In a conversation with The Wire’s founding editor M.K. Venu, former finance secretary Subhash Garg says that India’s economic situation is vulnerable amid the global energy disruptions triggered by the attack on Iran by the US and Israel. Garg notes that the government is only looking at short-term economic measures, including appeals to cut imports and foreign travel, which clearly signal economic distress.Garg cites how the rest of the world is behaving and urges structural reforms, faster energy transition, greater openness to global technology partnerships, and letting the rupee fall to its own level.Below is the full text of their conversation, transcribed by Ipil Baski, an editorial intern at The Wire.M.K. Venu: Hello and welcome to this special conversation on what is happening with the Indian economy. The Iran US conflict is showing no signs of quick resolution and we are seeing what is happening with inflation, with energy shortages, with fertilizer shortages, LPG shortages, everything feeding into a kind of hyperinflationary potential situation. The prime minister himself, from foreign soil, had warned recently that the kind of crisis that world economies are facing, especially the developing economies, could bring a lot of societies back to poverty, back to a situation of vast populations falling below the poverty line. As far as India’s economy is concerned, it is true that India is among the most vulnerable Asian economies hugely dependent on oil imports 80-85% to 88%, that is not denied by anybody. It’s a consensus that India is among the most vulnerable, but India was already vulnerable even before the US Iran war as aptly captured in the economic survey, just before the budget a few months ago, where the government admitted that the rupee was punching way below its weight. The government raised serious concerns over why foreign investment was shying away from India. Now this is the second or third year when we’ve had very very low next to zero foreign direct investments. Foreign institutional investments which are essentially portfolio investments which come into the stock market are also hugely negative. India has already seen over $21 billion of outflow this year. The rupee’s value is rapidly eroding, some say it’ll be 100 very soon and a lot of concerns around the economy. So today we decided that we would have someone who’s had hands-on experience with policy in the finance ministry until 2019 when he retired. Mr. Subash Garg, former finance secretary, is with us. Thank you Mr. Garg for joining us.Subhash Garg: Thank you.MKV: And Subhash Garg should need no introduction. He is a former finance secretary, author of two very well researched books that he has written both concerning the economy and policy and the latest one being No Minister where he has talked about the inner workings of the government, and no one better than Subash to explain to us what exactly is going on. Recently Subash tweeted that the Indian economy is falling apart, everything is going wrong, India is at a big risk. Falling rupee, energy, LPG shortages. He even spoke of growth, numbers or the GDP stock which appears to be exaggerated. So Mr. Garg just tell us – how do you see the present dire economic situation panning out? We had Surjit Bhalla, an economic adviser of this government who was during your tenure, I think, when you were still finance secretary, he went to the IMF as executive director and one of IMF’s job is to keep a close watch on the external sector situation for various countries, and Surjit Bhalla is saying in his write up, published two days ago in Indian Express, that India can be counted amongst the most fragile economies today along with Turkey, maybe Fragile Two, and I remember in 2013, India was among when there was a similar sort of crisis when the rupee was depreciating rapidly 20% over three months, we were counted among the Fragile Five and now we are as per Surjit’s own assessment, Fragile One. How do you see all this, Mr. Garg, can you just lay out your own thoughts on the state of the economy, state of the currency?SG: So thank you Venu. I think Surjit Bhalla’s piece in Indian Express is reflective of the desperate situation the Indian economy is in. He had defended the government for many years now. He was India’s econ executive director in the IMF for about three years. So, saying good things about the Indian economy and the government performance. To my mind, what he has written now, reflects the actual situation on the ground. I think the situation is still worse than what he has depicted, look at the growth situation. So, he has given out the numbers that don’t fall for this narrative of India being the fastest economy in the world, fastest major economy in the world. He has given out that in terms of growth we are ninth, in terms of per capita growth we are 16. So, all those numbers are coming apart, coming to make that the growth situation itself and remember this was the situation until last year and the things have deterioriated much more since then. I have been comparing the growth- there are three ways in which the growth can be measured. Real economy growth, the nominal economy growth and the dollar growth. The dollar growth is what is comparable across the world. In that we are actually in the negative with 10% depreciation of rupee and nominal growth of less than 10%, we are actually negatively growing. So, growth is very poor and this year…MKV: you’re saying that dollar growth GDP growth is negative at the moment?Subhash Garg -Right. Exactly. So if you compare internationally in a currency which is common to all rather than the fictional derived real economy growth in India when you don’t know what the real inflation is, any derived real economy growth is a suspect, so comparable dollar growth