A prelude to the Union Budget 2026

Key message: Union Budget 2026 is less about stimulus or concessions and more about managing trade-offs (growth vs fiscal consolidation; economic prudence vs self-reliance; public sector vs private sector, etc.) — a theme investors should factor into portfolio decisions.

Every Union Budget arrives with a familiar mix of hope and anxiety for investors. Will there be a big growth push? Will taxes change? Will markets cheer or sulk?

Going into this Budget, the macro backdrop is more nuanced than the headline numbers suggest. Growth hasn’t collapsed, banks are healthy, and inflation is manageable — but several underlying trends are flashing caution. For investors, this is less about expecting fireworks and more about understanding constraints.

Growth looks fine — until you dig deeper

On paper, FY26 real GDP growth still looks respectable. But dig beneath the headline and the story becomes less comforting. Consumption has slowed, private investment remains cautious, and household savings have steadily declined. Multiple research reports point out that income growth for both households and corporations has weakened over the past year, even as selective tax cuts supported pockets of spending rather than broad-based demand.

For investors, this matters because sustainable corporate earnings are driven by income-led demand, not just government spending or credit-fueled consumption.

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​Government revenues are under pressure

Slower nominal GDP growth is now showing up clearly in government finances. Gross tax revenue growth in FY26 has fallen well short of budget expectations, driven by softer income tax collections, GST rationalization, and weaker corporate profitability

At the same time, the disinvestment program has once again failed to meet targets. To bridge the gap, higher dividends from PSUs and the RBI have helped — but this has come at a cost. PSU capital expenditure as a share of GDP has fallen to nearly half of pre-COVID levels, weakening the medium-term investment pipeline

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Capex cuts are a constraint, not a choice

With revenue falling short and fiscal deficit targets largely non-negotiable, the government’s room to spend has narrowed. As a result, both revenue expenditure and capital expenditure have undershot earlier plans in FY26

Most analysts expect the upcoming Budget to remain fiscally prudent — not because growth doesn’t need support, but because the government is committed to a steady debt-reduction path. Capex is likely to grow in FY27, but at a measured pace rather than as a big stimulus.​

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Household balance sheets are quietly weakening

One of the more underappreciated trends is the deterioration in household finances. Net financial savings have declined even as household debt has risen. Consumption is increasingly being funded by borrowing rather than income growth.

This is problematic from a fiscal standpoint too. Consumption funded through credit generates far less tax revenue than consumption funded through rising wages or profits — making it structurally negative for government finances and aggregate demand over time.

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External risks are rising

India’s external environment has become more challenging. Exports are under pressure from higher US tariffs, global supply-chain disruptions, volatile commodity prices (especially metals), and slowing global growth.

Capital flows haven’t helped either. FDI has moderated, FII outflows have persisted, and the rupee has weakened — all of which increase external vulnerability, even though current account deficits remain manageable for now.

Banking system is strong — with one caveat

On the positive side, India’s banking system is in good shape. Liquidity remains comfortable, capital buffers are strong, and credit growth, while moderating, is still healthy. The credit-to-deposit ratio has stabilised at elevated levels, reflecting improved intermediation efficiency and balance-sheet strength

The caveat? A rising share of consumer credit. While this supports near-term demand, it raises questions about sustainability if income growth doesn’t catch up.

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Taxes: Don’t expect big surprises

A redrafted Income Tax Act has already been implemented, and GST and excise rates have undergone significant changes just a few months back. Given the fiscal constraints, markets are not expecting any major tax giveaways or hikes in this Budget.

That said, selective customs duty tweaks remain possible, especially where global trade commitments or domestic manufacturing priorities require adjustments.

Key overhangs markets want clarity on

Finally, investors will be watching for guidance on two important issues:

·         The 8th Pay Commission, where future payouts could create fiscal pressure, even if implementation is likely later.

·         Sovereign Gold Bond (SGB) redemptions, which have implications for government borrowing and liquidity.

Clear communication on timelines and provisioning could matter more than actual allocations this year.

