Indian economic strategy in the new globalisation

by Vijay Kelkar and Ajay Shah.

A great global order has run astray. For over half a century, the world operated under an open system of movement of goods, services, capital and people, a system that was built by the post-war Western powers. India, for all its post-independence suspicions of the market and the world, was a big beneficiary of this order. From 1991 to 2011, India’s GDP growth quadrupled, not solely from an act of internal genius, but on the back of a global system that allowed Indian goods and services to find markets, that established the flow of capital, technology and business knowledge into India. Global companies brought new levels of productivity and knowledge into India, while foreign financial firms gave capital to India’s high-tech sector, and foreign buyers purchased Indian services exports that are at a run rate of $400 billion a year. Foreign companies provided the foundational technologies -- the CPUs, operating systems, the Internet and all the systems software -- on which India's knowledge economy was built. The champions for Indian openness, such as Jagdish Bhagwati and Ashok Desai, were proved right in abundance.

We must first confront a difficult truth: India's growth from 1991 to 2011 was partly built on a global system's benign neglect, a diplomatic dividend that has now been fully spent. In those years, India did not always play by the rules. We, as a nation, maintained a plethora of tariff and non-tariff barriers, all the while taking for granted the access granted to us by a world that was, for the most part, exceptionally indulgent. This indulgence stemmed from the West's perception of India as a decent, democratic country that would, in time, graduate to being a valuable successful country that would be a good citizen in the world economy. The West saw the idea of India; they felt India was a nation on a path to prosperity that was worth supporting, even if it did not always reciprocate with fair play when it came to economic nationalism. This benign neglect is an important element of India's growth story in the great years of 1991-2011, an element that is often neglected.

That era is now over.

The year 2016 was clear and sombre turning point. Donald Trump's rise to power and his subsequent policies of "America First" signalled the end of the post-war consensus on globalisation. At about the same time, China became estranged from the world due to its sustained use of unfair trade practices, going beyond tariffs to a dogged pursuit of economic nationalism where the ability of foreigners to operate in China is undermined. What we are witnessing is not a temporary hiccup, but a major change in the world economy. This is a new Globalisation, where the two poles of the old order (the US and China) are either hostile to the system or using it to their own unfair advantage.

So far, the US economy has endured the Trump shocks. We should not, however, be complacent about this good fortune. There are concerns about what will happen in the US economy on four fronts: local inflation which would then require tough monetary policy, loss of export competitiveness, adverse impact upon investment through increased uncertainty and punishment from the financial markets (Shah, 2025). Just as there are `gains from trade' with GDP growth induced by liberalisation, economic laws work in reverse also: Deglobalisation will harm growth, and the two epicentres of this problem are China and the US. All this paints a more sombre outlook for the world economy. A US with policy capabilities akin to those in an emerging market will be viewed with greater hesitation by global investors, inducing new stresses in financial markets. This is bad for the significantly outward-oriented economy that modern India has become: we need a successful prosperous world economy in order to sustain our rise.

For us in India, this is not a crisis moment on the scale of 1991. We are not facing an immediate balance of payments collapse. But it is an inflection point of equal, if not greater, long-term significance. The old strategies will no longer work. We cannot continue to rely on the indulgence of an open world that supports the rise of India. The path to India's ascent has just become considerably harder, and a commensurate, well-thought-out response is required.

The task of economic thinkers in India today is to strategise that response. Many good writings have emerged on this: Chinoy, 2025; Das, 2025; Ninan, 2025; Rao, 2025; Sengupta, 2025; Sharma, 2025. In this article we draw on all these and synthesise a full picture.

The New Core: Embracing the OECD (ex-US)

The first step in this new world is a pragmatic reassessment of our trade partnerships. If the US and China are now problematic partners, where does India’s future lie? The answer is to pivot aggressively and strategically towards a new core: the set of countries we can term the "OECD ex-US." This group includes the United Kingdom, the European Union, Japan, Canada, Australia, South Korea and many others. Adjacent to this are sophisticated countries such as Taiwan which are not members of the OECD. These are advanced, rules-based economies that remain committed, for the most part, to an open global system. While there are blemishes -- such as the agriculture policies of the EU -- by and large this remains the the sensible and stable core of globalisation today.

