Once again to the Davos Brainstorm here on India Today and Business Today TV. While geopolitics has dominated the discourse, in particular because of what President Trump is doing or perhaps won't do, the impact of that is clearly being felt on geoeconomics as well, and the Trumpian world order has caused considerable disruption and a lack of certainty as to what lies ahead. To try and make sense of that, as to what lies ahead for the economic order, I'm joined by a very special guest, Professor Gita Gopinath, Professor of Economics now at Harvard University, former Deputy Managing Director at the IMF. Always good to have you, Gita, on the show. Thank you very much.
We're speaking at a time of great uncertainty, and it seems to be sooner or later affecting economies across the world. Even as we speak, the rupee has gone to its lowest against the dollar. We had a 1,000-point-plus drop in the markets yesterday. Are you getting a sense that 2026 is going to be a year of uncertainty when it comes to economies across the world, including India?
It is going to be high levels of uncertainty, and it's going to be high levels of volatility. So we will see markets drop, we will see them come back up, we will see currencies move probably more than what we saw in 2025. Now, I was of the view that we were past peak tariffs in 2025 coming into 2026 because, one, there's the Supreme Court decision that has to come out, and there are the midterm elections where, frankly, tariffs are raising inflation in the US and it's leading to an affordability problem, and that is consequential for elections. But the year started out in a perplexing way, with the whole Greenland piece and a rupture of relations between the US and the European Union, which was not something that was on the cards last year.
Because the IMF, for example, has projected for India itself, what, 7.3% for '25-'26, and perhaps slowing down a bit into '26-'27, 6.4, 6.3. Do any of those projections hold in this Trumpian world order? Should we be looking at them in the first instance?
Again, it is a good, useful indicator. I have to say that 2025 played out about what was projected for the world. You know, I think they predicted 3.2 and it ended up 3.3, slightly better, but the ballpark was really good. So it is a useful number to keep in mind. But that said, we are certainly, you know, playing it by ear quite a bit these days and hoping for the global economy to all hang together.
Because you wrote an interesting article recently in the Financial Times. You argue that 2025 created an illusion of stability with global growth holding up despite tariffs, policy chaos, and rising uncertainty. Do you seem to believe, when you say it's created an illusion of stability, do you believe that illusion will hold, or sooner or later ruptures will be seen in economies across the world?
Well, I think one of two things are likely. One is, at the minimum, I expect that there will be a slow hit to living standards over time because structural changes of the kind that we're seeing, you don't see showing up immediately in GDP numbers. It weakens the economic potential slowly, and then it adds up over time. That's why I gave the example of Brexit in that article, which is that in the two years after Brexit, investment in the UK went up, and everybody said, 'Oh wow, this is much ado about nothing.' But actually that was not the case. In fact, investment started slowing and really slowed relative to what it would have been in the absence of Brexit. Also, the other thing I want to keep in mind is that while tariffs were a headwind, you had a good tailwind that came from AI, and that played a very important role. You know, the investment boom in AI, the stock market-driven wealth increases in AI, all of those helped growth, the fiscal stimulus, the fiscal spending that happened in China, Germany, some in the US, more happening this year in the US. All of that is offsetting it. So I, you know, I'd like to push back on this basic sense that somehow tariffs haven't done much. They've actually played out the way you would expect, keeping in mind that the average tariff rate is lower than what the sticker shock numbers are.
So you're saying these are times to be cautious, in a sense, because there's a belief that India, for example, I go back to India again, that India in a way has shown itself to be a bit of an outlier, still the fastest-growing large economy in the world, and that therefore with our domestic demand being what it is, we will do reasonably well even with these global headwinds. Do you go along with that, or is there a sense, as many businessmen privately tell me, privately not publicly tell me, these are uncertain times and they are very worried?
So, in terms of estimates of what the tariffs will do for India, it's about, it will knock off something about 0.7 percentage points from growth over a two-year period. I think nobody in India should think that, while you know what you've seen is a lot of exports from India that were previously going to the US were redirected to other markets, including the Middle East, other countries. Similarly, China redirected a bunch of flows, trade that was going to the US, to other countries in Asia, in Europe, and some of it, of course, has found a way back into the US, which is what happens. This is not a sustainable situation. I don't think there is, 'Oh, we will all very simply easily pivot away from the US and sell to other markets, and therefore we don't need to worry about the consequences.' The US is a large market. It does matter if you have very high levels of tariffs with the US. Whether, you know, how this gets solved is going to come down to the two heads of state. I mean, President Trump and Prime Minister Modi, a discussion and a decision at that level.
But you've also, and you alluded to it briefly, that there are signs that the US economy also could well be slowing down. Jobs could, you know, jobs could get scarce in the months ahead. Inflation, which you mentioned, could become a serious worry. Given all of that, does that add another factor in a way? Will that be a restraint at all, in your view, on what Donald Trump does or not? Can we separate the geopolitics from the geoeconomics at all anymore?
So the restraints that we have seen have come when there have been very big, dramatic decisions like April 2nd, Liberation Day tariffs. Then we saw financial markets respond very strongly between April 2nd and April 5th when they went and put a pause on those tariffs. Really, something could have broken in the markets. So markets are not a good disciplining device for slow erosion. They're good for when there are big shifts that you see. And indeed, if there is a huge decoupling of many more countries with the US, or the attempt to decouple, which I don't think is easy to do, but the attempt to decouple with the US, that will have big financial market implications.
Couple of other points that you've been making in recent comments and articles. One is your warning on AI, that it's not about its transformative potential, but you suggest that profitability and a risk of a dot-com style correction. Now, everyone here in Davos is talking about what the AI boom is doing. You seem to, again, be giving a slightly cautionary tale there.
