India’s External Debt: The Post-Covid Slippage Investors Can’t Ignore

 The Reserve Bank of India put out its quarterly external debt release on 29th June 2026, and as usual, the headline number got a polite nod and nothing more: India’s external debt stood at US$ 762.8 billion at the end of March 2026, up US$ 26.3 billion over the year, taking the debt-to-GDP ratio to 20.8% from 19.8%. On the surface, unremarkable. But when we look at the internals, the story that emerges is less reassuring than the headline suggests. The external sector isn’t in danger, but it has quietly become more fragile since the post-Covid recovery years, and that fragility matters for how we think about the rupee and India’s external financing risk over the next few years.

A manageable ratio, a weakening structure

The debt-to-GDP ratio at 20.8% remains comfortably in what economists would call manageable territory, and it isn’t wildly different from the 21.1% recorded in 2021, the last full year still shadowed by the pandemic.

However, the foreign exchange reserve cover for total external debt has fallen from 100.6% in 2021 to 90.6% in 2026. The share of short-term debt (original maturity) in total external debt has risen from 17.6% to 19.6%, and short-term debt as a proportion of forex reserves has climbed from 17.5% to 21.6%. Each of these is a small move in isolation. Together, they describe a debt profile that is shorter in tenor and less well cushioned by reserves than it was three years ago.

The debt service ratio is the one metric that needs a more careful read, because a straight 2021-to-2026 comparison is flattering — it fell from 8.2% to 5.8%. But 2021 was still a Covid-distorted year with depressed current receipts inflating the ratio. Using the post-pandemic trough of 5.2% in 2022 as the fairer base, the ratio actually climbed for three straight years, peaking at 6.7% in 2024, before easing back to 5.8% in 2026. That is not a story of steady deterioration, but it is not a story of steady improvement either — it is a debt service burden that has been more volatile and, on trend since the 2022 low, higher than the immediate post-pandemic years.​

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None of this is a crisis signal. But it is a genuine, multi-year softening in India’s external debt buffers since the immediate post-Covid years — exactly the kind of quiet deterioration that headline ratios are designed to hide.

Who is doing the borrowing — and what it says about domestic savings

The more interesting story sits in the borrowers’ profile. Government external debt has risen from US$ 133.3 billion at end-March 2023 to US$ 167.5 billion at end-March 2026 — an increase of roughly 25% in three years. That is a meaningful acceleration in sovereign external borrowing, even though it remains a modest 4.6% of GDP.

Deposit-taking corporations — India’s banks, effectively the country’s lenders — have grown their external debt from US$ 163.4 billion to US$ 202.1 billion over the same period, a rise of roughly 23.7%. I read this as a signal worth sitting with: when banks lean more heavily on external borrowing, it is often because domestic deposit and savings mobilization isn’t keeping pace with credit demand. FCNR(B) inflows and forex swap windows, which I’ve written about in recent months, are part of the same story — the banking system reaching outward because the domestic liability side isn’t growing fast enough on its own.

Non-financial corporations, by contrast, have grown their external debt far more modestly — from US$ 242.5 billion to US$ 277.9 billion, an increase of about 14.6%. Corporate India has been comparatively restrained in tapping external debt markets even as government and bank borrowing has run well ahead of it.​

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The composition matters as much as the aggregate. A rising share of government and bank borrowing, growing faster than corporate borrowing, is consistent with a fiscal and financial system leaning more on external capital to plug gaps that domestic savings once filled comfortably. That ties directly into the fiscal-deficit-and-currency thesis I laid out in my recent post on rupee depreciation: subsidy and transfer liabilities pushing the government toward more external financing, even as it stays a small share of GDP.

The one-year wall: US$ 327 billion coming due

This is the number that should get more attention than it does. On a residual maturity basis — that is, counting all debt obligations falling due over the next twelve months, regardless of original tenor — India has US$ 326.9 billion of external debt maturing within one year. That works out to 42.9% of total external debt, and 47.3% of foreign exchange reserves.​

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Read that last figure again: nearly half of India’s forex reserves would be required to cover just the debt coming due in the next twelve months.

This is where the debt story connects directly to the currency story. A large share of this near-term debt will need to be rolled over rather than repaid outright — that’s normal in any economy with an active external debt market. But rollover risk is precisely the channel through which global risk-off episodes, a sudden Fed repricing, or a fresh leg of the West Asia crisis I’ve been tracking, could translate into real pressure on the rupee. When $327 billion needs refinancing within a year and reserve cover has thinned from 100.6% of total debt to 90.6% since 2021, the margin for error on the currency has narrowed, even if nobody is calling it a crisis today.

Investor takeaways

·         India’s external debt-to-GDP ratio remains manageable at 20.8%, but this headline number masks a genuine post-Covid weakening in reserve cover and debt tenor — don’t let the stable ratio lull you into complacency.

·         The debt service ratio’s apparent improvement since 2021 is partly a base effect; on trend since the 2022 low, the near-term repayment burden has actually risen before easing slightly in 2026.

·         Government and bank external borrowing are growing markedly faster (c.25% and c.24%) than corporate external borrowing (c.15%) since 2023 — a pattern consistent with slower domestic savings and deposit growth funding the gap through external channels.

