The world is entering an era of ‘Might is Right’. It has always been so but with the two recent wars — Russia-Ukraine and US, Israel-Iran — this has become pronounced.
Even if there is some justification, relentless attacking of another country through air strikes is a violation of the principle with which the international order was built up after World War II.
In this new situation, in a world interconnected through trade, not only the nations directly involved but also other nations suffer. The world trade is shrinking. Interdependence has become a liability.
Earlier, unilateral imposition of high tariffs by US resulted in the weaponisation of tariffs. Tariffs were used to achieve non-economic objectives. Developing economies were allowed to levy tariffs on certain commodities because of the time needed to catch up with developed countries.
If this is to be reconsidered, there is a forum and method to do it. Unilateral actions on tariffs can only disrupt world trade. How should developing countries react to the emerging situation of wars and tariffs? What can be done to reduce their adverse impact?
Reversal of trade theory
The economic impact of the two wars has been severe. They have knocked out the very basis of international trade, the world order and its governance. International trade theory suggests that if there is free trade among countries, each country will produce that commodity in which it has a comparative advantage. The net result will be that the world will be a least-cost economy with welfare gains.
Of course there are certain caveats. When WTO was being set up, experts recognised that there is a need to provide certain concessions to developing countries as mentioned earlier. Benefits of international trade are also built on the premise that there are no impediments in the transport of goods.
Unfortunately, we see a breakdown of all these assumptions in the current situation. There is a blockade of Strait of Hormuz by both US and Iran. India depends on Gulf countries for crude oil to a large extent. Nearly half of India’s oil imports are from Gulf countries. India’s dependence on Gulf countries for gas is even greater. If there is no free passage through the Strait, we face an extremely difficult situation.
Overall availability of crude oil gets reduced and prices shoot up. Both US and Iran are ignoring the code of conduct laid down by maritime laws. Strait of Hormuz is not Suez Canal which was artificially constructed and where toll fee is permissible. Strait of Hormuz is a natural sea way. A modest toll fee may be permissible to take care of the maintenance of the sea way but not a heavy toll.
Supply disruptions and alternatives
Supply disruptions affect the production processes. The supply chain linking many countries is an integral part of the production system now world over. With the Strait of Hormuz being restricted and breaking the supply chain, it has caused heavy risks on both growth and inflation across the countries.
What could have been done by India or any other country caught in this mess? First, particularly in the case of critical inputs, we should avoid dependence on other countries. This is not always possible. In the case of crude oil, it is nature’s gift.
One thing we can do is not to rely on one group of countries particularly geographically aligned, but diversify the sourcing. India has moved in that direction. There are almost 41 countries from which India is importing. In fact, India’s attempt to import from Russia also came under special attack earlier with US levying 25 per cent tax on imports from countries that had traded with Russia.
Second, if import is unavoidable can we hold an inventory lasting for several months? Data indicate that this has also been done, although not at the scale as suggested by International Energy Agency (IEA), which suggest Strategic Petroleum Reserve (SPR) covering 90 days of domestic consumption. But this has a high cost. Expensive storage facilities will also have to be put up. One has to strike a balance here. We can look at how Japan has done, which has reserves that can cover domestic consumption for more than 200 days.
Another way to do is to look at the option of having forward commercial storage agreements with source companies that will reduce the cost.
Third, India and other countries must look at alternative sources of energy. Use of coal was discouraged because of environmental considerations. Solar energy is a good option. Much has been done in recent years with its share in total installed power generation capacity increasing to about 25 per cent. But more should be done. On a mission mode expansion in the area must be undertaken.
The other alternative is nuclear energy. India has made progress in this area also. France is one major country where, based on some estimates, nuclear energy meets nearly 70 per cent of energy requirements with 57 nuclear reactors in place.
However, safety concerns related to nuclear energy cannot be brushed aside. Experts need to come together and provide a plan of action. These, however, are all medium-term objectives.
While a number of initiatives can be undertaken to take care of the present situation, one must take note that the world is moving towards a sub-optimal situation. We will have to live in a costlier system. In the emerging world of dominance of ‘might’, will defence need more attention? Will ‘guns’ take a lead over ‘butter’ in the allocation of resources?
Emerging economies like India need to create buffers for essential commodities to mitigate the exogenous shocks. Some of the essential inputs that we may have to focus could be food, fuel (including gas), fertilizer, and on the resources side, it is foreign exchange reserves and fiscal space. India has sufficient food and forex reserves. Forex reserves do not help always us in the present case when, supply is disrupted. With prudent fiscal management, India has created a fiscal space to mitigate the risks. Fiscal prudence must continue to remain a major focus of the government.
With the changing world situation, the medium-term strategy must be to create buffers for fuel and fertilizers or any other commodity, which is critically important. We should also work towards an improved world environment of cooperation rather than confrontation.
Rangarajan is Chairman and Bhanumurthy is Director of Madras School of Economics, Chennai
Published on April 21, 2026