The bottom line for investors

This Budget is unlikely to be dramatic. Instead, it will probably reflect a careful balancing act — supporting growth where possible, preserving fiscal credibility, and avoiding long-term slippage.

For investors, that means tempering expectations. The focus should be less on Budget-day announcements and more on medium-term themes: quality balance sheets, pricing power, domestic manufacturing, and companies that can grow even in a slower macro environment.

Sometimes, the most important Budget signals are not in what is announced — but in what the government chooses not to promise.

Preparing for the dinner party of generous uncle

One of my distinct childhood memories is of an uncle who used to travel abroad for work almost every year. After every foreign trip, he would invariably host a family dinner. At these gatherings, he would passionately explain the difference between heaven (Europe and the USA) and hell (India). He would make every adult regret being born in India and inspire every child to dream of settling abroad.

My brother and I were least interested in what the uncle had to say. Our attention was firmly fixed on the final act—the opening of the goodies bag after dinner. He would generously distribute “gifts” brought from “foreign.” These invariably included bathroom slippers, shaving and dental kits, cosmetics, and writing instruments picked up from hotel rooms and flights; bottles of perfume; some clothes; small toys; and souvenirs—mostly bought from dollar stores (a fact I discovered only in hindsight after travelling myself).

Three essential items were bottles of liquor from the duty-free shop, a wristwatch, and some electronic gadget (a camera, oven, juicer, or VCR). These, however, were offered for sale. In hindsight, I realize that he probably recovered the cost of his entire trip by selling these items.

The Union Budget feels uncomfortably similar.

Each year brings an elaborate build-up, breathless commentary, and a speech promising balance, growth, and inclusion. By evening, optimism peaks. By the next morning, reality intrudes—through fine print, revised calculations, and newly discovered burdens. The middle class feels poorer, markets recalibrate, and expectations quietly reset.

For nearly 30 years, this cycle has remained remarkably consistent. Budgets do not fail because governments lack intent; they fail because they are asked to be miracles. Growth engine, redistribution tool, political manifesto, and fiscal discipline document—all rolled into one.

The Union Budget 2026 arrives with an especially inconvenient truth: the government has more commitments than cash. Capital expenditure must rise, social obligations cannot shrink, and global conditions are unforgiving. Additional resources must be raised—and no amount of pre-budget consultation can change that arithmetic.

For those expecting the finance minister to pull a bazooka out of her tablet, I have said this before and reiterate it here: the Union Budget in India broadly serves five objectives…

The Union Budget in India usually has five objectives:

(i)    Presenting the annual accounts of the previous year's Union Government for consideration and approval of the Parliament.

(ii)   Presenting the policy roadmap for the future. This usually is a political statement.

(iii)  Presenting the budget of the Union government for the following year. This includes the budget for various revenue and capital expenditure of the union government, allocation of resources to states and union territories, and sources of revenue to meet the budgeted expenditure and allocations.

The key monitorable in this exercise usually is the difference between the revenue and expenditure. The excess of budgeted expenditure over budgeted revenue is termed as fiscal deficit.

This deficit is met by the union government through borrowings from various sources. Changes in provisions of various tax laws are also monitored closely as it impacts the tax liability and compliance requirement for the taxpayers.

(iv)  Presenting an action taken report for the previous budget proposals.

(v)   Presenting a medium-term fiscal road map in terms of the Fiscal Responsibility and Budget Management Act 2003 (FRBM Act).

The interest of most capital market participants is usually limited to the third objective listed above. The rich eagerly wait for the budget to get fiscal incentives to make investments and find loopholes for evading taxes. The middle classes wait for some tax concessions. The poor anticipate more subsidies and welfare schemes.

This year, in particular, the budget anticipations are mostly focused on the following two points:

1)    How the finance minister will manage resources to meet the requirements for higher capital expenditure to stimulate the investment demand and pay commission payout. Raising tax rates or imposing additional levies may not be preferred options. Therefore, abandoning fiscal consolidation by retaining current fiscal deficit (4.4% of GDP) target; raising non tax revenue (aggressive disinvestment); higher tax revenue through stricter compliance; and additional duties on precious metals may be some of the preferred sources of additional revenue.

