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Economist Ajay Shah on why China's rise, social media, and the retreat of American leadership broke the old world order, and what actually makes a country resilient when the next crisis hits.
Anupam Manur is a Professor of Economics at the Takshashila Institution. His research interests lie at the intersection of economics, technology, and public policy. He writes on platform economics, international trade, India’s ongoing jobs crisis, and on economic policy. Ajay Shah is an economist who has held positions at various government and academic institutions, known for his work on public policy and institutional reform.
Crises are not rare events. By Ajay Shah's reckoning, something like five financial crises happen somewhere in the world every year, most of which never make headlines. What determines whether a country survives one intact is not luck but preparation done long before the crisis arrives. In this conversation with Anupam Manur, Shah argues that the instinct to reach for protectionism, currency controls, and trade barriers the moment danger appears gets resilience backwards. Real resilience comes from flexible prices, institutions strong enough to resist bad ideas when everyone is frightened, and financial strength built up during calm times.
Shah traces the current "age of chaos" to three structural breaks: the rise of China as a systemically important non-market economy, the arrival of social media which undid a century-old political settlement around inequality and elite leadership, and the loss of American leadership under Donald Trump, which had previously held together everything from freedom-of-navigation shipping lanes to global environmental agreements. He works through what resilience means in practice, from the primary deficit and fiscal strategic depth to labor market flexibility and exchange rate adjustment, using examples ranging from the UTI bailout to Modi's caution during COVID to Britain's wartime borrowing history. He then turns to China specifically, laying out a categorized framework for when protectionism is justified and when it is not, before widening the lens to global risks over the next decade and what India's own reform process is missing.
The conversation moves from the abstract architecture of global crises down to the granular mechanics of Indian public finance and back up to geopolitical scenarios, all anchored in Shah's central argument: resilience is built in peacetime, not manufactured in a crisis.
Manur, Anupam, and Ajay Shah. "Turbulence | Risk and Resilience: Built in Peacetime." XKDR Forum, August 21, 2026. Video, 1:35:45. https://www.xkdr.org/viewpoints/turbulence-risk-and-resilience-built-in-peacetime
Somewhere in the world right now, a financial crisis is probably underway. Ajay Shah's rough estimate is that something like five financial crises happen globally every year, from banking seizures to currency breaks to governments discovering they can no longer roll over debt. Many of these never make headlines outside their own country.
Anupam frames the puzzle at the heart of the episode using 2008 as a hinge point in recent history: a single financial crisis seemed to cascade into the Eurozone crisis, Brexit, Trump, a wave of right-wing authoritarian leaders, and, after Covid intervened, Trump's second term. The question he poses to Ajay is why crises that look structurally similar can produce such different outcomes, and whether the difference lies in the absorptive capacity of different states and the global system.
Rather than categorizing types of financial crises, Ajay locates the deeper cause of today's "polycrisis" in three big historical shifts.
The first is China. After the fall of the USSR in 1989, there was widespread optimism that liberal democracy and free markets had won and the world would simply find its feet. For a long stretch, it did. But China built a state-controlled, industrial-policy-directed economy that does not fit any conception of a market economy, and China became too large and systemically important to ignore. Roughly 30% of global manufacturing now happens there, a concentration rivaled in history only by the United States' roughly 40% share of world GDP at the end of World War II. The novelty, Ajay stresses, is not just that China is big, but that it is a fundamentally non-market actor at that scale, something the world had never faced before.
He connects this directly to economic theory:
"When Paul Krugman wrote theoretical papers around new trade theory, they were considered just theoretical papers. The idea that there can be a country where there is one government and the government subsidizes an industry, that industry has increasing returns to scale, it kills off all global rivals, and then it starts recouping the profits. That whole thought process did not exist in the world until we got to China."