·         US$ 327 billion of external debt — 43% of the total, 47% of forex reserves — falls due within a year. This is the single most important number in the release for anyone positioning for currency and rate risk over the coming twelve months.

·         None of this points to a solvency crisis. It does argue for staying selective on rupee-sensitive and import-dependent sectors, and for treating any near-term INR stability as a rollover-financing outcome rather than a structural improvement.

 

Rupee Depreciation: A Fiscal Reading

Every time the rupee slides past another round number against the dollar, the same debate breaks out. Television panels turn it into a scoreboard of national strength. Social media turns it into a political weapon. Very little of this debate is about economics.

Strip away the noise, and an exchange rate is just a price — the price of one currency in terms of another, set by demand and supply like any other price. Demand for the rupee comes mainly from India’s trade earnings and from foreign capital that wants to own rupee assets. Supply of rupees is shaped by domestic fiscal deficit, money supply growth, and the pace of domestic inflation relative to the rest of the world. A country that runs a trade deficit, expands its money supply to fund government spending, and tolerates a higher inflation rate than its trading partners will see its currency drift lower over time. This is not a defect. It is arithmetic.

What is worth examining more closely is the fiscal piece of that arithmetic — not fiscal deficit as a single number on a budget slide, but as a growing stock of promises that a democratically elected government finds very hard to walk back.

Promises are liabilities too

A subsidy, a free ration scheme, a monthly cash transfer to women or farmers, a pension — once announced, these are rarely withdrawn. Politically, taking away a benefit is far costlier than granting one. Over time, these commitments start to behave less like annual budget line items and more like long-duration liabilities sitting on the government’s balance sheet, denominated entirely in rupees.

This detail — that the liability is in the government’s own currency — matters more than it first appears. Sovereigns that owe money in their own currency almost never default outright. They have a far easier option available: let inflation and currency depreciation quietly reduce the real value of what they owe, while continuing to pay the promised amount in full nominal rupee terms. The pensioner still gets the same number of rupees. The farmer still gets the same cash transfer. But each of those rupees buys a little less than it used to, and each dollar of external obligation gets a little easier to run since the government’s own tax revenue — also denominated in inflating rupees — grows in nominal terms even when real growth is unchanged.

Seen this way, currency depreciation is not simply something that happens to a fiscally stretched government. It is something that works in that government’s favor. A rupee that strengthened sharply would do the opposite — it would raise the real value of every subsidy and every pension commitment already on the books, making an already large fiscal burden heavier rather than lighter. Structurally, the incentives point only one way.

The scale of the promise

It helps to put a number on how large this pool of promises has become. Going by the 16th Finance Commission’s own review of state finances, states’ spending on subsidies has grown from roughly INR 4 lakh crore in FY19 to about INR 10 lakh crore budgeted for FY26 — two and a half times in seven years. Unconditional cash transfers to households have grown even faster, from about INR 73,000 crore to roughly INR 4.2 lakh crore over the same period, nearly a six-fold increase. The Commission’s own conclusion is that this expansion, more than anything else, is what is pushing an increasing number of states into revenue deficit — borrowing not to build a road or a hospital, but simply to fund routine, recurring expenditure.

The states, taken together, are currently budgeting a fiscal deficit close to 3% of their combined GSDP, and the Finance Commission’s own roadmap does not see the center’s fiscal deficit falling below 3.5% of GDP before FY31. Add the two together and general government borrowing in India stays well above 6% of GDP for years to come. That is the pool of rupee liabilities this argument rests on — large, growing, and, going by the political economy of welfare spending in India over the last decade, not something that reverses easily regardless of which party is in office.

What this means for an investor

Treat gradual rupee depreciation as the default, ongoing case for planning, not as an occasional shock to be reacted to. Anyone with long-dated rupee liabilities, or future foreign expenses such as a child’s education abroad, should build this into their planning horizon rather than their reaction to headlines.

Some permanent allocation to real assets or growing assets like equities is a reasonable hedge against this specific dynamic — the slow erosion of the rupee’s purchasing power — distinct from any short-term view on the dollar.

Businesses with real pricing power, export linkages, or import-substituting products benefit structurally from a currency that drifts lower over time. Businesses carrying dollar-denominated debt against rupee revenues carry the opposite exposure and deserve closer scrutiny.

The composition of government spending — how much goes to capital creation versus how much goes to subsidies and transfers — is a slower-moving but more revealing signal of currency direction than the monthly trade deficit or foreign investment flow numbers that dominate financial headlines.

A closing thought

The Bhagavad Gita’s second chapter tells Arjuna that heat and cold, pleasure and pain, come and go like the seasons, and that a steady mind learns to bear them rather than resist them. A currency behaves in much the same way over a long enough horizon. Its slow drift lower is not a nation failing to be mourned or denied. It is simply the mechanism doing what it was always going to do — quietly, and on schedule.

(This post draws heavily from Vikas Sehgal’s post My Mother’s Pressure Cooker . All copyrights are acknowledged with gratitude.)

Also read

Why this Kolavari di over INR

Rupee Depreciation: Demand, Supply, and Simple Economics

Stress-tested India!

