India's strong growth fundamentals face risks from prolonged external shocks: Erik Berglof

New Delhi: According to Erik Berglof, Center Director at the Stockholm School of Economics, India's robust growth fundamentals are intact, but prolonged external shocks and global uncertainty pose significant risks to the economy, Berglof told a gathering on the sidelines of the Kautilya Economic Conclave.

Berglof highlighted that India possesses very strong growth prospects, but uncertainty in regions such as the Gulf has created stress for the economy. He pointed out that while the country's fundamentals support high growth, external disruptions present significant issues. The Center Director also mentioned that the prolonged nature of the recent geopolitical shock could impact India, and government measures to protect households from its effects might weaken incentives to reduce reliance on fossil fuels and hasten the shift towards cleaner energy.

India has been disproportionately affected by US tariffs, according to Berglof, and the uncertainty and arbitrary nature of tariff measures are as concerning as the tariffs themselves. He emphasized that India must strengthen resilience against climate shocks, geopolitical risks, and other external disruptions.

Berglof cautioned about the rising US bond yields and their potential impact on emerging and developing economies. He noted that higher interest costs could be particularly damaging amid elevated debt levels and substantial repayments expected over the next five years. However, he noted that India is better positioned than many other emerging economies due to its significant buffers and lower debt levels compared to some vulnerable countries. He attributed this to sound fiscal policies.

Regarding India's fiscal position, Berglof stated that a deficit would not be a major concern if the Middle East conflict was resolved; however, prolonged uncertainty requiring higher deficits over several years could prove damaging. He also highlighted the need for greater resilience in energy and water security. India faces a significant water challenge and requires domestic reforms, including water pricing and management.

Despite these vulnerabilities, Berglof reiterated that the growth fundamentals in India are very strong, but addressing external and domestic vulnerabilities is crucial to sustaining growth.