However, market conditions and higher yields could make disinvestment and aggressive borrowing challenging.

2)    Does the finance minister announce any measures to support the capital markets, especially to stem the incessant outflows of capital that is adversely affecting the INR, Bonds, and the sentiments of domestic investors.

As far as I am concerned, I will listen to the finance minister mainly for objectives (ii) and (iv). More importantly, I would like reassurance that the government is fully conscious of global challenges, has a credible strategy to deal with them, and is firmly in control of the balance of payments situation.

I carry no expectations of tax concessions. I am convinced that my effective tax rate has already bottomed out. Any concession—if granted—would likely be ad hoc and possibly misleading, much like the shiny gifts at my uncle’s dinner: attractive at first glance, but rarely of lasting value.

De-globalization or re-globalization - 2

Continuing from yesterday.

The case of India

India is a textbook example of this new world order:

It plays an active role in BRICS, a group of emerging economies focused on economic cooperation, development financing (e.g., the New Development Bank), and alternative institutions outside Western dominance.

At the same time, India engages deeply with the Quadrilateral Security Dialogue (Quad) — alongside the U.S., Japan, and Australia — to boost security, technology, and trade cooperation in the Indo-Pacific.

Rather than choosing one camp, India’s multi-alignment strategy shows how countries can navigate a complex world by partnering on specific issues with different sets of nations.

Global balancing acts

In much of the world, states are balancing: Economic cooperation that boosts trade and investment, Strategic cooperation for security, and national autonomy to protect key interests.

This creates overlapping spheres of influence — regional trade deals, bilateral agreements, and selective multilateralism — that together make up the new global order.

Investment implications of the reconfigured world

The new global structure has important implications for investors. As globalization evolves, so will markets, capital flows, and risk profiles.

Supply chain realignment creates new opportunities

With firms diversifying away from single-country production, regional supply chains will grow. Investors should look for opportunities in countries benefiting from this shift — especially in ASEAN, India, and parts of Africa and Latin America where production is expanding.

Higher costs and risk due to fragmentation

Protectionist policies and tariffs can lead to higher input costs, supply chain disruptions, and volatility in profit margins. Investors should factor in geopolitical risks and trade policy uncertainty when valuing companies with international exposure.

Growth of regional trade blocs

As countries form regional trade arrangements, investment opportunities linked to intra-regional commerce will rise. Funds flowing within a bloc (like ASEAN, EU, or BRICS) may see faster economic integration and growth.

Strategic sectors in focus

Governments will prioritize sectors seen as critical — such as technology, defense, energy, and critical minerals — for national and regional security. These sectors may enjoy higher investment priority and support.

 

Currency and capital flow dynamics

Fragmented globalization can influence currency markets and capital flows. Some nations may push for alternative financial systems or reserve currencies (e.g., BRICS de-dollarization talk), affecting global finance and investment returns.

Risk management and diversification

Investors must adapt portfolios to:

hedge geopolitical risks,

diversify across regions and asset classes,

and capture pockets of growth rising from new blocs and partnerships.

In sum: rather than betting on a return to isolation, smart investors will adapt to a multipolar, multi-trade-bloc world where localized integration coexists with still meaningful global interdependence.

Conclusion: Globalization evolving — not ending

The debate isn’t simply about whether globalization survives. Instead, we’re witnessing its transformation — from a world connected by broad, uniform rules to a more segmented, regionally focused, and politically nuanced global order. Trade and capital still flow, but through multiple lanes rather than a single global highway.

This world of overlapping alliances and trade networks — multilayered globalization — offers both risks and opportunities. For investors, the challenge and opportunity lie in anticipating shifts in supply chains, geopolitics, and regional ties.

Rather than fearing isolationism, savvy players will embrace the complexity of this evolving global landscape.

Also read

View from the Mars

View from the Mars 2

De-globalization or re-globalization

For decades after World War II — and especially after the Cold War — globalization was the defining trend shaping the global economy. Markets, capital, people, technology, and ideas flowed across borders with increasing speed and volume. China’s entry into the WTO in 2001 was one of the most dramatic accelerators of global economic integration, lifting millions out of poverty and making global supply chains deeply interconnected. However, the 2008 global financial crisis marked a turning point, slowing trade growth and exposing vulnerabilities in the global system.