The Reserve Bank of India (RBI) recently released the half-yearly Financial Stability Report (FSR) for June 2026. The report has come in the middle of a live geopolitical shock, therefore requires closer scrutiny. The broad message from the RBI is reassuring - the Indian financial system remains sound, even as the world around it gets noisier.

The RBI has framed the report against two forces reshaping the global economy and financial system — growing geopolitical fragmentation, and the technological disruption unleashed by artificial intelligence. The global economy, RBI notes, has stayed resilient so far, helped in part by optimism around AI-driven productivity gains. But the near-term outlook remains clouded given how quickly the environment keeps shifting.

The RBI captures the balancing act well: despite repeated shocks, the global financial system has shown notable resilience, with markets settling down after an initial bout of volatility triggered by the West Asia conflict. But global financial stability risks, the report cautions, remain elevated — lingering supply-chain uncertainty could still tighten financial conditions and reignite inflation, while high public debt, bond market fragilities, stretched asset valuations and the growing footprint of leveraged non-bank financial intermediaries (NBFIs) could all amplify the next shock.

On India, the tone is more reassuring. Domestic financial stability risks remain contained despite the global turbulence, the RBI says, underpinned by a strong banking system, healthy capital and liquidity buffers, and steady credit growth. India’s macroeconomic fundamentals, it adds, are stronger than those of many peers — and stronger than in previous crisis episodes — which gives the economy real buffers to absorb external shocks.

Some of the key highlights of the June 2026 FSR are listed below:

Global scenario

·         Markets held up, but the risk list hasn’t shrunk. The global financial system has demonstrated resilience through successive shocks, with markets turning more sanguine after the initial jolt from the West Asia conflict — helped by a smaller-than-feared rise in oil futures, strong corporate earnings and the AI-driven investment boom. Even so, elevated public debt, bond-market fragilities, stretched valuations and the expanding role of NBFIs remain live vulnerabilities.

·         Asset valuations look stretched, and AI stocks are a concentration risk. A sharp correction in global equities — particularly if triggered by a reassessment of AI-related earnings and valuations — could spill over into domestic markets. Debt financing by AI-linked companies has also been rising, a theme the FSR flags for the first time this cycle.

·         NBFIs keep growing in size and interconnectedness. The report flags the systemic importance of non-bank financial intermediaries and their deepening linkages with the banking sector as an area warranting close monitoring.

·         Cyber risk has a new face — AI. In a dedicated survey of 33 scheduled commercial banks and 10 upper-layer NBFCs, AI-enabled cyberattacks emerged as the single most significant risk expected over the next twelve months — ahead of ransomware, phishing and third-party or supply-chain risk. Even institutions confident about their overall cyber preparedness flagged the speed, scale and sophistication that AI brings to the threat.

Domestic economy

·         Growth headwinds from the conflict are receding, but not gone. With the signing of an interim peace deal, some pressure has eased, though the Indian economy and financial system remain exposed to geopolitical tensions and associated shocks. The Monetary Policy Committee (MPC) has projected growth of 6.6% for 2026-27, while flagging that elevated oil and commodity prices, along with weaker global growth, remain downside risks.

·         Inflation has crept up. Headline inflation rose from 3.5% in April 2026 to 3.9% in May 2026 on the back of oil pass-through. A combination of the conflict-driven supply shock and a projected weak monsoon due to El Niño could push inflation toward the upper end of the tolerance band in Q3:2026-27 — the MPC has already revised its inflation projection for 2026-27 upward, from 4.6% to 5.1%.

·         The balance of risks has actually turned more favorable. This is credited to the interim peace deal in West Asia along with recent Government and RBI measures aimed at strengthening capital inflows — even as some impact from India’s dependence on imported energy remains unavoidable.

·         Capital flows have come under pressure. Net FDI flows turned muted amid rising global uncertainty, and net international investment position dynamics reflect the broader retreat in capital allocated to emerging markets during the conflict period.

Indian equity markets

·         Indian equities underperformed EM peers, then corrected further. Trailing its emerging-market peers for over a year, the domestic equity market fell further amid concerns about India’s exposure to the oil-price shock and a resulting softening in corporate earnings growth. India’s earnings-growth differential over EM peers has now dropped below its long-term average.

·         FPIs sold at a scale not seen in over two decades. FPI equity outflows of US$ 30.7 billion in 2026 exceeded the prior record of US$ 18.9 billion set in 2025 — the highest outflow observed in the past two-and-a-half decades. FPI ownership of Indian equities has fallen to a two-decade low, and for the first time is now below that of domestic institutional investors (DIIs).

·         Domestic investors were the shock absorbers. Despite the sharp correction, the 5-day worst-drawdown in Nifty 50 during this episode was the mildest across comparable crisis periods studied by the RBI, thanks in large part to rising support from mutual funds, insurers and pension funds.

·         The Nifty 50 rally of the last two years has partly unwound. A returns-decomposition exercise (Gordon Growth Dividend Discount Model) shows that between September 2024 and June 2026, a rising equity risk premium — reflecting heightened investor risk aversion — has eaten into the gains that were earlier driven by risk-premium compression. The correction has, at least, brought valuations closer to their historical average, even though Indian equities continue to trade at a premium to EM peers.