The second break is the rise of social media around 2010. Ajay argues it fundamentally altered society by breaking down what he calls the old political settlement, a hundred-year-old arrangement in which societies had learned to tolerate high inequality without it curdling into destructive politics. Drawing on sociologists M. N. Srinivas and André Béteille, he explains that poorer people traditionally looked up to elites and modeled behavior on them, a process called Sanskritization, which historically drove modernization (for example, when Indian elites abandoned caste-based restrictions on marriage). Social media broke this in two ways: it exposed ordinary people to curated glimpses of elite wealth, which manufactured envy that used to stay hidden "behind a high wall," and it replaced upward-looking aspiration with peer comparison and influencer culture, so children stopped dreaming of being astronauts and started dreaming of being on talent shows or becoming influencers.
The third break is the loss of American leadership. Ajay describes the US as the essential power that held the post-1945 global system together, protecting sea lanes through the Navy's freedom-of-navigation exercises and coordinating global agreements. He points to the ozone layer as an example of what that leadership achieved:
"The West led an agreement where all the countries, including India, agreed to shut down their CFC production. And the ozone layer problem was solved. And that's the power of what American leadership could do. And we have not been able to do that with climate change, because we lost that American leadership."
Under Trump, Ajay argues, America stepped back from that role, and wars in Ukraine and Iran are, in his view, partly a consequence of that vacuum.
Anupam pushes on whether social media doesn't just reshape politics but also amplifies financial crises and populist economic responses, including tariff policy.
Ajay answers with his own change of mind. During the UTI mutual fund crisis in India, he was a vocal critic of using government money to rescue the institution, publicly debating M. Damodaran, who was leading the government's response, in front of 500 people. Ajay argued UTI should simply be allowed to fail. Shortly afterward, he was appointed to the Ministry of Finance to work on the very crisis he had criticized, and helped negotiate a burden-sharing formula between investors and the government.
"Many, many years later, when you do the balance sheet correctly, M. Damodaran was right and I was wrong. On a mark-to-market basis, the government made a profit out of its intervention in UTI."
He extends this to the 2008 US financial crisis, where he says the federal government's interventions were, net-net, financially successful, but the political framing was toxic: headlines about $500 billion going to "fat cats" while ordinary pensions were squeezed created fuel for anti-elite anger on both the left and right. This dynamic, he argues, fed into the racialized backlash against Obama and helped produce Donald Trump. He is careful to note this isn't a call for unconditional bailouts; some cost should always fall on private investors to limit moral hazard, but the communication challenge of explaining necessary interventions in a social media age is real and dangerous.
On tariffs specifically, Ajay notes that despite protectionism usually being popular with the public, polling shows support for Trump's trade policy has fallen to a core base of only 25-30% of Republicans, which he reads as a reassuring sign that social media's reach into public opinion has limits.
Asked to define what resilience actually looks like, Ajay lays out three categories.
The first is factor market flexibility, meaning prices, wages, and the exchange rate should be allowed to move in response to shocks. He calls the exchange rate "the most important price of all," a shock absorber that should depreciate when India faces an adverse shock (like the war in Iran), making exports more competitive and imports more expensive. On labor markets, he gives India relatively high marks, not because of good policy design but because most Indian labor sits in the informal sector, where wages and hiring are flexible. As an example, during the 2008 crisis several Indian IT companies had open conversations with workers about cutting wages instead of jobs, something textbook Keynesian wage rigidity theory would not predict. India's lack of internal migration barriers, unlike China, is cited as another structural advantage, visible when migrant workers returned to their villages during Covid.
The second pillar is the resilience of institutions and ideas, specifically the ability of checks and balances (parliament, courts, media, researchers) to resist bad policy ideas that surface during a crisis. Here Ajay directly challenges the popular idea that crises drive reform:
"I totally disagree. This is Indian middle-class drawing room chatter. It is a lack of knowledge of politics in India, where people want a strong leader... You should not feel confident that a crisis will generate good outcomes. A crisis can generate terrible outcomes."
He cites the Reichstag fire as the starkest historical example of a crisis being used to suspend constitutional constraints and consolidate power. In every financial crisis, he warns, there will always be economists proposing higher tariffs or industrial policy, and think tanks need to keep debunking these ideas even when the arguments are decades old, since being previously refuted doesn't stop bad ideas from resurfacing.
The third pillar is financial strength, at the level of individuals, corporations, the financial system, and above all government. Vijay Kelkar's line anchors this point: "the time to fix the roof is when the sun is shining."