in current US dollars is actually negative. We are one of the worst performing country in the world. So that is where the growth situation is. Rupee I think everyone knows now, we were the worst performing currency last year at this moment also we are worst performing country in terms of rupee. Everyone is affected by the Iran-US-Israel conflict and the blockade in the Strait of Hormuz. But look at everyone else, the stock markets in the rest of the world other than India are not falling. In fact, still there are many stock markets that are rising. Even currency dollar is at a pressure and most currencies in the world are actually appreciating against dollar and in that situation we are depreciating and depreciating very badly. So you look at growth you look at the rupee energy situation is so terrible at this moment that very soon we may have a situation where you have to ration. Rationing is in some sort is the beginning. Fertilizer shortages you are going to face in the Kharif season. So, everywhere you look the conclusion is inescapable that the Indian economy is falling apart.MKV: Yeah. So, Subash, tell me, this is just the beginning in the sense, a lot of experts, both economists and other experts, are saying that the actual supply shock energy shortage is still not fully reflected in the price of crude. Crude is still at about 107 or whatever 110 dollars a barrel but a lot of people say that this number does not reflect the actual shortage on the ground. These are based on basically future prices and the future market is somewhat trying to be optimistic. But many experts say that the actual energy crude price could go up to 160- 170 dollars a barrel. Now, what is your sense, what will happen the next 2 months if things don’t get resolved. Will there be a precipitate increase in inflation, etc., and shortages, rationing and all kinds of curbs or do you think it will be incremental, what is your sense?SG: So the current shortage is more of short term. You see, if you look a little bit at the long term, the energy demand for the world has peaked now and is likely to decline in times to come, whereas supply side except for the shocks which are there is not short of the demand. So the long-term trajectory of crude should be more benign. But you have a problem which is specific to India and you have a problem globally which is short-term supply kind of shock, thanks to the Strait of Hormuz. So, the Strait of Hormuz situation is not going to resolve very soon. The way things look, it’s already been more than two and a half months. We are running into the third month and the way things are panning out. It may continue for long and we already have very serious damages in the gas infrastructure as well as oil infrastructure in the Gulf.MKV: So that will take time to recover.SG: So, that situation will persist. So supply side shortages are currently estimated at about 12 million barrels a day about 12% of the global consumption of 100 million barrels a day and that will persist and gas is still worse for India. So, when you translate the supply shock to the Indian situation, we have it very bad. We don’t allow the oil prices and the gas prices to be transferred to the consumers and that creates an enormous amount of fiscal strain for the government in the OMCs as well as on the tax side. The government wouldn’t be able to hold it for longer. They have decided on the strategy of incremental increases. These will go if you don’t do it, don’t pass on. So, one of the arguments which most economists make these days is that the rupee should be allowed to fall to its true level. Now what is the true level? If you don’t allow the prices to pass on to the consumers, the real value of the rupee will never be reflected. And therefore, for India, we have literally wasted, mismanaged our energy economy. In the last year when Mr. Modi joined we had 70% dependence on oil and the world was switching over to renewables especially solar and wind. We today have reached 88% dependence because our domestic production is also falling and our diversion or transition to renewables is not happening. Our renewable electric vehicles at 2% of the domestic sale is one of the lowest in the world today. The countries where 90% 60% 70% transition is happening. So, we have not transitioned away from the oil. We have coal but we have a bad quality of coal and coal is very ugly environmentally, very unsound today it’s costlier than renewables. So, mismanagement of the energy economy has led to this situation which is not going to go away even if the Strait of Hormuz gets cleared for India.MKV: So, I’ll come to some other macroeconomic strategies being adopted by the government which in my view are on very shaky ground. For instance, the Prime Minister suddenly announced urging people to cut down their edible oil consumption, urging farmers to shift to natural farming, urging people not to travel abroad and not to buy gold etc. and today the commerce minister Piyush Goyal has said that they are coming up with a comprehensive strategy on how to reduce outflow of dollars maybe even discourage companies which are investing abroad. So, Mr. Garg, you were a part of policy making do you think such band-aid measures will work? I personally think that a person of Prime Minister stature saying that is giving a signal to the world market that India has a dollar problem and that people should not travel abroad. What do they spend? I think the last figure is $16 billion is what Indians can travel abroad. So, it clearly it sends a very negative signal to the rest of the world that that that a large economy like India is so underconfident that it can’t even manage an outflow of $16 billion by people who are traveling abroad and you know asking farmers to shift to as far as possible