I am very positive on the technology itself, and so I expect this technology will raise productivity growth. It will raise growth in general. It's the most transformative technological change of our lifetimes, and maybe more than our lifetimes too. That is separate from valuations of companies, both those listed on the market and those not listed on the market yet, like OpenAI and Anthropic and others. You know, it's hard for me to see how each of these companies can make the kinds of profits that are needed to justify the level of investment spending that they're doing, the level of valuations that they have. I mean, they haven't presented, most of them don't really have a big profit-making model. There is so much competition. I mean, every day there's a new LLM that's coming and leapfrogging the other one, not just from within the US but from international sources. I don't know about you, I'm going across LLMs. I go across very many different versions of those. So it seems like a fairly competitive space at this time. So that's just my point. My point is that it's technology that's real. It's not a fake technology. I think it will have a big impact. But at the same time, it strikes me that these valuations are somewhat more fragile.
On China, you argue that the continued reliance on export-led growth is untenable in a way, and that prioritizing technology investment over social safety net risks deepening structural imbalances. I mean, are we seeing China? There are those who argue that what Trump is doing is actually not making the US great again, but making China great again, that in a way this is China's moment as a result, because of the disruption being created even as we speak between the US and Europe. Do you go along with that, or do you believe that China itself will also have to reboot?
I think both are true, which is that China needs to reboot again. China was one of the countries that in 2025 redirected its trade away from the US to Europe and the rest of Asia. That is not going to hold in the long run because Europe is going to put tariffs on China, and they will be justified in doing that by WTO rules. They're anti-dumping tariffs that you can put. So we will see that play out. China cannot rely on export-driven growth. It needs to rely on domestic consumption-driven growth. Unfortunately, at least by going by their 15-year plan and so on, I don't see a big necessary shift that should be happening. The other piece is also true, which is, you know, the Trump actions and policies and announcements are helping China. You saw Canadian Prime Minister Carney travel to Beijing, which is something that the Canadian Prime Minister has not done in a while, to have a trade deal with China.
Let's turn fully to India at the moment. When you were in India not too long ago, you said that India hasn't had a big demographic dividend, even though the population is big, the workforce is big, labor is contributing only about 30% to growth. Are we saying therefore that this is India's opportunity, but you need to have a faster pace of reforms? The Prime Minister says we're on a reform express. Do you see that reform express, or do we need to do much more?
I see a lot of important reforms. I think it's absolutely special what's happening, both in terms of physical infrastructure and roads, all of that, and also digital infrastructure. Those are very big. What was done in terms of implementing the labor law, which, you know, requires states to agree to that too, I think that's a good push, though I don't know whether that's strong enough to get the kind of labor market flexibility you need to get a stronger action from labor. Right. So we like to talk about the demographic dividend, but India's growth has been quite capital-intensive because of all the restrictions on using labor and all the problems that exist with that. Simultaneously, the skilling, human capital, those are not going to pay off instantly, it's going to take time, but that improving, raising that level of human capital will be important to make labor play a bigger part in.
So risks and opportunities. If I were to ask you two risks and two opportunities that you see India having at the moment in this unsettled world.
I think in terms of risks, frankly, near-term external, which is coming from the geopolitics, and I would say weather and climate, those shocks matter. It makes a lot of difference how good or bad the monsoon is in India even now for growth, because rural demand still depends quite critically on that. So I think those are important risks. In terms of opportunities, it's just reforms. Keeping on the path of reforms, continuing to show that India is a good place to do business, making it easier to acquire land, transfer land titles, having clean land titles, judicial reforms. It's a big area that's been stuck for a long time. I mean, those would help.
Yeah. I had a business leader come on the show and said it's not about the ease of doing business, but the speed of doing business that India needs. Very interestingly, the IMF, which you were a part of till not too long ago, has given India a C-grade for its national accounts data. That created a bit of a stir, whether India is using outdated base years, methodological weaknesses, discrepancies between GDP estimates. Where do you stand when you look at those India numbers, 6%, 7%? Do you go by them, or do you believe that they need to be further decoded in a way?
So when I was chief economist of the IMF, we used to ask ourselves this question all the time, and the truth is for pretty much most emerging and developing countries of the world, they would get close to a C-grade on their national account statistics because they don't have very good producer price indices, they don't do the right kind of double deflation that needs to be done, and so on. So, you know, when you try to look at other kinds of high-frequency data, and we didn't see any smoking gun evidence that there was something particularly different about India's GDP numbers versus any other countries, right? It is tough, it's complicated.
Why give it a C-grade then? You see, the moment you, the moment the IMF gave it a C-grade, there are now questions being raised, and they've been raised even before that, but when the IMF does it, then it gets additional ammunition that the data that is being thrown by the government lacks transparency. And therefore, should we go by the headline GDP numbers or actually try and break it down into specific sectors?
So the grades are an absolute measure, not a relative measure. So my previous point was saying that most emerging markets find themselves in that bracket because they don't have the national statistics being done the way it can be done. That requires investment, and actually the IMF is working together with the Indian statistics office to improve on this kind of data collection, and there's an important round that's being done right now in terms of rebasing, which will help improve the quality of the statistics.
Because again, one of the concerns is how do you get private investment back on track in India if India has got to go to the next level. Despite all the incentives the government has given, private investment has been sluggish. It's been largely state-driven capital investment. Do you believe that's where the ease of doing business, of ensuring that there's a growing business confidence, needs to be restored? Also, a climate free of fear, if I may call it that, that businessmen need to believe that they will not be unfairly penalized for actions they take.
I do believe that the complications in terms of being able to do business, all of the areas where I said reforms were needed, including on land, are holding back private investment. And indeed, you want to be in a predictable environment when it comes to regulations, when it comes to government policies. And sometimes, you know, that has not been as predictable as it should be.