Ajay introduces the primary deficit (the deficit excluding interest payments) as the single most useful number for judging fiscal health, and argues healthy public finance requires a small primary surplus in eight out of ten years. India's ten-year average primary deficit sits around 2.5%, meaning the country needs an adjustment of roughly 2.5 to 3 percentage points of GDP to reach a safe zone. Symptoms of this imbalance include a debt-to-GDP ratio that keeps rising rather than falling, and a growing share of government spending consumed by interest payments. Ajay also flags a measurement risk: if India's GDP is overestimated, then debt-to-GDP could actually be 100-110% rather than the officially reported ~90%.
He reframes this entire discussion under the concept of "strategic depth" rather than narrow debt sustainability arithmetic. A state with strategic depth can respond meaningfully to wars, pandemics, and disasters, because it entered the crisis with clean books and genuine voluntary lenders. He contrasts this with financial repression, in which roughly 95% of Indian government borrowing is coerced out of the financial system rather than raised voluntarily, something he calls a disguised form of taxation rather than honest borrowing.
The historical example he reaches for is Britain's wartime borrowing:
"The UK government went to the bond market and said, guys, will you lend to me? The bond market said, sure, you give me a higher interest rate, I will lend to you. And the UK government was able to borrow like 150% of GDP to fight the First World War, and 200% of GDP to fight the Second World War... That's what makes a great country. In India, there would be no discussion beyond 3% of GDP."
He traces the British debt-to-GDP time series through the Napoleonic Wars, the Crimean War, and both World Wars, showing large spikes during wars followed by consistent paydowns, a discipline that, in his telling, was only lost once the welfare state took hold in the later 20th century. Anupam notes this discipline is only possible because Britain kept its "purse clean" during normal times, building the trust needed for voluntary lenders to show up when it mattered.
Ajay revisits the Covid pandemic as a live test of strategic depth. Despite an extreme economic catastrophe from the lockdown, India did not mount a large-scale fiscal stimulus comparable to the United States. Based on secondhand accounts, Ajay describes Modi's reasoning: before agreeing to a large stimulus, he reportedly asked to be persuaded that a similarly large stimulus would not be needed the following year, since nobody knew how long the pandemic or its later waves would last.
Ajay endorses the underlying caution as wise in principle, but argues the specific fiscal position India entered the pandemic with was itself too weak:
"Mr. Modi was correct that, in the Indian environment, it made no sense to try to be like the United States. Why? Not because we are a poor country, because we're a country where public finance has not been managed well... With his conservatism, we are 2.5 to 3 [percentage points] away from where we ought to be."
On strategic reserves more broadly, Ajay uses the example of natural gas to argue that money itself, not physical stockpiles, is often the real strategic asset. When global LNG prices spiked, tankers went to the highest bidder. India, thanks to hard currency earned through software exports, could outbid Bangladesh and Pakistan for scarce tankers, while those countries faced power cuts. He draws a direct, if uncomfortable, link between India's internal inequality (a small, highly productive software-exporting elite) and this form of national resilience, and concludes that being rich, in the sense of a government that isn't broke and a currency that isn't propped up artificially, is the deepest form of strategic protection available.
Turning to firm-level strategy, Anupam raises the trade-off between efficiency and resilience in global supply chains, and asks whether firms made a strategic error by over-optimizing for efficiency during the globalization era.
Ajay frames 1989 to 2016 as a distinct historical window, the "happy days" of post-Soviet globalization optimism, during which it was entirely rational to optimize for a world of open trade and predictable supply chains. Hindsight is 20/20, he argues; at the time, it made sense to bet on that world continuing. The break came in 2016 with Trump's election, followed by the first wave of China tariffs by 2018, marking the start of deglobalization. Firms today, he says, need to reassess the "mean-variance trade-off" of their supply chains and favor greater resilience, such as diversifying suppliers across countries, even at some efficiency cost.
He draws a parallel to 1989 itself: the truly clever strategic thinkers were the ones who understood immediately, not with hindsight, that the fall of the USSR meant India could and should abandon socialism and open up, a bet that paid off through the Rao-Singh reforms. The lesson he draws is that businesses, like policymakers, often underestimate how profoundly the political world has shifted underneath them, and reward flows to those who notice early.