Financial system stress in India

·         The stress indicator ticked up, but stayed low by historical standards. The Financial System Stress Indicator (FSSI) rose during the conflict period, but the level of stress in the domestic financial system remains relatively low compared to previous crisis episodes.

·         Banks are in their best shape in decades. Scheduled commercial banks (SCBs) remained resilient, with the gross non-performing assets (GNPA) ratio falling to a multi-decadal low of 1.8% in March 2026 and the net NPA (NNPA) ratio at 0.4%. Return on assets (RoA) stood at 1.3% and return on equity (RoE) at 12.6%, while the capital to risk-weighted assets ratio (CRAR) and common equity tier 1 (CET1) ratio stood at 17.7% and 15.3% respectively — both comfortably above regulatory minimums. Credit growth accelerated to 14.5% y-o-y and deposit growth to 11.5% y-o-y during 2025-26.

·         Stress tests say the buffers can take a hit. Macro stress test results indicate that the banking system remains well-positioned to absorb potential shocks, with aggregate capital ratios projected to stay comfortably above regulatory thresholds even under hypothetical adverse scenarios.

·         NBFCs and other intermediaries also pass the test. Non-banking financial companies (NBFCs) remained financially sound, supported by strong capitalization, healthy profitability and improving asset quality. Stress tests of mutual funds, clearing corporations and the insurance sector similarly point to continued resilience, even as rising interconnectedness across entities and sectors is flagged as a channel that merits close surveillance.

The moot point in FSR is whether India’s buffers — strong bank balance sheets and resilient domestic flows — are enough to keep absorbing repeated external shocks without the strain showing up in the real economy. On the RBI’s own assessment, so far, they have.

Some random thoughts

 West Asia crisis

In June 2026, the US and Iran signed an agreement to extend their ceasefire by 60 days. This gave both sides time to negotiate a lasting solution to a long conflict. Most West Asian countries seemed to support this process. But Israel, the most important player in the region, kept its distance and did not fully sign on to the terms.

This week, Iran held the funeral of Ayatollah Ali Khamenei, its Supreme Leader, who was killed in joint US-Israel air strikes in February 2026. Leaders from several countries attended the long-delayed funeral, and millions of Iranians came out on the streets of Tehran to mourn him. His son, Mojtaba Khamenei, has since taken over as Iran's new Supreme Leader.

Even as the funeral was underway, the fragile ceasefire came apart. In the past two days, Iran attacked commercial ships passing through the Strait of Hormuz. The US responded on 7 July with what it called “powerful strikes,” hitting more than 80 targets inside Iran, and reimposed the oil sanctions it had lifted as part of the ceasefire deal. Iran, in turn, said it would deliver a “crushing response” and struck US bases in Kuwait and Bahrain on 8 July. On the same day, speaking at the NATO summit in Ankara, President Trump said he now considers the ceasefire “over” and a “waste of time.” Oil prices jumped sharply on the news.

Looking at the mood of the Iranian people, the stance of Iran's leadership on its right to enrich uranium and control the Strait of Hormuz, and Israel's position on Iran's rights, it seems to me that this conflict is far from over. This week's exchange of fire, coming barely three weeks after the ceasefire was signed, confirms that hoping for a lasting solution within the 60-day window was always more wishful thinking than realistic expectation.

A more likely path over the next couple of years could involve four things. First, Iran may push ahead with building a nuclear deterrent against Israel and prepare to avenge the killing of its former Supreme Leader. Second, GCC countries may continue to keep an equal distance from Iran, Israel and the US, even as some of them, like Kuwait and Bahrain, get drawn into the crossfire. Third, Israel may keep trying to weaken Iran's ability to strike it. And fourth, the US may keep swinging between war and peace, as it has done again this week.

Ethanol blending

The government's policy of blending ethanol with petrol has drawn sharp criticism from citizens. There have been complaints of vehicle damage and lower mileage due to blended fuel. Several environmental groups have also opposed the E20 policy, saying it uses too much water to produce ethanol.

The government has strongly defended the E20 policy, pointing to its environmental, agricultural and economic benefits. Automobile companies have also said that E20 fuel does not damage modern, compatible vehicles. A review of thousands of service records suggests there is no widespread evidence of engine damage, wear and tear, or corrosion caused by E20 fuel.

Even so, opposition parties and civil society groups have turned E20 into a popular campaign against the government. They allege that the blending policy mainly benefits the family of a minister who is in the ethanol production business.

This could well become a major election issue. It is not clear how the government will restore public trust in blended fuel and put this controversy to rest. If I were asked for a suggestion, I would say the government should make blended fuel optional rather than mandatory, and offer incentives such as a lower price for blended fuel or a subsidy on insurance premiums.

Infra construction quality

Poor quality of infrastructure, especially roads, along with allegations of large-scale corruption in awarding and executing key infrastructure projects, has become a common topic on social media.

While corruption cannot be ruled out, a more likely reason for the poor condition of newly built roads is rushed construction to meet deadlines, which are often set for political reasons. Poor design and inadequate safety audits are also major concerns for road quality in India.