In the years since, the globalization story has become more contested. Events like Brexit and renewed trade tensions, especially large-scale tariffs by the United States, have fueled talk of deglobalization — a retreat from deep integration toward national self-interest. But the reality on the ground is more nuanced: rather than a simple return to isolationism, we may be entering a multilayered world of competing regional arrangements and overlapping alliances.

Challenges to globalization

Globalization today is under pressure from several important forces:

Trade fragmentation and protectionism

Rising tariff barriers and nationalist trade policies, particularly in major economies like the United States, are fragmenting trade networks. These policies aim to protect domestic industries but raise costs and disrupt long global supply chains, leading firms to regionalize production instead of relying on wide-spread global integration.

Slower trade and investment growth

Although global trade has rebounded in absolute terms, trade relative to GDP has declined since the global financial crisis, and foreign investment flows have become sluggish. Traditional globalization levels — measured by the volume of cross-border goods, capital, and labor — are no longer rising as fast as before.

Political backlash and inequality concerns

Growing inequality and political polarization have made many societies skeptical of globalization. People feel left behind by global markets, driving support for policies that emphasize national sovereignty and economic self-sufficiency, a trend captured in economic theory as a political trilemma facing policymakers.

Geopolitical tensions

The rise of geopolitical competition — especially between the U.S., China, and their respective allies — is reshaping trade and finance. Countries are increasingly cautious about over-dependence on rival powers, pushing diversification or substitution in critical sectors such as technology and energy.

Supply chain resilience concerns

Recent global shocks — including COVID-19 and geopolitical conflicts — revealed how too much reliance on single country supply routes can be risky. New agreements like the Supply Chain Resilience Initiative show how countries are trying to rebuild supply lines in more secure, multi-partner arrangements.

In short: globalization isn’t collapsing, but it’s being reshaped by political choices, economic nationalism, geopolitical rivalries, and supply chain reconfiguration.

Are we heading toward isolationism or multilayered globalization?

The debate often frames the question as either full deglobalization (a retreat into isolation) or continued globalization. But that binary is too simplistic.

Not isolationism — But fragmented integration

Complete isolation — where countries withdraw from global engagement — is unlikely because economic interdependence offers too many benefits. Global markets still trade, but they trade differently. Instead of one integrated world market, we are seeing:

Regional blocks — like the European Union and ASEAN — strengthening cooperation.

New groupings — like BRICS and the Quad — reflecting different priorities and partnerships.

Overlapping memberships, where countries cooperate in one group on certain issues and compete in others.

This is not traditional globalization, but multilayered globalization, where regional ties and economic blocs coexist with global markets.

…to continue tomorrow

New watchlist

The RBI in its latest Financial Stability Report, has cautioned about the emerging risks in the markets. In particular, the RBI highlights three risks to be watched carefully by the investors – (i) financial sector asset quality, especially for the private banks and small banks; (ii) valuation risk in the equities; and (iii) financial risks emanating from stablecoins and private credit.

Credit Quality is good, but needs to be watched

One of the clearest messages from the RBI’s latest Financial Stability Report is this: India’s banking system is in good shape, but some areas of concerns have emerged.

Banks today are better capitalized, more profitable and far cleaner than they were a decade ago. Capital adequacy ratios are well above regulatory requirements; liquidity buffers are comfortable and gross NPAs continue to trend down. Even under RBI’s worst-case stress scenarios, banks remain resilient.

For investors, this is a big positive. Strong banks mean smoother credit flow, better transmission of monetary policy and lower risk of sudden financial shocks.

But this is not a “no-risk” story.

The RBI flags specific pockets of concern—especially unsecured retail lending and microfinance. Some private banks have seen higher slippages and write-offs in unsecured personal loans. While this is not system-threatening yet, it is an area to monitor closely if economic conditions tighten.

