By Amit Kapoor & Meenakshi Ajith
A currency is, in the end, a mirror. It reflects not just trade balances and capital flows but the deeper story of what a country produces, how efficiently it produces it, and how much the world trusts its future. By that measure, the Indian rupee which closed at a low of ₹95.27 to the dollar on 02 June 2026, having lost 6 per cent of its value in calendar year 2026 alone, is showing us something we need to look at carefully, and honestly. Perhaps not with panic, but with the kind of clear-eyed seriousness that the moment demands. That the pressure has migrated from trading screens to living rooms became clear last week, when the Prime Minister asked Indians to carpool, use public transport, work from home, skip foreign holidays, and stop buying gold. Gold is not an incidental item on that list. It is the second largest component of India’s import bill after crude oil amounting to $71.97 billion in FY26, up by 24 per cent in a single year. On 13 May, the government followed the Prime Minister’s appeal with policy, restoring import tariffs on gold and silver to 15 per cent and stating formally that precious metals are “relatively less linked to productive industrial activity” than energy, manufacturing inputs, and capital goods. The tariff will feed through into domestic prices, but the deeper question it leaves unanswered is one of resource allocation and why gold remains such a dominant store of value for Indian households, and what that says about the alternatives available to them.
Taken together, the appeal and the policy response that followed were not an explicit crisis declaration, but they were a signal that the economy’s vulnerabilities have grown too large to be absorbed quietly at the policy level and must now be shared with every citizen. The world has undoubtedly dealt India and other emerging economies a difficult hand this year.Nevertheless, a difficult hand alone does not fully explain where we are right now.
Let us start with what India buys from the world. In FY25, India’s merchandise import bill stood at $720 billion against merchandise exports of $437 billion, a goods trade deficit of nearly $283 billion, only partially offset by a services surplus. A trade deficit is, at its root, a savings problem. When a country consistently spends and invests more than it earns and saves, it must borrow the difference from the world, and the exchange rate is the price of that dependence. When those flows weaken, the rupee is the first to know. At the centre of that deficit sits crude oil: $137 billion on 234 million tonnes, with domestic production covering barely 12 per cent of requirements. The rest of the story is equally revealing; edible oils at nearly $19 billion with India importing 56 per cent of its requirement; fertilisers at $7.7 billion with potash and phosphates almost entirely sourced abroad; electronics imports at over $85 billion. Together these describe an import basket that reflects the limits of an economy still building its value-added manufacturing base where growth has relied more on arbitrage than on the depth of what it produces.
Some argue the picture looks less alarming once oil is stripped out, but it does not. Stripping oil from India’s trade deficit is blissfully avoiding the unavoidable. Crude import dependency has deepened to 88.2 per cent as domestic production has slipped further. This basket is price-inelastic: when the rupee falls, India does not buy less oil, fewer fertilisers or fewer components, but it simply pays more, automatically widening the deficit. Artificially holding fuel and fertiliser prices below global levels makes this worse, suppressing the demand adjustment that would otherwise trim volumes and transferring the cost onto government balance sheets.
Sophistication of a country’s export basket predicts long-run growth more reliably than volume. However, that sophistication is built from the manufacturing base beneath it. Countries that make complex things export complex things. With manufacturing at just 13 per cent of GVA against China’s 25 per cent and Vietnam’s 24 per cent, the base from which export complexity can grow remains shallow. The ongoing rupee depreciation offered a textbook tailwind and yet merchandise exports grew only 0.08 per cent. The opportunity existed on paper, but we haven’t’ built the industrial base.This is not for want of investor interest. Gross FDI rose 18 per cent through February and net flows briefly turned positive and then the US-Israel-Iran war began. Foreign investors pulled $12.3 billion out in March alone, and the rupee broke through ₹92, ₹93, ₹94, and ₹95.63 in quick succession. Capital will keep flowing in and out with the news cycle. What determines how much it matters is the strength of the productive base beneath it.
The country is certainly moving in the right direction. India’s semiconductor push, electronics assembly growth, and PLI-linked investment are real. Having climbed from 81st to 38th on the Global Innovation Index over a decade, and with over 120 unicorns and four innovation clusters in the global top 100, India has demonstrated it can build at scale when it commits. Nevertheless, sustaining that momentum requires matching ambition with foundations. Vocational training reaches only 2.4 per cent of India’s 15-to-24-year-olds and India’s pool of high-skilled workers are low to feed its ambitions. R&D investment at 0.65 per cent of GDP against China’s 2.4 per cent remains the most important number India needs to move, and no export basket climbs the value chain without it. Additionally, South Asia faces a projected loss of over 5 per cent of working hours to heat stress by 2030, which is a productivity drag that is already arriving and will fall hardest on the workers that India’s industrial transition most depends upon. While the foundations are being laid, its pace and depth in the coming 3 years will determine our closeness to the 2047 vision.
At $2,397 in current US dollar terms, India’s GDP per capita remains well below peers such as Brazil, Indonesia, and Vietnam. Sophisticated industries need sophisticated home markets to develop in. With household incomes still low, that domestic pull remains weak. The rupee is not just reflecting a trade deficit. It is reflecting the cost of an economy whose internal market has not yet grown large enough to anchor the complexity it is trying to build.
External shocks will come again. The dollar will strengthen, capital will flee, oil will spike. India cannot control any of that. What it can control is the depth of its productive base, the quality of its workforce, and the seriousness of its investment in knowledge and resilience. The rupee’s fall is not the crisis, but it is the signal. The real crisis would be to treat this moment as a temporary inconvenience, wait for global conditions to improve, and return to business as usual. India has the ambition. The mirror is asking whether it also has the resolve to confront the productivity gaps skilling its workforce, investing in R&D, moving up the value chain, and preparing its economy for the climate pressures already arriving.
(Amit Kapoor is chair and Meenakshi Ajith is development policy lead with Institute for Competitiveness. X:@kautiliya).
The article was published with Business World on June 13, 2026.