Whatever the reason, the fact remains that India spends much more than the global average to build its highways, yet the quality of these highways remains poor in terms of design, durability and comfort.

It would help to open up infrastructure construction to global competition and make it mandatory for all projects above Rs 50 million to be awarded through global tenders.

It would also be worthwhile to set up a dedicated highway police force to ensure the safety and security of highway travelers and to quickly address complaints of damage and accidents.

 

Is India staring at 2013, all over again?

History does not repeat itself but it often rhymes. Anyone who lived through the 2011-2013 period in India, and is watching the country in 2026, will find the rhyme hard to ignore. The characters have changed, the specific allegations are different, but the underlying script — a government fatigued by its own longevity, an economy under external stress, and a restless youth looking for a new savior — feels strikingly familiar.

The Making of 2014

India came out of the Global Financial Crisis of 2008-2010 in far better shape than most of its global peers. But the relief was short-lived. The years 2011 to 2013 turned out to be among the most turbulent in India’s recent economic and political history.

The government of the day was under siege from a string of scam allegations — coal mine allocations, 2G spectrum, and Commonwealth Games spending were the most prominent among them. Charges of misgovernance and corruption piled up. The Supreme Court’s description of the CBI as a “caged parrot” of the government became a defining image of that period, capturing how deeply institutional credibility had eroded.

On the economic front, the taper tantrum in the West triggered a full-blown current account crisis in India. The government was simultaneously accused of policy paralysis, with key infrastructure projects stuck and important economic reforms deferred indefinitely.

The youth of the country, disillusioned with the establishment, took to the streets. An avowedly ‘idealist’ new party emerged out of that discontent and swept to power in Delhi. Even the allies within the ruling UPA coalition began quietly distancing themselves from the Congress party at its center.

Sensing the opportunity, the BJP in 2013 named Gujarat’s Chief Minister, Narendra Modi, as its prime ministerial candidate — projecting him as the leader who would rescue the country from the mess and carry it to new heights. In 2014, the regime changed.

Twelve Years Later, 2026

Fast forward to today, and the parallels are hard to miss.

India has just come through a war with Pakistan in 2025 and a major crisis in West Asia, emerging from both with relatively limited economic damage — not unlike how it navigated the Global Financial Crisis a decade and a half earlier.

But once again, the government is fending off a string of allegations — misappropriation of temple funds, repeated examination paper leaks, a lack of transparency around the use of the PM CARES Fund, poor quality of public infrastructure construction, and a controversial ethanol-blending policy. A Bombay High Court judge has strongly criticized the government and the Mumbai Police for suppressing dissent — an echo, however faint, of the institutional friction of 2013.

An ‘idealist’ party has captured power in Tamil Nadu. In Delhi, the youth is protesting again, this time under the banner of an unorganized, loosely structured group calling itself the Cockroach Janta Party. And on the economic side, the country has just been through a balance of payments scare, with the RBI and the government having to take strong, visible measures to arrest the decline of the rupee.

None of this means 2026 is a photocopy of 2013. The specific issues differ, the political actors are not identical, and the economy today is structurally stronger in several respects. But the pattern of a long-serving government facing corruption charges, an external account under stress, and a young population looking for a new political alternative is a pattern investors would do well to recognize.

Three questions to watch over the next year

With key state assembly elections scheduled for 2027, the next twelve months will be an important test. Investors should watch closely for three things:

·         Will the government turn more populist ahead of the 2027 state elections, at the cost of fiscal correction?

·         Will India witness a repeat of policy paralysis, where key economic and other reforms are once again deferred?

·         Will the government lean on tax concessions to pacify an agitated middle class, financing this by cutting back on capital expenditure?

If these fears materialize, financial markets are unlikely to take it kindly. A slippage on fiscal discipline, a pause in reforms, and a shift away from capex-led growth toward consumption sops would be read by markets as a repeat of exactly the mistakes that cost the previous regime its mandate. Valuations, already under pressure, would have little cushion left to absorb such a shift.

An investor’s takeaway

For investors, the lesson from 2013 is not that history guarantees a particular election outcome in 2029. It is that markets punish drift — drift on fiscal discipline, drift on reforms, drift on institutional credibility — well before the ballot box does. Portfolios built on the assumption that the current growth and capex cycle will simply continue uninterrupted may need to build in some room for disappointment over the next year. Quality businesses with strong balance sheets, and sectors less dependent on continued government capex or populist largesse, are better placed to absorb this uncertainty than those that are not.

Twelve years is long enough for a country to forget its own history, and short enough for that history to return wearing a slightly different costume. Whether 2026 turns out to be 2013 in disguise is a question only the next twelve months can answer. Until then, watch the fiscal arithmetic, watch the reform calendar, and watch the streets — they have a way of telling the story before the results do. 

Is the Empire collapsing?

Empires end. History offers no exceptions to this rule, only variations in mechanism. Climate stress, in particular, has a well-documented record as a driver of civilizational collapse, and it is worth revisiting that record before asking whether Europe is now entering its own version of the same cycle.