Ajay sets out a structured way to think about protectionism against China, rejecting any blanket ideological stance in favor of category-by-category first-principles reasoning.
Category one is military technology, where he takes a maximalist position: zero Chinese content should be allowed in anything defense-related, both for supply chain resilience and because of the credible risk of kill switches or data leakage. He connects this to Operation Sindoor, arguing Pakistan's near-total reliance on Chinese military equipment effectively turned the conflict into a live battlefield test for Chinese weapons systems, which China then publicized. Rather than pursuing costly self-reliance, he argues India should deepen collaboration with the West, since South Korea, Japan, Taiwan, Australia, Europe, and the US all share the same objective of excluding Chinese technology. India's genuine comparative advantages here, he says, are low-cost manufacturing capacity for consumable items like drones (needed in volumes as high as tens of thousands per day) and geographic remoteness in southern India, which sits further from Chinese, North Korean, and Russian missile range than manufacturing hubs in South Korea, Ukraine, or Poland.
Category two is domestic strategic vulnerability: no Huawei-style switches in Indian telecom infrastructure, and no Chinese electronics with surveillance capability embedded in physical assets. He draws a clean line, developed with Nitin Pai and Ajit Ranade, that China should be welcome to invest in "dumb" infrastructure like highways, but not in anything with embedded electronics or data access. He also flags basic cybersecurity negligence as a domestic vulnerability in its own right, recalling that Ministry of Finance computers had no backups during his time there, and warning about the intelligence value to adversaries of breaches at institutions like AIIMS.
Category three is industrial policy for sectors where India has genuinely passed the market test. Automobile components is his example: private Indian firms became globally competitive and proved it by exporting, and current Chinese dumping justifies temporary protection until, in his framing, "China implodes."
Category four covers sectors with no meaningful Indian production capability, such as solar panels and lithium-ion batteries. Here he argues the calculus depends on whether China could weaponize a supply cutoff. Solar panels pose a manageable risk, since India could simply source panels from other countries. Lithium-ion batteries are a harder case, given how deeply they are woven into transport, and he mentions an ongoing paper with Nikit Abhyankar, Amol Phadke, Gautam Bambawale, Ashwin Gambhir, and Shantanu Dixit exploring how to balance cheap Chinese batteries against the kill-switch risk.
Anupam presses on two hard questions: can India afford to wait for China's economic troubles to play out, given that manufacturing knowledge lost now might take a generation to rebuild, and does India even have the state capacity to make the fine-grained, sector-by-sector judgments this framework demands?
On the first question, Ajay argues China's genuine success story ran from 1978 to 2012, and the turning point was Xi Jinping's rise, which reversed Deng Xiaoping's system of dispersed power and term limits, and used an anti-corruption campaign as a device for consolidating personal power and attacking elites, a pattern Ajay compares to other populist leaders. He points to repeated industrial-policy failures, particularly electric vehicle oversupply piling up unsold in warehouses, as evidence that China's growth model is structurally broken, not just cyclically weak, and that this shows up even in China's own official GDP data, which he considers less trustworthy than India's. He does not treat this as guaranteed collapse but as a live, ongoing dynamic that other countries, including India, do not need to face alone, since most advanced economies are simultaneously erecting trade barriers against China.
On state capacity, Ajay is candid that India currently lacks it. He describes hypothetically whether he and his NIPFP colleagues, working closely with a reform-era Ministry of Finance under Manmohan Singh, Rangarajan, and Montek Ahluwalia, could have contributed usefully to sector-by-sector China judgments, and concludes they likely could have, getting things right perhaps 60% of the time. But he argues today's bureaucratic and intellectual culture has declined too much for this kind of judgment-based industrial policy to work reliably in the short term. His answer is therefore two-layered: in the short term, India should be very skeptical of anything resembling industrial policy, but the long-term project should be rebuilding the intellectual culture, quality of bureaucracy, and role of external experts that once made this kind of nuanced judgment possible.
