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Is the India Growth Story Over?
In a television speech to the nation, Indian Prime Minister Narendra Modi urged his people to make sacrifices by spending less on fuel, fertilizer, and travel. He also asked them not to buy gold for a year. “To save foreign exchange, we must accept the challenge of patriotism,” he said. It appears that India's problems do not just stem from the effects of the US-Iran war; India's problems started well before that. Flight of foreign capital has put the Indian currency under tremendous pressure, with the Indian rupee falling nearly 10% in recent months. Many analysts believe that the Indian IT services exports could fall significantly as the artificial intelligence (AI) models begin to replace the IT workers. It could create a balance of payments crisis that could force India to seek the IMF bailout in the not too distant future. Already, the Indian economy has slipped to the sixth-largest economy by nominal GDP, dropping from previous projections that had it at fourth.
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| Indian Economy Drops From 4th to 6th Rank. Source: IndMoneyApp |
Energy Crisis:
India is facing a serious energy crisis driven by the closure of the Strait of Hormuz that has disrupted global oil and gas supplies. While the government has assured citizens that there are no immediate shortages of petroleum or natural gas, the escalating costs of imports are putting extreme pressure on the nation's foreign exchange reserves.
AI Challenge:
Indian IT firms are cutting staff to prepare for the expected disruption from the adoption of AI. For example, the IT services firm Cognizant is planning major workforce reductions that could impact between 12,000 and 15,000 employees globally, with India expected to account for the majority of the cuts, according to a report.
A US-based investment research firm Citrini Research is forecasting a significant disruption to India's traditional IT services sector by 2027-2028, driven by the collapsing cost of AI coding agents. Here's an excerpt of the Citrini research report:
"The country’s IT services sector exported over $200 billion annually, the single largest contributor to India’s current account surplus and the offset that financed its persistent goods trade deficit. The entire model was built on one value proposition: Indian developers cost a fraction of their American counterparts. But the marginal cost of an AI coding agent had collapsed to, essentially, the cost of electricity. TCS, Infosys and Wipro saw contract cancellations accelerate through 2027. The rupee fell 18% against the dollar in four months as the services surplus that had anchored India’s external accounts evaporated. By Q1 2028, the IMF had begun “preliminary discussions” with New Delhi".
Stocks Selloff:
Sensing the growing crisis, Indian stock market investors are selling off their holdings. IN particular, foreign investors have accelerated their exit from Indian equities in early 2026, selling over $20 Billion in the first four months, driving 14-year low ownership levels. Triggered by Middle East conflicts, rising oil prices, and rupee depreciation, this record exodus—marking the worst quarterly selloff in March—was driven by outflows in banking, financial services, and IT.
Investors see the writing on the wall. The Indian economy has already dropped from the 4th to the 6th rank in the world. The Indian currency is under a lot of pressure. India's current account deficit will worsen with the loss of IT services exports.
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Riaz Haq
India's balance of payments deficit extends in May as portfolio outflows persist | Reuters
https://www.reuters.com/world/india/indias-balance-payments-deficit...
MUMBAI, July 15 (Reuters) - India's balance of payments (BoP) remained in a deficit for the second consecutive month in May, as capital outflows added to the pressure of a current account deficit, central bank data showed on Wednesday.
The deficit, however, narrowed compared to April when India reported a BoP deficit of $6.6 billion.
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Here are some details from the May data:
India's overall balance of payments recorded a deficit of $4.4 billion in May this year compared with a surplus of $4.4 billion in the year-ago period.
Current account balance stood at a deficit of $2 billion for the month compared with a surplus of $700 million in May 2025.
Net transfers, which include remittances from Indian workers overseas, rose to $13.6 billion from $10.5 billion a year ago.
The capital account, which includes foreign portfolio investments, saw an outflow of $2.4 billion in May 2026 compared with an inflow of $3.7 billion in the same month last year.
India reported a surprise surplus in current account and overall balance of payments for the January-March quarter of fiscal 2026 on strong earnings from the services sector, an increase in worker remittances and forex swaps conducted by the central bank.
Worries over India's balance of payments deficit have been a crucial pain point for the rupee in 2026, as the Iran war lifted oil prices sharply and caused unabated capital outflows.
While an interim ceasefire and policy measures to boost dollar inflows have prompted analysts to forecast a near neutral or modestly surplus BoP for the fiscal year ending March 2027, the most recent flare-up in the Middle East and its impact on oil prices will be in focus in the near term.
on Thursday
Riaz Haq
Chen Zhou Katrina
India’s services exports are set to overtake merchandise exports for the first time: $421 billion versus $442 billion in FY2025–26. Services already cover nearly two-thirds of India’s goods trade deficit.
I’ve long argued that India has the same weakness in services and manufacturing, it does increasingly sophisticated work for global companies but creates too few Indian companies that own the final products.
India now hosts over 1700 global capability centres employing 1.9 million people. Yet some work once outsourced to TCS and Infosys is simply moving into foreign companies’ captive centres. Indian engineers still do the work and India records the export income, while the foreign parent controls how that work becomes a global product.
That is the real story here. India is becoming indispensable to global companies much faster than Indian companies are becoming indispensable to the world.
https://x.com/southernm46171/status/2077999752810320136?s=61&t=...
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India's services exports growth highlights limits of manufacturing Push
https://asia.nikkei.com/economy/india-s-services-exports-growth-hig...
BENGALURU -- India's services exports are on the cusp of overtaking merchandise exports for the first time, underscoring how the country is increasingly dependent on information technology for growth even as policymakers push to transform the nation into a manufacturing powerhouse.
Services exports reached a record $421 billion in the fiscal year that ran through March, just shy of the $442 billion earned from merchandise exports, according to government data, as export growth in goods slowed down to about 1% amid disruptions from U.S. tariffs and the West Asia crisis in March.
Since coming to power in 2014, Indian Prime Minister Narendra Modi has positioned the country as a manufacturing hub for everything from iPhones to solar panels, particularly as companies and countries look to shift supply chains away from China. But while services exports have grown at a compound annual rate of 9.3% over the past 12 years, goods exports have grown at barely a third of that pace.
Underpinning this shift has been the rise of IT services companies such as Tata Consultancy Services and Infosys, which have captured outsourced tech spending, and more recently global capability centers (GCCs) -- entities owned by multinationals handling tasks such as IT development, research and data science.
"If current growth rates persist, services exports could overtake goods exports next year, making services India's bigger export category for the first time," said Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI).
The crossover would mark a symbolic shift in the structure of the Indian economy. Economists say the resilience of services exports has helped cushion India's widening merchandise trade deficit, easing pressure on the country's external account. However, they warn that relying too heavily on the IT sector -- parts of which are seen as threatened by the rise of artificial intelligence -- risks leaving India without the manufacturing growth needed to create millions of jobs and diversify exports.
In the April 2025 to February period, services exports generated a net surplus of $201 billion, which offset 64.7% of the merchandise trade deficit, according to an analysis of trade data by the government's top think tank, NITI Aayog.
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These factors, combined with India's relatively low wages, have led to a GCC boom in the country. There are more than 1,700 of the centers, employing over 1.9 million people, according to the government.
Still, economists point to weaknesses in the services sector, such as an overreliance on IT services and the U.S. market, which have left the middle class it once powered vulnerable to a slowdown in job creation as more and more businesses rely on AI to automate and shorten tasks.
on Saturday
Riaz Haq
on Saturday