Climate and the fall of empires

The Late Antique Little Ice Age coincided with the Western Roman Empire’s final unravelling in the 3rd-5th centuries AD, compounding the pressures of plague, fiscal exhaustion and military overextension that were already stretching the empire past its limits. Tree-ring and sediment records from Central America show that a sequence of severe droughts in the 8th-9th centuries AD placed unsustainable stress on Mayan agricultural systems, contributing materially to the classic Maya collapse. The fall of Angkor and the Khmer Empire in the 15th century is now strongly linked by dendrochronological evidence to decades of monsoon failure alternating with catastrophic flooding, which overwhelmed the empire’s elaborate hydraulic infrastructure. And the decline of the Indus Valley Civilization is tied by most current scholarship to a weakening of the monsoon system and the shifting of the Ghaggar-Hakra river network, compounded by the breakdown of long-distance trade routes that had sustained its cities. Across each of these civilizations, climate stress did not act alone -- it layered onto existing political, fiscal or military fragility and turned manageable strain into terminal decline.

The colonial-industrial inversion

The modern era tells a more familiar story. From the 18th century onward, European powers -- and subsequently North America -- built a two-century lead through colonial extraction, first-mover industrialization, and control of the financial architecture that governed global trade and capital flows. Asia, Africa and Latin America spent much of this period as suppliers of raw material and labour rather than as originators of capital or technology, absorbing the costs of an order they had little hand in designing. That order defined the last two hundred years. The question worth asking now is whether it still holds.

The tide turning

Over the past two decades, the balance has visibly shifted. China, India and the Gulf oil economies have re-rated on the global stage -- in GDP share, manufacturing capacity, technological catch-up, and for the Gulf states, in sovereign capital accumulation that now rivals the balance sheets of Western institutions. Europe, over the same period, has stagnated. Growth has been anemic, productivity gains have flattened, and the continent that once led the industrialization of the world now lags in the technologies that will define the next several decades -- semiconductors, artificial intelligence, batteries and electric mobility among them.

Europe’s native demographics have deteriorated materially. Fertility rates across the continent’s largest economies sit well below replacement level, the working-age population is shrinking, and dependency ratios are rising in ways that structurally weigh on both consumption and long-term investment. Alongside this, Europe has faced large-scale immigration from poorer regions of Asia and Africa, driven by conflict, economic disparity and demographic pressure in the sending countries. The scale and pace of this migration have strained housing, public services and labour-market integration in ways that have become a defining feature of European politics over the past decade, feeding directly into the fiscal and social pressures the continent now carries.

Climate change has compounded these strains rather than acted as a separate force. Europe has experienced a sequence of severe summer heatwaves in recent years, part of a broader warming trend that has strained energy grids, agricultural output and public health systems built for a cooler climate. The loss of cheap Russian energy has added a further structural cost, raising input prices for European industry at precisely the moment competitiveness with Asian and American manufacturers matters most.

Political responses have leaned toward expanding social spending and protecting existing entitlements rather than funding the scale of investment needed to close the innovation gap. The result is visible in the data: European equity markets have structurally underperformed global peers over a two-year stretch of valuation derating, sovereign fiscal positions have weakened as debt-servicing costs have risen alongside social outlays, and private investment in research, technology and new industrial capacity has lagged both the United States and China. Europe’s genuine and substantial trade deficit with China -- concentrated in electric vehicles, batteries, solar equipment and consumer electronics -- is direct evidence of this competitiveness gap in exactly the technologies that will matter most over the next decade. Where the United States has poured public and private capital into semiconductors and artificial intelligence, and China has built dominant scale in batteries and clean-energy manufacturing, Europe has largely regulated its way through the same period, producing a dense rulebook rather than a comparable industrial base.

None of this is helped by the fragmentation of Europe’s own capital markets. A continent of national exchanges, national pension systems and national banking champions has struggled to concentrate capital behind its own technology companies at the scale needed to compete with Silicon Valley or Shenzhen. The result is a familiar pattern: European researchers and start-ups often build the early-stage innovation, only to sell out to American or Asian capital once meaningful scale is required, exporting the eventual economic value of the invention along with the intellectual property that created it.

Strategically, European capitals are recalibrating toward both Beijing and New Delhi -- not out of any inherited historical alignment, but out of economic necessity: supply-chain diversification away from an increasingly unpredictable US tariff regime, and a search for growth partners as domestic demand stagnates. It is a realignment born of weakness rather than choice, and it marks a meaningful shift from the transatlantic order that defined European strategy for the better part of a century.

The investment reading

For an Indian investor, the operative question is not whether Europe is collapsing in the dramatic sense of Rome or the Maya, but whether its relative economic weight will keep shrinking against Asia over the coming decade -- and it is difficult to build a credible case that it will not. The demographic arithmetic, the energy-cost burden, the innovation gap and the strain of managing large-scale immigration are all structural, not cyclical, and structural problems do not resolve on a market cycle’s timeline. This argues for a portfolio construction that leans structurally toward India, China and the Gulf capital pools, and treats European exposure as a value trap dressed in the language of stability rather than a genuine long-term compounding opportunity.

