India under Modi has gone from ‘fragile five’ to ‘vulnerable one’

If Morgan Stanley, or any other institution, were to identify the most vulnerable economy today, India will be the one.

Morgan Stanley characterised India, along with Brazil, Indonesia, South Africa, and Türkiye, as ‘fragile five’ in 2013, when India faced big rupee depreciation after the United States Fed’s ‘taper tantrum’ policy.

For 13 years, Prime Minister Narendra Modi and his Ministers have wielded the ‘fragile five’ label to berate the Congress-led UPA government’s economic performance.

But how has the Modi government itself fared?

Surjit Bhalla, a strong backer of the current regime, recently pared the ‘fragile five’ down to a ‘fragile two’ featuring India and ‘possibly Turkey’ as its ‘distinguished’ occupants.

Morgan Stanley, a staunch acolyte of the Modi government for at least seven years, has not updated the ‘fragile five’ list since the US unleashed trade and tariff shocks last year, and attacked Iran on February 28. Instead, it now finds all of Asia ‘vulnerable’.

So, is Asia vulnerable. or is it India alone? Why is India so exposed? Will India earn the dubious distinction of being the ‘vulnerable one’?

Worsening fundamentals

On every macro-economic indicator, India is either performing badly or is at an enormous risk of gross under-performance.

GDP growth is collapsing. The NSO’s second advance estimate for 2025-26 pegs ‘real’ growth at 7.6%, but this figure is misleading: it assumes just 1% inflation (with nominal GDP at 8.6%). This growth is also after the government pushed a Rs 12 trillion over-reported GDP to 2023-24. In current US dollars, IMF’s World Economic Outlook shows growth at only 4.2% ($3.92 trillion in 2025-26 versus $3.76 trillion in 2024-25). With inflation surging and the rupee depreciating sharply, real growth in 2026-27 is likely to fall to 5-5.5%, while IMF’s dollar-based growth could be as low as 2-4%.

Inflation is rising fast. Petrol and diesel prices have already been hiked by at least Rs 7.5 per litre, with more increases expected. Secondary effects from fuel, gas, and aviation prices are driving up industrial and agricultural costs, pushing WPI inflation above 8% in April. With interest rates and fiscal deficits climbing, broad based inflation is inevitable.

The rupee is Asia’s worst-performing currency, and may soon touch 100 to a dollar. India’s $700 billion forex reserves inspire little confidence, given soaring debt-servicing obligations (both government and private). Investment costs are rising, exports remain stagnant, and the current account deficit is rising menacingly. Seeing no positive returns from equity and debt, the FPIs are bolting, thereby putting big pressure on the Indian rupee.

The investments, both domestic and foreign, are on the backslide. The gross FDI inflows are stagnant. With sharp increase in repatriation, FDI inflows have become meagre (less than $27 billion in 2025). Indian industrialists are racing to invest abroad making the outward FDI (ODI) jump up. Consequently, the net FDI is virtually zero or negative. There is very little investment opportunity in India in the new-age industries in the absence of technology leadership (solar, electric vehicle, semiconductor chips, computer servers, AI agents, etc.). The domestic investment is also consequently lukewarm.

The government finances are under severe pressure. Real GST growth in April was only 2.83% (including GST cess in April 2025). The excise duty cuts of Rs 10 per litre will wash out 40% of excise duty revenues. The OMCs under-recoveries will have to be paid. The expenditures (fertiliser subsidy, higher DA increases, etc.) will deepen the fiscal hole. The fiscal deficit will increase by over Rs 3 trillion.

In short, not a single macro-economic fundamental looks healthy.

India — the only vulnerable

India slipped to 15th place in global FDI rankings in 2024 (World Investment Report) and likely fell further in 2025. While global FDI is declining, India’s performance is particularly weak. Domestic private investment continues to shrink quarter after quarter, and government capital expenditure, which drove investments till 2024, is now stalling. Productivity-enhancement investment is virtually absent.

India’s investment growth engine is sputtering. Merchandise exports have stagnated since 2013-2014, while imports have surged. The trade deficit with China has crossed $100 billion annually, and problems with the US threaten to wipe out India’s export surplus. West Asian exports are at risk following the US and Israel war on Iran.

India’s net export growth engine is stuck. The government and the RBI find $700 billion of forex reserves inadequate for protecting the rupee.

India’s foreign external vulnerability is too obvious. Türkiye has struggled since 2013 on account of Erdogan (a dictator) forcing bad economic policies. Türkiye’s is not a good peer group for India. meanwhile, most East Asian economies have surged ahead of India; Vietnam is the region’s new growth tiger.

Morgan Stanley is yet to update its ‘fragile five’ list. If it, or any other institution, were to identify the most vulnerable economy today, India will be the one.

Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream Dented’, ‘Commentary on Budget 2026-2027’, and ‘We Also Make Policy’.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)