to natural farming. So all these things, what sort of signal are they sending and what do you think the world market will think that the Prime Minister is expressing India’s vulnerability on various levels and they there could be a renewed attack on the rupee and what could be the consequence of such signalling?SG: So there are two, I think reasons why the Prime Minister made the appeal. Number one, I think he was he’s realizing now there is a problem with the rupee exchange value as well as the reserves not being very usable or the disinclination of the government and the Reserve Bank of India to use the reserves in the difficult situation in which we are, so they are doing everything which will put less pressure on the reserves which will allow the demand supply sort of gap between the dollar demand supply to be sort of bridged in some way and that is one. So the reduce edible oil imports or don’t travel abroad or don’t buy gold none of them are going to work they are not or switch to the to the organic farming and the natural farming you don’t do it in a day, it’s not possible, the natural farming scheme the government is running for dunkey’s number of years it is still not shifted 1% of the agricultural production to the…MKV: Yeah. Yeah. I remember when you were there so many budgets made so many provisions for natural farming. It never worked actually. You’re right.SG: None of these measures actually are going to make any impact as far as the foreign exchange situation is concerned. This brings me to the second message which he was trying to say. If you analyse all these measures, these are largely barring some farmers etc. which are more of the optic reasons these are basically directed against the middle class. So, the middle- class travels abroad, the middle class buys gold, the middle class does most of these kind of things, edible oil, etc. That’s more consumer but imports, we are short on edible oil. So, the middle class has been a protected constituency of this government. They have tried to please the middle class by doing everything. You remember the tax concessions, one lakh rupees per month income being exempted, then that GST kind of reduction. All these were because the middle class is vocal and the middle class occupies the space in social media and elsewhere. So this government has been attempting to sort of keep the vocal middle class on its side. But now it seems to have come to the end of its ability to do more for the middle class. So in my judgment, the Prime Minister was perhaps trying to sort of prepare the middle class for the difficult times ahead and that is why he talked about these kinds of things. It was a preparatory thing that you can’t avoid the price increases for long and the middle class be aware of that and therefore I’m making an appeal which I think he knew that this appeal is going to make no difference and therefore I’ll come to the next stage of raising the prices. So I think that was the signalling which as far as the rest of the world is concerned. But I think in the rest of the world, the interaction with India is reflected in the FBI’s buying Indian stocks, FDI coming into the country. All of them have started writing off or becoming sort of lukewarm about India.MKV: I want to ask you why you think this is happening? Subhash, have you seen this kind of risk aversion for foreign investors not investing in India? I mean why do you think foreign investors are shying away like The Economic Survey itself said, what is the reason in your view?SG:The Economic Survey, by the way, I can understand the chief economic advisor’s limitations. He can’t criticize the government he…MKV: But he did criticize and he said foreign investment is shying…SG: Explaining that he tries to smuggle in something sensible in the previous survey he said, do business with China technologically China is this won this, time he said that rupee is punching below whereas actually the rupee was more due for the depreciation still he tried to say that handle the rupee, so he makes some limited sort of advice within this space but all of them the important thing is that all of them are rejected out of hand immediatelyMKV:What is your view? Why is investment not coming to India?SG: Look at FDI for example first. So FDI comes into a country where it thinks that there is a business opportunity. There is an opportunity to make profits. There is a new technological investment happening in the world today. There are three major areas where the investment is flowing, one is the energy transition, so whether it is solar, wind or the electric vehicles etc. So that is where the investment is flowing. The second thing is the digital transition which is semiconductor chips, computers and the third one is AI related agentic manufacturing. So in all three areas India is literally zero, okay. So when you don’t have investment opportunities here, you don’t have technological leadership in any of these three areas. Why would any foreign investors come here? Why are the foreign investors or everybody else still investing in America as far as AI related manufacturing is concerned or AI related software and programming is concerned? Why is everyone still investing in China in the energy transition and computerisation? Why is everyone still going to Taiwan or Vietnam? That is where the opportunity is. So believe me the Indian economy today has a big problem of only having the old mature supply access industry steel cement and others and there are no great investment opportunities. So that is the reason why FDI is not coming. Now for the FPIs, the FPI is a simple merchant. If they look at the stock market…MKV: Yeah they look at companies. Yeah.SG:Yeah. And for the last 20 -21 months, Indian markets are actually giving a dollar negative return