It is worth prioritising engagement with them as (a) They have a high level of GDP and (b) Their democratic and pro-globalisation policy frameworks are grounded in the Second Globalisation. Advanced mature democracies operate as institutions; policy movements are not personalised into the whim of a leader; when an agreement is made, it will stick for a long time, which is the time horizon required for private firms to commensurately respond.

We in India need to push on two approaches with these countries.

First, we should work with these countries to construct a new system of globalisation, where a variety of the unfair practices that were tolerated under the GATT or WTO are blocked [EiE Ep96 Is globalisation doomed?] That would be the best response. India has the opportunity to be in the founding group of such a new system. Once this is up and running between a core of important countries, such a system can be presented as an open system available to all countries, should they commit to deep globalisation on a defined set of conditions. The Trans Pacific Partnership ("TPP") -- which morphed into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) with the 11 countries going ahead without the US -- and the EU are examples of modern multilateral deep trade agreements.

Alongside this, we should make it a top priority to seek a new style of Free Trade Agreements (FTAs) or Comprehensive Economic Cooperation Agreements (CECAs) with every country in this bloc. The term `Deep Trade Agreements' (DTAs) vividly suggests the nature of bilateral trade agreement that is now desirable. The recent Indo-UK FTA is a step in the right direction. But it must be seen as the beginning, not the end. A DTA is not just about reducing tariffs; it is about harmonizing regulations, setting common standards, and creating a predictable legal and business environment that supports free movement of goods, services and capital. Such agreements would allow Indian firms to integrate into advanced global supply chains, gaining access to high-quality technology, capital, and markets.

This strategy demands an Indian retreat from the traditional protectionist approach. Our long-held reliance on high tariffs and a Byzantine web of non-trade barriers, a long list of redlines that subverted meaningful trade deals, is no longer viable. The benign indulgence we enjoyed in the past is gone. Our traditional ways, in a world of rising trade tensions, will be met with a reciprocal, and likely unpleasant, response. The United States is going through the throes of a great upsurge in populism; we cannot afford to provoke a turn towards aggressive economic nationalism, and a rejection of the global trading system, from the rest of the advanced economies. The message must be clear: India is no longer an aspiring economy seeking special treatment, but a serious global player willing to offer an equal, level playing field, and engage in deep globalisation.

This idea is not unique to us. Sensible policy thinkers the world over are looking at the wreckage of the post-Trump trade environment, and thinking on similar lines (Froman 2025, Hinz et. al. 2025).

Such deep engagement would make many new kinds of economic activity possible, which are presently not undertaken:

• Consider the German automotive industry under conditions of a DTA with the EU. Indian firms could then become part of the BMW or Mercedes-Benz supply chain, not just for low end parts, but for high tech components and software of the future automobile. This would require harmonising standards and IP protections.
• Consider the Japanese electronics or South Korean shipbuilding industries. A DTA with these countries could create conditions for them to see India as a China+1 partner (or really, OECD(ex-US)+1) for their advanced manufacturing.
• There are remarkable developments in defence R&D and manufacturing currently emerging, in the coalition of Poland and South Korea. Under conditions of deep integration with these countries, there is an opportunity for India to be a manufacturing platform for this joint work, harnessing Indian skills and geographical remoteness. This would simultaneously give India access to high technology and better defence equipment.

The Inward Turn: Removing the Domestic Shackles

Maximising our engagement with the OECD ex-US bloc is only half the battle. The other, and perhaps more difficult, half is to look inwards. To trade more intensely and successfully with a smaller, more discerning group of partners, Indian firms must be more globally competitive. This requires a sweeping agenda of domestic policy reforms that remove the shackles upon the domestic economy. Eight things loom large.

I. The indirect tax system

The current Goods and Services Tax (GST) regime, while a monumental step forward, is plagued by a major flaw: it fails to fully reimburse exporters for all indirect taxes paid. For the GST to actually be the promised "destination-based consumption tax", you do not tax non-residents. The existing system leaves many taxes (cesses, electricity, fuel, municipal taxes) embedded in the cost of production, which are not refunded to the exporter, thus making Indian exports artificially expensive. Input tax credit (ITC) has to flow fully, so as to generate the complete refund at the point of export. We advocate for a move to a single, low-rate GST, coupled with a simple carbon tax (Kelkar and Shah 2022, Kelkar, Modi and Shah 2025). Such a system would not only make Indian goods more competitive but would also align with evolving global standards, such as the European Union’s Carbon Border Adjustment Mechanism (CBAM), which taxes imports based on their carbon footprint (Jaitly & Shah, 2023).