Anupam asks whether India even has an obligation to join the West's broader campaign against Chinese non-market practices, or whether it could instead simply maximize its own self-interest, taking cheap Chinese goods wherever beneficial while letting the West fight its own battles.
Ajay agrees in part: for sectors with no viable Indian industry, India should simply open the floodgates to cheap Chinese goods without hesitation. But on the question of aligning with the West more broadly, he distinguishes between being narrowly transactional and being strategic over a longer horizon. Using Japan as an example, he argues that decades of mutual accommodation, where India shapes elements of domestic policy to suit Japanese interests in exchange for Japan doing the same, produces more value than one-off, purely self-interested transactions.
This leads directly into a criticism of India's traditional foreign policy doctrine of strategic autonomy, which he frames as an unwillingness to make deals at all:
"Foreign policy is the business of making deals. I give something, you give something, we come together, we make progress for both of us... We should be willing to make deals that further Indian interests. It's Indian interests that are important. And interests are not always served by autonomy."
Asked what global risks lie ahead beyond the topics already discussed, Ajay first addresses AI, describing himself, half-jokingly, as "a sixty-year-old white-haired Unix hippie" who is cautious about sweeping claims. He does not frame AI's risk in terms of job losses, but in terms of a quieter epistemological threat to how young people build knowledge. Used well, AI is a powerful partner for learning and thinking, something he says he personally uses roughly 25 times a day. His concern is narrower: people who cut corners on homework, exams, or transactional work tasks using AI may get the credential or the promotion without acquiring the underlying knowledge, while those with genuine intrinsic curiosity will use AI to accelerate learning rather than bypass it.
On geopolitics, he runs through a list of scenarios already broadly understood by strategists rather than presenting new analysis: Russian escalation into Western Europe, a possible collapse of the Putin regime and the risk of loose nuclear weapons, a scenario resembling a second 1989 in which Russia fragments, a Chinese land grab into Russian territory such as Vladivostok, a North Korean attack on South Korea or Japan, and continued implosion pressures inside China. He also flags concern about Israel, describing it as a great country and an important stabilizing military power in the Middle East, while questioning whether Netanyahu's right-wing nationalism is damaging that role over time.
In the closing exchange, Anupam raises the standard Kingdon policy framework (problem, policy, politics) and asks whether India's reform failures are mainly about missing political alignment (as with the repealed farm laws) or about missing ready-made policy solutions (as with stalled labor and land reforms).
Ajay's first response is that meaningful reform is almost never generated by sitting politicians or civil servants, since their instincts run toward small bureaucratic fixes like "single window" clearance rather than genuinely tearing down state interference. Real reform emerges from long-term shifts in ideas and incentives built outside government, in society, until the political rewards facing a minister or governor change. As an example, inflation targeting only became policy once finance ministers began to be praised rather than punished for adopting it; the RBI did not originate the idea internally.
His second and larger point is a compact diagnosis of what ails India: "too much central planning and too little rule of law." He argues this applies across telecom regulation, capital controls, and tax administration alike, wherever officials exercise arbitrary discretion (deciding which technology, which financial instrument, or which activity is acceptable) instead of operating under clear, predictable, rule-based law. He argues that even well-regarded market-oriented reforms have often been shallower than they appeared. As an example, he revisits FERA's 1999 replacement by FEMA, celebrated at the time as liberalization, but which he says mainly removed criminal penalties while leaving the underlying control structure intact, only for those criminal penalties to be reintroduced by 2015.
Ajay's closing argument is that even the economists who drove 1991-2011 liberalization lacked the implementation knowledge to translate their ideas into durable institutional design, and that this gap, the actual blueprints for laws, organizational design, and checks and balances, still does not widely exist in India today. He places the responsibility for closing that gap squarely on researchers and policy institutions:
"We, in the research organizations, are the choke point. We don't have the knowledge, the documents, the planning, the preparation, the community building, the persuasion, the creation of human capital, the creation of hundreds of people through which these things will get solved."
The complete transcript file is available to download below.
05 Oct 2026
Abhishek Anand
21 Sep 2026
Sanjiv Shah
07 Sep 2026
Arvind Chari
2026, XKDR | GSTIN: 27AAACX3640C1ZN
by Sane Difference