On the NBFC side, balance sheets look stable and asset quality is improving. However, NBFC-MFIs face rising credit costs, and fintech-led unsecured lending is growing rapidly. Regulation and underwriting discipline will matter a lot going forward.​

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Banks and large NBFCs remain long-term structural winners. However, investors should prefer institutions with strong deposit franchises, conservative underwriting and diversified loan books. Avoid chasing growth at the cost of asset quality.

Lower volatility may be deceptive

If you only look at market volatility, everything seems fine. But the RBI tells a different story beneath the surface.

Equity valuations—globally and in India—are at the higher end of historical ranges. A small set of AI-linked stocks has driven a disproportionate share of global returns. This concentration makes markets vulnerable to sharp corrections if expectations change.

India has handled global shocks well so far, thanks to strong domestic investor flows and resilient earnings. SIP inflows into mutual funds continue to act as a stabiliser. But earnings forecasts have softened, and equity risk premiums are rising.

Bond markets are also adjusting. Government borrowing remains high, yield curves have steepened, and long-term bond demand from banks and insurers has moderated.

This is not a time for blind risk-taking. Quality matters more than momentum. Valuation discipline, earnings visibility and balance-sheet strength should drive investment decisions. Expect higher volatility, even if it hasn’t shown up yet.

Stablecoins, private credit & interconnected risks

One of the most important—and less discussed—parts of the FSR is its focus on new-age financial risks.

Stablecoins are growing fast and are now deeply linked to traditional financial markets, especially US Treasury markets. During stress events, stablecoin runs could amplify global liquidity shocks. While India’s direct exposure is limited, spillovers are real.

Private credit is another area of concern. Globally, opaque lending structures, leverage and interconnected financing raise the risk of hidden losses. Indian banks are increasing exposure to private credit vehicles, which needs careful monitoring.

Finally, financial interlinkages are growing. Banks, NBFCs, mutual funds and insurers are more connected than ever. This improves efficiency—but also means stress can spread faster.

Innovation is positive, but complexity increases risk. Investors should be cautious with businesses dependent on opaque funding, excessive leverage or regulatory arbitrage. Transparency and governance will be key differentiators.

Bottomline for investors

India’s financial system is strong, but this is a phase for selectivity, patience and risk awareness—not complacency.

 

RBI Financial Stability Report (FSR) – December 2025

The December 2025 Financial Stability Report (FSR) presents a cautiously optimistic assessment of India’s financial system amid a volatile and uncertain global environment. While global macro-financial risks remain elevated due to geopolitical tensions, trade fragmentation, stretched asset valuations and rising public debt, India stands out as a relative anchor of stability, supported by strong domestic demand, improving balance sheets and prudent regulation.  

High global growth masks vulnerabilities

Globally, growth has surprised on the upside in 2025, aided by front-loaded trade, fiscal support and unprecedented investment in artificial intelligence (AI). However, the RBI flags that this apparent resilience masks deeper vulnerabilities. Equity valuations, particularly in AI-linked stocks, are stretched, hedge fund leverage is rising, private credit markets are expanding rapidly with limited transparency, and stablecoins are becoming more systemically relevant. The disconnect between high uncertainty and low market volatility raises the risk of abrupt corrections. A disorderly adjustment in global risk assets, especially US equities, could have meaningful spillovers across emerging markets.

Indian economy remains resilient

Against this backdrop, India’s macroeconomic fundamentals remain robust. Real GDP growth exceeded expectations in the first half of FY26, driven by strong private consumption and sustained public capital expenditure. Inflation has moderated materially, fiscal consolidation is progressing, and India’s sovereign rating was upgraded by S&P in August 2025. The external sector remains resilient, with a manageable current account deficit, improving financial account balance, and foreign exchange reserves providing more than 11 months of import cover.

Domestic financial system remains robust

The domestic financial system continues to display strength across institutions and markets. Scheduled Commercial Banks (SCBs) report strong capital adequacy, ample liquidity buffers, improving asset quality and stable profitability. Stress tests indicate that even under severe macroeconomic shocks, banks would maintain capital well above regulatory thresholds. Credit growth has revived, with improving risk profiles in both corporate and household lending, though pockets of stress remain in unsecured retail loans and microfinance.