and on top of that if you factor in the dollar depreciation, their returns become still more negative. So, if your stock markets have lost 10% over the last 20-21 months and your rupee has lost 15%, you are actually sitting on a 25% downturn minus the dividend etc. So, 15 to 20% is the negative returns. So, FII is not in charitable businesses; they will walk out. So, look at everything, look at the one more side lot for foreign capital or the flows that were coming with Indians borrowing abroad because they thought that the rupee exchange rate is stable and therefore they can sort of raise cheaper money abroad even that doesn’t exist so their repayment costs are going up so every way you look at, now in fact the more difficult things are going to come. The remittances have held out still, if the government takes measures like what you’ve just hinted, Piyush Goyal like putting restrictions on LRS or disallowing the FDI abroad, the international investors as well as the Indian diaspora out…MKV: Will hold their dollars outside yeah.SG: Right. So this is a kind of panic reaction. The government earlier was trying to sort of smooth sail the middle class and now it seems to be shifting to the panic mode. If it shifts, we have tougher days ahead.MKV:So you rightly pointed out that there is a panic reaction. I completely agree with you that there’s a panic reaction because the more you start curbing outflows the more foreign investors will get apprehensive that if they bring the money in they would also be subjected to some outflow restrictions. So I think that psychology also operates according to you?SG: Of course it operates. It’s essentially the first thing foreign investors look at. Is there a profitable opportunity? Can I make a profit then? I can repatriate my profits then. I see this in FDI. If you look at it the fresh inflow is still coming at about $70-$80 billion but what is happening more is that the repatriation is now about $50 billion those which had been ex invested earlier. So, instead of new flows coming more aggressively the existing investments are exiting. Yeah. Right. That is and you now see it in the startup space.MKV: But that’s a dangerous situation to be in. Right?SG: Of course it is.MKV:And tell me yeah Mr. Garg, where do you see the rupee going from here? Because the perception of the Indian currency as you initially said, its global perception about the performance of rupee is very poor. We were the worst performing in 2025. We are the worst among the worst performing in 2026 so far this year. And as you yourself said there are many currencies which are appreciating against the dollar but we are depreciating as a result, as somebody pointed out, we are even depreciating indirectly through the dollar against currencies like Bangladesh, Pakistan, etc. So, as long as this weak perception of the rupee stays, do you think that the foreign investors will hold back, because they would wait for the rupee to stabilize at some level, because as you said they don’t want to invest in and then see further deprecation of rupee and consequently their returns would suffer so they would wait for the rupees value to stabilize. So where do you think the rupee value will stabilize in the coming weeks and months? What is your sense?SG: I think Venu, that is where the situation is most delicate in my judgment and the government is getting very contrary advice and I think the government is not really thinking strategically long term, they’re just trying to manage for the short term. Look at a very strange situation today. The top economist of the country across the aisle, whether they are Modi-BJP supporters or they are against him –Arvind Panagariya, Arvind Subramanian, Raghuram Rajan, Gita Gopinath – anyone you name all of them are offering one advice, which is strange to my mind.MKV: Let the rupee fight its own level.SG: Correct. Let the rupee fall to its own level. Now one question we should be asking is what is the rupee’s real level. How do you measure? Are any of these economists in a position to tell what is the real level of the rupee? Now that is where I think the policy makers get very confused advice and signals. The policy maker should be more sort of pragmatist. Now there’s only one measure which economists and the Central Bank uses to define what is the true level of the rupee. It is called Rear.MKV – The RBI has a 40 currency basket rear.SG: Correct. So the important thing is that it tells you that rupees value should be 90 today.MKV: About yeah 90 to 92. Yeah you’re right.SG: Today we are at 96, 97.MKV: So that means we are highly undervalued.SG: We are actually far below what is the real value of the rupee. And now on top of that these economists tell you that find its own level don’t worry about 100.MKV:So, I want to ask you something here…SG: In response to your earlier question the short-term rupee dollar rate is determined by the short-term demand and supply situation not by the fundamental real value of rupee.MKV: It’s the capital flow capital outflow and inflow.SG: In the current situation, there is a dollar demand far in excess of dollar supply and that can only be provided and corrected by the Reserve Bank of India. If the Reserve Bank of India doesn’t create or remove the gap between the demand and supply rupee will artificially fall further 100 and it will go beyond. So the advice is completely wrong that RBI you should sit in the sidelines and don’t do anything. It’s the RBI which can only handle.MKV: So aap sahi keh rahe ho ki kahi economist yahi advice kar rahe hai ki let the rupee weaken to beyond 100, 102, 103. Now as per you yourself said RBI’s own 40 currency basket, rupees should be around 90 to 92. Now, at what point should RBI start selling more dollars? There is a view that actual expendable