This is not a call to abandon Europe entirely. Pockets of genuine strength remain -- in luxury goods, specialty industrials, pharmaceuticals and select areas of aerospace -- where European companies still hold global pricing power built over decades. But these are increasingly exceptions carved out of a broader structural decline, not evidence against it. Portfolio construction should treat them as selective, name-specific bets rather than a reason to hold broad European market exposure at the weights an earlier era of global allocation would have justified.

A closing thought

Krishna’s counsel to Arjuna is that forms arise and dissolve, and that grieving the passing of a particular order mistakes the transient for the permanent. Rome fell and successor orders filled the vacuum it left; none of those successor powers imagined its own impermanence either. Europe’s twilight, if that is what this is, will not arrive as a single dramatic collapse but as a slow erosion of relative weight -- in growth, in innovation, in strategic weight -- while the world’s center of economic gravity continues its shift toward Asia. The task for the investor is not to wait for the headline moment of collapse, but to price the erosion that is already underway.

For those looking to obtain European passports to escape tax burdens in the US, India or elsewhere the task might be urgent and more important.

 

 Choose your economic model

In the post-World War II era, two forces have driven economic development more than any other: real estate and exports. Together, they have transported most economies from underdeveloped to middle-income status over eight decades. Technology and productivity gains have played a critical but largely supporting role — improving export competitiveness and raising household affordability for property ownership.

Improvements in social outcomes — inclusiveness, sustainability, equity, and quality of life — have typically followed economic development with a lag, sometimes by decades. It is therefore reasonable to assess any country’s economic model against these two pillars: how well it has built exports, and how well it has developed real estate.

India’s experience on both counts is instructive — and incomplete.

Exports: A story that stalled

As India opened up its economy in 1991, exports began to rise noticeably. Growth then accelerated sharply from around 2004. Much of that momentum can be traced to the structural reforms of the NDA government under Atal Bihari Vajpayee (1998–2004) — aggressive privatization of core sectors, rapid build-out of industrial and trade infrastructure, and the development of engineering and technology capabilities, partly driven by the necessity of surviving international sanctions after the 1998 nuclear tests. Those compulsions produced competencies that later translated into genuine export strength in engineering, technology, and pharmaceuticals.

But after the Global Financial Crisis of 2008–09, the story changed. Exports stagnated. More telling, India’s exports as a share of GDP peaked around 2013–14 at roughly 25% and have been declining since. A sharp post-Covid recovery briefly arrested that trend, but the past three years suggest a resumption of the downward drift.

 

(These figures include merchandise exports, services exports, royalties, and technical fees.)

The structural issues are well known: weak manufacturing competitiveness, logistics gaps, a modest share of global value chains, and a services export base that is deep but narrow. None of these are easy to fix. But the data makes clear that post-GFC India has not been able to sustain the export-led momentum that most successful Asian economies relied upon.

Real Estate: Underdeveloped and under pressure

Granular data on real estate’s direct contribution to India’s GDP is not readily available. The broader category of “Financial Services, Real Estate and Professional Services” under the services classification shows that this group’s share of GDP rose from around 15% in the early 1990s to approximately 22–24% today — a significant structural shift.

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Much of that gain likely reflects financial services rather than real estate itself. A May 2026 KPMG report estimated real estate’s direct contribution to India’s GDP at approximately 7.3%. By comparison, most Asian economies see real estate contributing 13–15% of GDP — a gap that reflects how far India’s urbanization and housing development still have to go.

The enabling conditions for a strong real estate cycle have been present to varying degrees. Since 1991, average lending rates have fallen sharply — from nearly 19% at their 1992 peak to around 9% today — driven by sustained fiscal consolidation, better inflation management, and structural improvements in the current account. Lower rates, combined with rising employment, improving real wages, better connectivity, and expanded urban access, supported a strong real estate growth cycle through the 2000s and early 2010s.

That cycle has since lost momentum. Inflation has proved sticky, the current account remains structurally vulnerable, and real wage growth in the formal economy has slowed. Interest rates, while well below their historical highs, have stopped falling. Without a resumption of the structural improvements that drove the last cycle, the tailwinds for real estate are weaker than they were.​

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 The central question

This brings us to the harder question. If both pillars of the conventional post-war growth model — exports and real estate — are underperforming, what does India do?

One option is to double down: fix the structural constraints on exports, accelerate urbanization, and build the financial depth needed to sustain a larger real estate cycle. This is the well-tested Asian playbook.

The other option is harder to define but not trivial to dismiss. As I argued in a 2014 post on this blog (see Utopia: The Economic Solution), the Gandhian model — grounded in decentralization, labor-intensive production, self-reliance, and the primacy of the individual over capital — has attracted serious academic attention and is not without practical merit. The question is whether India has already travelled too far down the urbanization and integration path to reverse course, or whether elements of that framework can be selectively incorporated into a hybrid model.

Borrowing blindly from western models will not work in the Indian context. India’s economic model needs to reckon with a class structure, an employment challenge, and a rural civilizational inheritance that standard industrialization narratives do not address well. At the same time, a pure retreat to pre-industrial self-sufficiency is not a realistic option for a country of 1.4 billion people with legitimate aspirations.