Non-Banking Financial Companies (NBFCs) also remain resilient. Capital positions are strong, asset quality is improving and profitability is stable. While NBFC-MFIs have seen some rise in credit costs, overall systemic risk remains contained. Importantly, stress tests suggest that aggregate NBFC capital would remain above regulatory requirements even under adverse scenarios.

Financial markets stable despite foreign outflows

Financial markets in India have been relatively stable despite global volatility. Equity markets have been supported by strong domestic institutional investor flows, resilient SIP inflows and improving corporate earnings. However, valuations remain at the higher end of historical ranges, and earnings expectations have softened. Bond markets are adjusting to higher sovereign issuance and a steepening yield curve, while demand for long-term government securities from traditional institutional investors has moderated.

A notable theme in the report is the growing interconnectedness between banks, NBFCs, mutual funds and other financial entities. While this enhances credit transmission and financial deepening, it also amplifies contagion risks during stress episodes. The RBI’s network and contagion analysis shows that while the system is resilient, shocks can propagate faster in an increasingly interconnected environment.

The report also places emphasis on emerging risks from stablecoins, private credit, climate finance and artificial intelligence. Stablecoins, in particular, are highlighted as a potential channel of cross-border spillovers due to their scale, reserve composition and links to traditional financial markets.

Regulatory framework continuously strengthening

On the regulatory front, Indian authorities continue to strengthen resilience through enhanced supervision, improved governance standards, simplified regulatory frameworks and stronger customer and investor protection. The approach remains balanced—supporting innovation and growth while safeguarding systemic stability.

In conclusion, the December 2025 FSR reinforces confidence in India’s financial system. Strong growth, sound institutions and sizable buffers provide resilience against global shocks. However, elevated asset valuations, global spillover risks and evolving non-bank and digital finance channels warrant continued vigilance. For investors, India remains a structurally strong but tactically selective opportunity.

…more on this tomorrow 

India at the crossroads: Autonomy or Drift?

India’s strategic ambition is clear. The country seeks autonomy—engaging with all major powers while avoiding dependence on any single one. In an increasingly multipolar world, this objective is both sensible and necessary. Few countries of India’s size and complexity can afford rigid alignment without sacrificing long-term flexibility. Yet ambition alone does not determine outcomes. Execution is also critical.

Strategic autonomy is not sustained by positioning or rhetoric. It rests on economic depth, institutional credibility, and policy consistency. Without these foundations, neutrality risks being interpreted not as strength, but as indecision. In such cases, dependence emerges not by design, but by default.

Autonomy as a strategy, not a slogan

Strategic autonomy is often misunderstood as passive neutrality. In reality, it is an active strategy. It requires the ability to say “yes” or “no” to partnerships based on national interest, not compulsion. That ability depends on leverage.

Countries with economic scale, technological capability, financial depth, and institutional reliability possess bargaining power. They can diversify relationships, negotiate terms, and absorb external shocks. Countries lacking these attributes may aspire to autonomy, but struggle to sustain it under pressure.

India’s aspiration, therefore, is well-founded. Its challenge lies in converting aspiration into capability.

The execution gap

India possesses undeniable advantages. Its large domestic market provides scale. Its demographic profile offers long-term consumption and labour potential. Its geographic position makes it relevant to global supply chains seeking diversification. Few emerging economies combine these attributes. Yet the translation of these advantages into sustained investment and productivity growth has been uneven.

Private capital expenditure remains cautious. Corporate balance sheets are healthier than in the past, yet investment decisions are selective and incremental. Foreign capital, while still present, has become more discerning, favoring specific sectors and companies rather than broad-based exposure. This behavior reflects not pessimism about India’s prospects, but uncertainty about its trajectory.

Investors and businesses are asking a simple question: What kind of economic and strategic environment will India offer over the next decade? The absence of a clear answer delays commitment.

Markets want consistency in delivery, not mere intent

Markets usually evaluate countries based on demonstrated capability. Vision documents, speeches, and policy announcements matter only insofar as they translate into predictable outcomes.