dollars with RBI in the reserves are less than $500 billion because they have nominally, they have 69 $690 billion but there’s an SDR component and gold component and some forward commitments which cannot be used immediately. So, do you think RBI can keep aside say $100 billion $150 billion to defend the rupee at some level at whatever 100 or 98 or wherever is that a tricky decision? That’s what I’m asking. Yeah.SG: This is a mindset issue. Yeah, I have been writing, which you just pointed out that of 700 odd billion dollars of that 115 is gold which is not usable, which is a useless foreign exchange asset as far as the foreign exchange element is concerned. You are sitting over 100 billion of forward swaps dollars which in fact the RBI is committed to sell in future and to that extent, that is not there. Yeah. The IMF reserve transposition SDR is relatively minor but let us assume that there are about 500 billion usable reserves. Now 500 billions of usable reserves and there are various estimates about the gap between the demand and the supply of dollars. Some people place it at about $60 billion. Some people place it at $80 billion. But it’s certainly not more than a hundred billion dollars for the year as a whole. So spending 500 out of 500 should be a very easy situation. It should not be a problem except that you have a psychological mindset of not spending but you end up spending because there is a real demand which has to be met. And when you grudgingly or unwillingly let the dollar flow to the market then the rupee depreciates faster. Yeah. See we have a very very, I would say sinister kind of situation. At this moment some of the economists and some of the people closer to the government, have started suggesting what happened earlier that the open FC and RB deposits allow. So at this point when the reserve bank should be supplying dollars is actually thinking of buying more dollars and the kind of swaps which you run, there’s an announcement of a $5 billion swap which will take place any day Now that is where the RBI is actually buying dollars today. This is very weird in my judgment. Where do the people who sell the dollar to RBI today and take it back after two or three years get the dollar from? They get the dollar from the market which raises the prices. So we have a very very wrong strategy in managing. As a policy maker if I were to be in the government, I would advise just ignoring these fellows for not using the RBI reserves and this situation may last for 3 months.MKV: Okay. So Subash one final question. What should be done can you if you are in the still in the government finance secretary but two three things that they should do to mitigate the panic response that that the government is offering today and to kind of calm the sentiments what would you doSG: See the trouble is that we start digging the well when we have a problem or when there is a house on fire. Every crisis situation requires two kinds of measures. One is short-term alleviative relief kind of measures and the other one is to initiate the long-term measures which create which take care of the distortions in the economy. If you go back to 1991 when we faced a bigger crisis, there again a lot of short-term measures were taken, but more importantly many long-term measures were taken. So short-term measures the government is taking, but if you can adjust the prices to reflect, because that is what can correct the real consumption real demand for that is one short-term but more importantly we should initiate the long-term measures, whether it’s in the energy side I spoke about, that let us do business with China to sort of make the energy transition happen, let us do business with the Americans to take the AI transition to happen, let us get the government out of the business public sector disinvestment program is what is what is needed. You need to take on agriculture. We have a very big problem. We have been discussing this earlier. The absorption of the government managing so much of the price is still administered in the economy whether it’s power, whether it’s fertilizer, whether it’s the input prices all of those distortions need to be sorted out. Let the reserve bank and the government rework its relationship. Let the Reserve Bank no longer be the debt manager of the government which creates a problem. All that the Reserve Bank is doing today is to ensure that the government’s borrowing program gets completed.MKV: Also the Reserve Bank is giving nearly three lakh crores to the government as dividends.SG: This is weird but sort of a pleasant consequence for the government. The RBI balance sheet is in rupee. If rupee depreciates, RBI balance sheet rises, RBI profits rise, nation suffers but RBI gets more profit and it is transferred to the government. So on one hand the government loses a lot of things but on the other side and these are all paper profits. You can’t create profit out of misery which the RBI does and the government receives it. That’s a very bad sort of symptom of the Indian economy. So I’ll just end my sort of assessment of the economy. Surjit Bhalla called it Fragile Two against Fragile Five in 2013. In my judgment today, India is the most vulnerable country in the world. So it is from Fragile Five 12 years back 13 years back Mr. Modi and his government has brought India to be the only vulnerable country in the world and that vulnerability cannot be set or cured by taking these short-time palliative measures and not allowing the economy to reform. Reform the economy if you want to get out of this vulnerable situation.MKV: So thank you very much Mr. Subash Garg for talking to us. You’ve always given us a lot of your insights from your institutional memory by being in the finance ministry. Thank you very much for talking to us.