II. Regulatory reform

We need to build on the intellectual foundation of the Financial Sector Legislative Reforms Commission (FSLRC). The FSLRC’s core ideas -- checks and balances for regulators that wield legislative and executive and judicial power -- are not limited to the financial sector. They must be applied across all statutory regulatory authorities in India. When regulators are enveloped in checks and balances, their arbitrary power will be diminished and their behaviour will become more predictable. This predictability is the bedrock of business confidence, both for domestic firms and foreign investors. This agenda is the sensible interpretation of the fashionable word `deregulation' (Shah, 2025; Krishnan, 2025).

III. Improving the judiciary

None of this can succeed without fundamental improvements in the Indian judiciary and legal framework. The delays in Indian courts, and the risk of matters being decided incorrectly, are a major drag on economic activity. Businesses, both Indian and foreign, are hobbled by disputes that can last for decades. This unpredictability hinders modern business arrangements which are grounded in contracts that perform as promised, and help to create a significant "India risk" premium. There is now a body of knowledge and experience in building better courts which can be brought to play upon this problem (Shah, 2024).

IV. Cities are where production actually happens!

Whether it is services or manufacturing, export oriented production happens in cities. There is a direct connection between the Indian urban reforms agenda -- the economies of agglomeration of talented people into livable spaces -- and the ability of India to produce and export. Thus far, there is little to report on the agenda of decentralisation to city governments, and to better town planning. A great deal of knowledge has now been developed in the country and can be usefully deployed into these questions.

V. Solve the logjam in agriculture

We have long known that Indian agriculture is broken owing to the comprehensive array of state intervention. The Indian state is overseeing and subsidising a faulty system of intervention that is inducing a health crisis through bad nutrition and the burning of fields. Indian protectionism in this field is proving to be disproportionately costly for the overall Indian economy. This underlines the priority of obtaining progress in this area. The essential idea is to have a full play of the price system in agricultural inputs and outputs, with freedom for individuals to buy and sell land, to sell agricultural products, to trade in commodity futures markets in India and abroad, to store agricultural products, and to move agricultural products within India and across the border. Achieving these changes will need to be done with a comprehensive sense of all the margins of adjustment (partial liberalisation is harder for the people) and political wisdom. The metaphor of structural adjustment programs is required for solving the sites of the highest intervention in the past, i.e. Punjab and Haryana.

VI. Macroeconomic resilience

In this turbulent environment, it will be particularly important to maintain macroeconomic stability. The path to macroeconomic stability lies not in autarkic instincts, or stifling private sector innovation, but in creating institutions for resilience. India has made one big movement forward in the form of the inflation targeting system [EiE Ep68 Inflation targeting], which has now delivered better CPI inflation stability from 2015 onwards. We must keep a zealous watch on CPI inflation, and ensure it does not deviate from 4% as is specified in the inflation target. With that problem mostly under control, there are now four areas of work for establishing macroeconomic resilience:

1. There is a problem with fiscal prudence, with a debt/GDP ratio that has risen considerably, and a primary deficit which is well above zero in all years. New institutional designs such as a Fiscal Council can help in this journey.
2. There is a problem with exchange rate inflexibility: a floating exchange rate [EiE Ep67 Exchange rate flexibility] is a great shock absorber when faced with difficult times (Shah, 2024).
3. Much needs to be done to create robust and resilient financial markets, which can absorb shocks in times of need (Shah 2026).
4. The gradual dismantling of the financial repression system (Chitgupi et. al. 2024) will create a new kind of strategic depth for the Indian state in terms of its ability to borrow from voluntary lenders, both onshore and offshore.

VII. Finance as the brain, financing as the raw material

The financial sector itself needs a fundamental overhaul, again drawing on the FSLRC’s vision. Indian firms currently operate with a significant disadvantage: a higher cost of capital compared to their global peers. This is a direct consequence of the malfunctioning financial system and the partially closed capital account. The Indian system of financial repression -- where the state uses regulation to appropriate a portion of private savings -- must be dismantled. Financial reforms will increase the quality of thinking that finance, the brain of the economy, is able to put in when allocating scarce domestic savings. By liberalising the capital account in a careful, sequenced manner, we can allow Indian firms to access the cheapest possible capital from global markets, making them more competitive.

