India Today• Mar 20, 2026• 20:45Interview

Interview: Raghuram Rajan Exclusive With Rajdeep Sardesai On Indian Economy And Iran War

Raghuram Rajan•Former Governor, Reserve Bank of India & Professor of Finance, Chicago Booth

Executive Summary

A hypothetical US-Israeli war with Iran has disrupted 20% of global energy production, creating a severe supply shock with the potential to push oil prices to $150-$200 per barrel and trigger a global recession.
India is identified as particularly vulnerable due to its heavy reliance on energy imports through the Strait of Hormuz, with rising oil prices directly threatening its current account deficit, inflation targets, and fiscal stability.
Former RBI Governor Raghuram Rajan warns that while government subsidies and a ₹1 lakh crore stabilization fund can provide a temporary buffer, a prolonged conflict will necessitate painful but unavoidable economic adjustments, as fiscal capacity is limited.
The crisis is framed as a critical 'wake-up call' for nations to build long-term strategic resilience by diversifying supply chains, increasing strategic reserves of critical goods (energy, APIs, semiconductors), and developing contingency plans for a more volatile world.

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Concerns Raised

A prolonged conflict could push oil prices to $150-$200, triggering a global recession and stagflation.
India's fiscal capacity to absorb the energy shock through subsidies is limited, risking a wider current account deficit and higher inflation.
Global supply chain vulnerabilities extend beyond energy to critical inputs like pharmaceutical APIs and semiconductors.
The world is entering a period of greater geopolitical risk and disorder, requiring new strategies for economic management.

Opportunities Identified

The crisis serves as a 'wake-up call' to build national strategic resilience against future shocks.
Opportunity to diversify energy import sources and reduce dependence on single choke points like the Strait of Hormuz.
Incentive to develop strategic reserves and contingency plans for critical goods beyond energy, such as APIs and semiconductors.

Key Themes

Geopolitical Conflict as a Global Economic Shock

The discussion centers on a hypothetical conflict in the Middle East that has shut down 20% of the world's energy supply. This single geopolitical event is shown to have immediate, cascading effects on global energy prices, inflation, and economic growth, highlighting the fragility of the global system.

This demonstrates how regional conflicts are no longer contained issues but can rapidly escalate into global economic crises, forcing a re-evaluation of risk and interconnectedness in financial markets and supply chains.

India's Macroeconomic Vulnerability

The analysis focuses heavily on India's exposure to the energy shock, given its dependence on imported oil and gas. A $10 increase in oil prices is estimated to widen the current account deficit by 0.5% of GDP, putting severe pressure on the currency, inflation, and government finances.

This illustrates the specific challenges faced by large, energy-importing emerging markets during a global supply shock, forcing difficult policy trade-offs between supporting consumers and maintaining fiscal discipline.

The Policy Dilemma: Subsidize vs. Adjust

A core theme is the choice governments face between buffering the economic shock through subsidies or allowing price signals to force adjustment from consumers and producers. Raghuram Rajan argues that subsidies are only a short-term fix and that a prolonged crisis makes painful structural adjustment fiscally inevitable.

This explores the critical decision-making framework for policymakers during an external crisis. The choice has profound implications for long-term economic health, inflation expectations, and the efficient allocation of resources.

The Imperative for Strategic Resilience

The crisis is presented as a catalyst for nations to build long-term resilience against future shocks. This strategy involves not just onshoring production, but a more nuanced approach of diversifying suppliers, building strategic buffer stocks of critical inputs (like APIs and semiconductors), and creating robust contingency plans.

This provides a forward-looking strategic framework for governments and corporations to navigate an increasingly uncertain geopolitical landscape, moving beyond reactive crisis management to proactive risk mitigation.

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Topics

Geopolitics Energy Crisis Oil Prices Middle East Conflict Global Economy Recession Risk Stagflation Inflation India Economy Fiscal Policy Subsidies Monetary Policy Supply Chain Resilience Strategic Reserves Semiconductors Pharmaceuticals (APIs)Current Account Deficit Strait of Hormuz

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