Overview
In recent years, geopolitics and its tensions has become a critical issue in many countries in the world. Geopolitics plays a crucial role in influencing the economy of any country in the world. It affects the countries’ trade policies, currency fluctuations, supply chains, investment flows, accessibility to resources, and advancement in technology. The world is going through big changes with several countries taking steps towards protectionism, restrictions on transferring of technology, creation of geopolitical blocs, de-globalisation, and re-emergence of mercantilism (accumulation of wealth through trade surplus) in their economy.

The Indian economy is affected by geopolitics and its rising tensions. It is particularly affected when the dollar gets appreciated leading to outflow of capital and also when spike in tariff rates lead to adversely affecting export levels. It is important to measure the impact of risk on the economy to get a clear picture.

Events of High GPRI in India
The recent RBI Bulletin published with the name as “Geopolitical Risk and Trade and Capital Flows to India,” takes into consideration the problem of geopolitical tensions and its impact on India. To measure India’s response to the geopolitical challenges on both domestic and global level, it implements Geopolitical Risk Index (GPRI). This bulletin is written by former Deputy Governor of RBI, Michael Patra with researchers Harshita Keshan, Sheshadri Banerjee, and Harendra Kumar Behara.

To evaluate the GPRI, it takes into consideration various news which has geopolitical implications. In case of India, high GPRI was hit in situations such as Kargil War in the year 1999, Kashmir insurgency of 1990, Gujarat riots in 2002 and also Mumbai attacks in 2008. A strong correlation is observed between GPRI of India and the world in the years after 2014. It indicates that India is getting more connected with the changes in global geopolitics.

Impact of High GPRI
The High GRPI of India leads to several adverse effects on the economy of the country such as depreciation of rupee, fall in capital inflows to the country, and decline in trade flows. It also leads to contraction in trade terms of the country. The increase in geopolitical tension in the country leads to an increase in the cost of trading and a spike in export prices. Increase in export prices adversely affects the export level in any country. Also, the change or rearrangement of trade routes of the country is observed due to the rising tensions. It leads to a spike in cost incurred by exporters and also insufficiency in resource allocation. In case of country-specific risks, the major issue of depreciation of rupee currency is observed resulting in foreign investors rapidly converting rupee into dollar to prevent the adverse impacts of the risks. Despite this, the effect on capital flows of the nation is quite brief in nature.

While analysing the response of both capital flows and trade, the recovery of trade is recorded at a slower rate. The recovery measures taken for capital flows levels are instant and significant. It recovers back at a faster speed. In contrast to this, it takes longer for trade flows to recover. It usually needs about 6 to 7 quarters to bounce back to health completely. In case of GPRI of India, a one standard deviation of risk to domestic GPRI can cause fall in capital flows by 0.2 percentage point and decline in trade volumes by around 0.9 percentage point. Also, the capital flows are one which will recover at a faster speed.

Impact of Global GPRI on India
The high Global GPRI indirectly impacts the Indian economy adversely. It affects India’s trade flows, fall in trade terms and also increase in capital outflows. In case of impact of Global GPRI on India, a single standard deviation to Global GPRI can adversely impact capital flows by fall of 0.3 percentage point and contraction in trade volumes by around 1.0 percentage point. The trade volume takes around 6 to 8 quarters for recovery indicates gradual recovery.

Nature of Geopolitical Risks
The geopolitical shocks are quite different from the usual economic risks. It is quite tenacious and long-lasting in nature. It is also difficult to bounce back to normal. In case of India, the domestic risk impacts the competitive nature of export and also disruption in supply chains. On the other hand, international risks lead to challenges in capital flows and trade levels. It is the result of change in capital allocations, stricter trade policies, and also make foreign investors cautious about investment.

Response to GPRI
India can address the issue of domestic and international GPRI by expansion of trade agreements and improvement in infrastructure of the country leading to secure and efficient trade relations. It should also focus on diversification of trade sources instead of relying on one or two. It is also important to create financial buffers. The expansion of trade agreements by initiating bilateral swap agreements and partnership can help to reduce shocks of GPRI. Also, connecting with multilateral institutions such as the World Bank and IMF will help the country. The creation of strong safeguard and precautionary approach will certainly help India to tackle the rising geopolitical challenges.