VIII. Improved engagement with the information space

Economic policy acts through the process of reshaping the optimisations of self-interested people, about the nature of government coercion and the strategy for future policy reforms and institution building (Shah, 2018). In this, the communication strategy of the government achieves importance. Central to the 1991-2011 macroeconomic boom was the trust and respect of the private sector, for a shared understanding of the strategy for reforms, carried across multiple elections and multiple teams. As the old adage runs, the policy maker must `say what you will do and then do what you just said'. The modern information environment has become more daunting, with the rise of social media. In such an environment, there is great value in a government that is known for truth telling. A strong orientation towards truth speech would be a powerful asset in improving the structure of expectations of the private sector.

All large global firms are looking to do less in the US and in China. If we play our cards right, India can be a OECD(ex-US)+1 centre of activity for many important firms. But this requires profound improvements in how the Indian state treats foreign firms. India needs to move towards a system of OECD-quality tax treaties and bilateral investment protection agreements. Most importantly, we need a clear Parliamentary law that establishes equal treatment for foreigners, moving away from a mindset of economic nationalism. This would send an unmistakable signal to the world that India is a safe and predictable place to do business.

Engaging the Giants from a Position of Strength

Once India has put its own house in order and established a new core of trade partners, it will be in a position of strength to deal with the two most difficult partners in the new world order: the United States and China.

The problems presented by these two countries are indeed knotty and cannot be solved with chest-thumping nationalism or bluster. Dealing with leaders who have an inward-looking political style requires deft handling and a deep understanding of their political economies. Public posturing or slighting them will not be consistent with Indian interests. The union government needs to create a sophisticated brains trust with a profound understanding of the US and China: their domestic politics, their economic vulnerabilities, and their negotiating styles—to do better in these complex engagements. Through border conflicts in Doklam and Galwan, the Chinese state has primed the Indian intellectual community with questions and concerns, and a significant depth of knowledge on the path forward is now understood (Bambawale et. al., 2021).

The problem of Chinese overproduction is real and immediate (Patnaik and Shah, 2024). The Chinese state's policy of subsidising its firms to maintain employment, which leads to a glut of cheap exports, is a form of economic warfare. It is not just unfair; it is destructive to the manufacturing bases of other nations, including India. A vigorous set of barriers against Chinese imports is not just justified, but necessary. However, this is not an argument for complete disengagement. There are many paths to engagement with China that can and should be pursued, particularly in areas where our interests align, such as in global institutions or in addressing global challenges. Collaboration between China and India is essential for global decarbonisation.

The United States presents a different, and perhaps more fundamental, challenge. The US, which built the old world order, is now in a period of self-doubt and retreat. There is no guarantee that a post-Trump environment will get the US back to its former normalcy as a champion of free trade. The protectionist genie is out of the bottle. Until the US finds its footing again, our primary strategy must be to embrace the OECD ex-US bloc. We should engage with China where it is rational, while recognising the sustained misbehaviour by China against India on numerous episodes before, and we should wait for the US to find its feet one day.

Conclusion

In summary:

1. India was a great beneficiary of globalisation
2. We must recognise that the nature of globalisation has changed, and that this is detrimental to India's interests
3. This is an important turning point in India's history; it is our duty to strategise a response.
4. India needs to be a prime mover of a new deep globalisation arrangement between the advanced economies -- excluding the US -- and India.
5. India needs deep trade agreements ("DTAs") with the advanced economies, excluding the US.
6. The competitiveness of producing in India needs to be addressed by domestic reforms: a globalisation-ready indirect tax system, regulatory reform, financial sector reform, legal system reforms, an environment of institutions for macroeconomic stability, making better cities, solving the policy stuck in agriculture, and shifting the communication strategy in favour of more truth.
7. We should engage with the highly flawed objectives of the US and China from such a vantage point of strength.

The era of India’s economic rise on the back of an indulgent, open global system is over. This is not a Balance of Payments crisis, where we have to mortgage RBI's gold in London, but it is an equally important moment. Our future depends on it. The leadership needs to take the opposition into confidence, as was done by A. B. Vajpayee in 1998 after the nuclear tests, and collaboratively lead this transformation. For all of us in India, for the people and the firms, this is a time to rise to our best and prove our mettle.

The authors are with the Pune International Centre and XDKR Forum.

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