Infrastructure projects, manufacturing investments, and supply-chain relocation require visibility over taxation, regulation, trade policy, and contract enforcement. Even modest uncertainty in these areas can materially alter return expectations.

India’s policy direction over the past decade has shown progress, but also frequent course corrections. While adaptability can be a strength, excessive recalibration creates ambiguity. For investors, ambiguity increases the cost of capital.

This dynamic explains why India can attract short-term flows during favorable cycles, yet struggle to convert interest into sustained long-term investment across sectors.

Fiscal choices and strategic consequences

One of the most immediate choices facing India concerns fiscal priorities. On one hand, fiscal discipline enhances credibility. It anchors inflation expectations, stabilizes interest rates, and reassures investors about macroeconomic stability. On the other hand, public investment in infrastructure and capacity building is essential for long-term competitiveness.

The risk lies at both extremes. Excessive fiscal conservatism may constrain growth and delay infrastructure development. Excessive expansion risks undermining macro stability and investor confidence.

Strategic autonomy depends on getting this balance right. A country constrained by weak infrastructure or unstable finances has limited room to maneuver geopolitically.

India operates in an environment where major powers increasingly seek alignment from partners—not necessarily ideological alignment, but economic and strategic compatibility. In such a world, autonomy is tested not during calm periods, but during moments of pressure. Trade disputes, supply disruptions, security concerns, or financial stress can force choices.

Countries with diversified trade, resilient supply chains, and domestic capacity can absorb pressure and negotiate outcomes. Countries lacking these buffers often find themselves aligning by necessity.

India’s current posture emphasizes engagement across blocs. This flexibility is valuable. But flexibility without depth is fragile. If domestic manufacturing remains shallow, technology dependence persists, or capital markets lack depth, external leverage increases. Over time, choices narrow.

Autonomy, therefore, is not preserved through diplomatic balance alone. It is earned through economic strength.

Institutional strength as strategic capital

Institutions are the most important determinants of autonomy. Independent regulators, credible courts, transparent rule-making, and stable contracts reduce uncertainty. They reassure investors that outcomes will not change arbitrarily. They enable long-term planning.

Countries with strong institutions attract capital even when growth slows. Countries with weak or inconsistent institutions struggle to retain capital even during booms.

India’s institutional framework has improved in several areas, particularly in financial regulation and market infrastructure. However, challenges remain in regulatory predictability, dispute resolution timelines, and policy coordination across levels of government. Strengthening institutions may not generate headlines, but it compounds over time. It converts scale into leverage.

The risk of drift

Drift is rarely the result of a single decision. It emerges gradually, through deferred reforms, inconsistent signals, and incremental compromises.

A country drifting does not collapse. It continues to grow, trade, and engage. But it does so on terms increasingly shaped by others. 

Dependence may appear in subtle forms: reliance on external technology, sensitivity to foreign capital cycles, vulnerability to trade disruptions, or constrained policy choices. Drift is particularly dangerous because it often goes unnoticed until options narrow.

India’s challenge is to avoid this outcome—not through confrontation or isolation, but through deliberate strengthening of its economic and institutional foundations.

What India needs to deliver

Policy clarity: Clear, stable frameworks for taxation, trade, and regulation

Infrastructure delivery: Timely execution rather than ambitious announcements

Manufacturing depth: Building ecosystems, not just assembly capacity

Financial deepening: Broadening access to long-term domestic capital

Institutional credibility: Reducing arbitrariness and improving enforcement

Progress in these areas may appear incremental, but their cumulative impact is significant. For markets, such progress reduces uncertainty. For geopolitics, it increases bargaining power.

Investors as early indicators

The collective behavior of investors often signals underlying realities before they become visible in macro data. When investors commit long-term capital, they are expressing confidence not just in growth, but in rules. When they hesitate, they are signaling unresolved concerns.

India’s current investment pattern—selective, cautious, and concentrated—suggests respect for opportunity tempered by uncertainty. Reducing this gap between interest and commitment is central to India’s strategic future.

The coming years will test India’s ability to convert ambition into execution. Success would allow it to shape outcomes in a multipolar world. Failure would not mean decline, but drift—gradual, quiet, and constraining.

