollars, exerting downward pressure on the Indian Rupee. The Rupee depreciated by 8% against the dollar in 2023, inflating the cost of imports and contributing to domestic inflation rates of 6-7% (RBI, 2024). This depreciation has also triggered foreign portfolio outflows, as investors seek safer assets in developed markets, further destabilizing India’s financial markets.
2.1.3. Trade Disruptions
The war has disrupted India’s trade with both Russia and Ukraine. Ukraine, a key supplier of sunflower oil and wheat, saw exports to India plummet by 60% in 2022-23 due to port blockades (Business Standard, 2024). Similarly, sanctions on Russia have complicated payment mechanisms, delaying trade settlements and increasing transaction costs for Indian exporters.
2.2. Middle East Conflicts
The Middle East, a critical hub for global energy supplies, remains a volatile region with significant implications for India’s economy.
2.2.1. Energy Security Challenges
India imports over 80% of its crude oil, with 50% sourced from Middle Eastern countries like Saudi Arabia, Iraq, and the UAE (Ministry of Petroleum, 2024). Escalating conflicts, such as the Israel-Palestine tensions and Iran-related sanctions, threaten supply chains and drive oil prices higher. For instance, Brent crude prices spiked to $95 per barrel in October 2024 following regional escalations, increasing India’s import costs by $10 billion annually (Business Today, 2024).
2.2.2. Trade and Investment Impacts
India’s trade relations with the Middle East are multifaceted. Israel is a key partner in defense and diamond trade, with bilateral trade reaching $10 billion in 2023 (MEA, 2024). However, ongoing conflicts disrupt these ties and threaten initiatives like the India-Middle East-Europe Economic Corridor (IMEC), a strategic trade route aimed at countering China’s Belt and Road Initiative. Additionally, remittances from Indian workers in Gulf countries, valued at $90 billion annually, face risks due to regional instability (World Bank, 2024).
2.2.3. Inflationary Pressures
Rising energy costs exacerbate India’s inflation, with the Consumer Price Index (CPI) rising to 6.5% in 2024 (RBI, 2024). Higher fuel prices increase transportation and production costs, impacting small and medium enterprises (SMEs) and reducing consumer purchasing power.
2.3. Tensions in the Indo-Pacific Region
The Indo-Pacific region, accounting for 50% of global trade, is a critical arena for India’s economic and strategic interests.
2.3.1. China’s Maritime Strategy
China’s “String of Pearls” strategy, involving port developments in Pakistan, Sri Lanka, and Myanmar, raises concerns about maritime security in the Indian Ocean. This strategy threatens India’s trade routes, which handle 90% of its international trade by volume (Ministry of Shipping, 2024). In response, India has bolstered its naval presence and deepened partnerships through the Quad (India, U.S., Japan, Australia) to secure maritime corridors.
2.3.2. Trade Imbalance with China
India’s trade deficit with China reached $85 billion in 2023, with imports of electronics, pharmaceuticals, and machinery dominating the balance (Ministry of Commerce, 2024). This imbalance weakens India’s manufacturing sector and increases reliance on Chinese supply chains, prompting policies like the “Atma Nirbhar Bharat” initiative to promote self-reliance.
2.3.3. Supply Chain Vulnerabilities
Disruptions in the Indo-Pacific, such as China’s export restrictions on rare earth minerals, have exposed vulnerabilities in India’s technology and renewable energy sectors. For instance, India’s solar panel production, reliant on Chinese inputs, faced delays in 2023, impacting renewable energy targets (Economic Times, 2024).
3. Emerging Western Policies and Their Economic Impact
3.1. Rise of Protectionism
Western nations, particularly the United States, have increasingly adopted protectionist policies, affecting India’s export-driven industries.
3.1.1. Tariffs and Trade Barriers
The U.S. imposed tariffs of 25% on steel and 10% on aluminum in 2023, impacting India’s $2 billion steel export market (Financial Express, 2024). Similarly, restrictions on textile and agricultural exports have reduced India’s competitiveness, leading to an estimated $5 billion loss in export revenue annually (Department of Economic Affairs, 2024).
3.1.2. Impact on Employment
Export declines in labor-intensive sectors like textiles and agriculture threaten millions of jobs. The textile industry, employing 45 million workers, saw a 15% drop in exports in 2023, leading to layoffs and reduced wages (Business Standard, 2024).
3.2. Capital Market Volatility
Monetary policy shifts in Western economies, particularly interest rate hikes, have triggered capital outflows from India.
