Chief Economic Adviser to the Indian government, V Anantha Nageswaran, said the Indian currency’s exchange rate is not justified by the country’s economic fundamentals, and it has a lot to do with artificial intelligence (AI).
While India’s fundamentals are strong – GDP growth fastest among major economies, inflation moderate, current account deficit contained at low levels, external debt lowest in the emerging market – yet the rupee has depreciated by over 13 per cent against the dollar in the past two years.
There have been three sovereign rating upgrades, but there’s something else going on, said Nageswaran in a piece for Livemint. The Korean won is also undergoing a similar trajectory, with a depreciation of more than 17 per cent in the same window, he said.
The economist explained that this has a lot to do with the pull of AI investment and its impact on global capital flows. He said money is flowing towards dollar assets and away from countries that are not at the centre of the AI capital expenditure narrative, despite the fundamentally-sound economies.
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Nageswaran argued that India is not a beneficiary of the AI narrative because it is not pursuing AI through “hyper-scale data centre construction and chip-intensive infrastructure investment”. India is approaching AI from the demand and application side, he said.
No one expected India to make world-class digital public infrastructure, he said, giving examples of Aadhaar, UPI, U-Win etc. “The world’s assessment of what constitutes a winning AI strategy could look quite different a year from now,” he wrote.
However, there is a concern that AI “structurally undermines India’s labour-cost arbitrage in IT-enabled services, while China continues to squeeze India’s manufacturing space,” he said.
Nageswaran said that the relevant unit of analysis for IT services is the Global Capability Centres (GCCs) of which India hosts around 1,800.
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“A GCC staffed with engineers designing semiconductor architectures or modelling risk for a global bank is not the same thing as a call centre handling insurance claims. Conflating the two understates how far India’s services export model has already evolved and overstates AI’s capacity to substitute it,” he wrote.
While India’s merchandise trade deficit is high, a significant portion of it is oil-related, he said. If we remove the oil, the non-oil merchandise trade deficit is considerably less alarming, said the economist.
Nageswaran said the deeper problem is less sectoral and more philosophical. He asked if anyone gave India a chance in the 1990s to build a globally competitive IT-enabled services industry that would generate export surplus and employ millions.
He said that the linear projections of that era – compounded by infrastructural gaps, bureaucratic constraints and capital scarcity – would have given a verdict of impossibility, and they were wrong.
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To make projections that India cannot achieve in manufacturing and AI will be to repeat an intellectual error of every India sceptic from previous generations, he said.
“The rupee’s current level reflects a global flow environment distorted by AI-driven capital concentration in the US, compounded by structural bear narratives about India that do not survive serious scrutiny. The fundamentals are sounder than the exchange rate implies. When the AI cycle turns – as cycles always do – that gap will close,” he wrote.