The answer is likely somewhere in the middle — a model that aggressively rebuilds export competitiveness and develops real estate as a genuine engine of growth, while orienting its social architecture around decentralization, broad-based employment, and sustainability rather than pure GDP maximization.

The policy choice ahead

The data from the three charts above does not make a comfortable reading. Exports as a share of GDP have been falling for over a decade. Real estate is significantly undersized relative to India’s peers. Lending rates, while structurally lower than in the past, are not falling anymore. These are not cyclical problems. They are structural.

Policymakers cannot afford to wait for the globally tested model to reassert itself on its own. A deliberate choice needs to be made — either recommit to the conventional model with genuine policy urgency, or develop a credible alternative suited to India’s specific conditions. Muddling through, which has been the default, is not a strategy.

What that alternative looks like is a conversation India has not yet had at the level of seriousness it deserves.

Also read – Utopia: The economic Solution

 

After the ceasefire: Why the uncertainty does not end here

Markets appear relieved. The US and Iran have reached an understanding to pause the hostilities that escalated earlier this year, and negotiations for a formal peace treaty are expected to unfold over the next two months. The financial world is, for the moment, pricing in stability.

I would encourage caution. As I argued in an earlier post (Exercise Caution in the Peace Trade), the probability is high that markets have already priced in the bulk of the peace dividend. What lies ahead is not a clear road to recovery but a landscape with multiple overlapping sources of tension — geopolitical, structural, and domestic. Investors would do well to incorporate these into their thinking.

This post is not a forecast. It is a map of the risks I think are being underweighted.

The MAGA domestic pivot

A ceasefire in West Asia does not suit every political narrative. For the Trump administration, the outcome of a conflict in which Iran appears to have extracted meaningful concessions — sanctions relief, asset releases, recognition of Strait of Hormuz leverage — may not sit comfortably with the Make America Great Again agenda. With US mid-term elections approaching, the political incentive to redirect attention is strong.

The most plausible redirections include a reignition of the tariff war, confrontation with NATO allies who did not participate in the Iran campaign, or attempts to exercise influence over Cuba and other near-hemisphere targets. Any of these would reintroduce uncertainty into financial markets.

A stronger Iran and a fragile West Asia

If early reports are accurate, Iran emerges from this episode with economic sanctions lifted and frozen assets released. More importantly, the conflict demonstrated to the world the latent leverage embedded in Iranian control over the Strait of Hormuz — leverage that Iran will not be inclined to relinquish quietly. How Tehran deploys this newfound strategic confidence will be critical to watch.

The two paths are clear. Iran pursues a Persian-imperial vision — enhancing support to Houthis, Hezbollah, Hamas and allied proxy networks — or it pivots toward economic pragmatism and regional co-existence. History suggests the former is more likely in the near term, even if the latter is in Iran's long-run interest. A rising Turkey, increasingly positioning itself as an alternative patron for these groups, complicates matters further.

On Israel, I will simply note what the June post observed: a meaningful and lasting peace requires structural change that goes well beyond a ceasefire. The depth of grievance on multiple sides — accumulated over decades and sharpened by recent events — means that conflict in the region will remain a background condition for years, not months.

Japan: The guilt fades, the ambition stirs

In November 2023, I wrote about the world shedding the guilt of the two world wars and gradually reverting to the competitive, nationalist norms that characterized the pre-1945 era. Japan is, in my view, one of the more significant expressions of this trend. There are faint but discernible signals that Japan — which carried the burden of WW2 guilt for eight decades — is beginning to reassert a martial identity. Shinzo Abe's assassination in 2022 accelerated political shifts in that direction; subsequent defence budget expansions and the revision of Article 9 constraints have continued that trajectory.

If Japan's strategic ambition continues to harden, the Indo-Pacific becomes a materially more volatile neighborhood. For India, which is simultaneously managing Chinese pressure on its northern and maritime borders, this is not an abstract geopolitical observation — it has direct implications for defence budgets, alliance posture, and the cost of maintaining strategic autonomy.

India's unfinished preparations

Near home, China continues to expand its presence in the seas around India, arming and supplying neighbours including Pakistan and Bangladesh. South Asia is unlikely to be a quiet region regardless of what happens in West Asia.

And India's own preparations for a more contested world remain incomplete. Energy security is a work in progress. Our external balances are heavily dependent on services exports and remittances from the West — both structurally exposed to disruption. We rely materially on China for critical chemicals, minerals, and APIs that underpin our pharmaceutical and electronics export industries. Defence indigenization, while underway and accelerating, is a decade or more away from delivering genuine self-reliance.

None of this is to be pessimistic about India's long-run prospects. It is to be clear-eyed about the gap between where we are and where we need to be.

What this means for investors

The short conclusion is this: a secular bull market in Indian equities is not around the corner. The macro environment will stay complex, headlines will remain stress-inducing, and the temptation to make large directional bets on peace, normalization, or a global risk-on cycle should be resisted.

That said, decent wealth compounding opportunities are always present, even in difficult markets. They are just not at the index level. The more productive approach is to focus on specific businesses with growth and earnings visibility that is not dependent on a benign macro outcome.

Volatility will stay elevated and stress inducing. Brace for it, and invest accordingly.