3.2.1. Foreign Portfolio Investment (FPI) Outflows
The U.S. Federal Reserve’s rate hikes to 5.5% in 2023 prompted investors to withdraw $20 billion from Indian equity markets, contributing to a 10% decline in the BSE Sensex (ICICI Direct, 2024). These outflows weaken the Rupee and increase borrowing costs for Indian firms.
3.2.2. Currency and Inflation Pressures
A depreciating Rupee raises import costs, particularly for energy and raw materials, fueling inflation. The RBI’s efforts to stabilize the currency through forex interventions have depleted reserves by $50 billion since 2022 (RBI, 2024).
3.3. Technological and Regulatory Challenges
Western regulations, such as the EU’s General Data Protection Regulation (GDPR), impose compliance burdens on Indian businesses.
3.3.1. Data Protection Compliance
Indian IT firms, generating $150 billion in export revenue, face increased costs to comply with GDPR and similar frameworks. Non-compliance risks penalties of up to €20 million, prompting investments in cybersecurity and data management (NASSCOM, 2024).
3.3.2. Opportunities for Innovation
These regulations also drive innovation in India’s tech sector. Companies like Infosys and TCS have developed GDPR-compliant solutions, positioning India as a hub for data security services (Economic Times, 2024).
3.4. Geopolitical Dynamics and Strategic Alliances
Sanctions on countries like Russia and Iran complicate India’s energy and defense procurement.
3.4.1. Energy Procurement Challenges
Sanctions on Iran have reduced India’s oil imports from the country to 5% of total imports, forcing reliance on costlier alternatives (Ministry of Petroleum, 2024). This shift increases energy costs and inflationary pressures.
3.4.2. Defense and Strategic Partnerships
India’s defense ties with Russia, including the S-400 missile system, face delays due to sanctions. To counterbalance, India has deepened collaborations with the U.S. and France, securing $5 billion in defense deals in 2023 (MEA, 2024). These partnerships enhance India’s strategic capabilities but risk escalating tensions with rival powers.
4. Strategic Opportunities for India
4.1. Strengthening Manufacturing
4.1.1. Make in India and PLI Schemes
The “Make in India” initiative and Production Linked Incentive (PLI) schemes have attracted $100 billion in investments across sectors like electronics, pharmaceuticals, and automobiles since 2020 (NITI Aayog, 2024). These policies aim to reduce import dependence and boost exports.
4.1.2. Global Supply Chain Integration
India’s participation in initiatives like the Supply Chain Resilience Initiative (SCRI) with Japan and Australia positions it as an alternative manufacturing hub to China, attracting firms like Apple and Samsung (Economic Times, 2024)
4.2. Leveraging the Service Sector
4.2.1. IT and Business Services
India’s IT sector, contributing 8% to GDP, remains a global leader, with exports projected to reach $200 billion by 2026 (NASSCOM, 2024). Investments in AI, cloud computing, and fintech enhance India’s competitiveness.
4.2.2. Financial Services Hub
Developing Mumbai and GIFT City as global financial hubs can attract foreign investment and boost service exports. Initiatives like the International Financial Services Centre (IFSC) have already drawn $10 billion in investments (Ministry of Finance, 2024).
4.3. Diversifying Trade Partnerships
4.3.1. Free Trade Agreements (FTAs)
India has signed FTAs with the UAE, Australia, and the UK, aiming to increase exports by $100 billion by 2030 (Ministry of Commerce, 2024). These agreements reduce reliance on Western markets and open new avenues in Asia and Africa.
4.3.2. South-South Cooperation
Strengthening trade with African and Latin American nations, particularly in agriculture and pharmaceuticals, can mitigate risks from Western protectionism. India’s pharmaceutical exports to Africa grew by 20% in 2023 (Pharmexcil, 2024).
5. Conclusion
The interplay of international relations and India’s economy reveals a complex landscape of challenges and opportunities. Geopolitical conflicts, such as the Russia-Ukraine war and Middle East tensions, threaten energy security, trade stability, and currency valuation. Concurrently, Western protectionism and regulatory frameworks strain India’s export sectors and capital markets. However, strategic initiatives like “Make in India,” PLI schemes, and diversified trade partnerships offer pathways to resilience. By leveraging its strengths in manufacturing, services, and innovation, India can navigate these global dynamics to achieve sustainable economic growth. Policymakers must prioritize adaptive strategies, balancing self-reliance with global integration, to position India as a resilient player on the world stage.
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Sejal Verma- BSc [Biotechnology], Content Writer
Anirudh Gupta- BA [Political Science ] , BCA