Markets, as ever, will watch outcomes rather than intentions.

The path India takes will be determined not by what it says it wants, but by what it consistently delivers.

Markets fear uncertainty more than bad news

Markets do not fear bad news as much as they fear uncertainty. Bad news, when clearly defined, is often easier for markets to handle than ambiguity. A weak earnings report, a rate hike, a tax increase, or even an economic slowdown can be painful—but if the contours are clear, investors can adjust expectations, reprice assets, and move forward. Uncertainty, by contrast, paralyses decision-making. It obscures future cash flows, complicates risk assessment, and raises the cost of capital across the board.

Understanding this distinction is essential to making sense of recent market behavior, where volatility often appears disconnected from headline severity.

Bad news can be priced; uncertainty cannot

The core function of markets is to price future outcomes (price discovery). This process relies on probabilities, assumptions, and models—none of which function well in the absence of clarity. When bad news arrives with sufficient detail, markets can respond decisively.

A recession forecast, for example, may lead to lower earnings estimates, compressed valuations, and sector rotation. Painful, yes—but orderly. Similarly, a clearly communicated monetary tightening cycle allows markets to adjust yield curves, currencies, and asset allocation accordingly.

Uncertainty operates differently. It does not merely reduce expected returns; it widens the range of possible outcomes. This makes valuation inherently unstable. When investors cannot confidently estimate earnings, interest rates, tax regimes, regulatory frameworks, or access to markets, they demand a higher risk premium—or step aside entirely.

Structural uncertainty vs cyclical uncertainty

Not all uncertainty is equal. Cyclical uncertainty—linked to business cycles, inflation fluctuations, or temporary policy tightening—is familiar and manageable. Markets have decades of data and experience navigating such phases. Structural uncertainty, however, is far more destabilizing.

Structural uncertainty arises when the rules themselves appear fluid. When trade frameworks change, geopolitical alignments shift, technology disrupts business models, or fiscal norms weaken, investors struggle to anchor expectations. Historical comparisons lose relevance. Models fail more frequently. The last few years have been dominated by precisely this kind of uncertainty.

Global supply chains are being restructured, but the endpoint remains unclear. Technology—especially artificial intelligence—promises productivity gains while simultaneously threatening existing revenue models. Monetary policy is constrained by high debt levels, blurring the boundary between fiscal and central bank independence. Geopolitics increasingly influences capital flows, trade access, and even currency usage. Each of these forces alone perhaps would be manageable. Together, they amplify uncertainty.

Businesses delay investment under uncertainty

One of the clearest consequences of uncertainty is delayed capital commitments. Businesses are generally willing to invest during downturns if they believe the policy environment is stable and demand will eventually recover. What they struggle with is not low demand, but unclear rules.

If tax structures may change, regulations may tighten, subsidies may disappear, or market access may be restricted, firms postpone irreversible decisions. Large investments, once made, cannot be easily undone. Uncertainty increases the value of waiting.

This behavior has a direct market impact. Slower capex translates into weaker earnings growth, lower productivity gains, and subdued job creation. Markets, sensing this hesitation, adjust valuations downward—even before earnings decline.

Policy ambiguity and market volatility

Markets respond not only to policy decisions, but to how those decisions are communicated. Clear, consistent policy—even if restrictive—is often better received than erratic or contradictory signals. A firm but predictable tax regime, for example, allows businesses to plan. A shifting or ambiguous regime encourages caution.

In recent years, policy ambiguity has become more common. Governments face competing pressures: growth versus inflation, fiscal discipline versus social spending, openness versus security. As a result, policies are sometimes announced incrementally, revised frequently, or implemented unevenly. For markets, this creates a fog.

Markets fall on “Good News”

We see markets occasionally decline on positive headlines. A policy announcement that promises reform but lacks details may increase uncertainty rather than reduce it. A growth stimulus without clarity on funding may raise concerns about fiscal sustainability. A technological breakthrough without a clear monetisation path may destabilise incumbents without creating immediate winners.

In such cases, “good news” expands the range of possible outcomes rather than narrowing it. Markets react negatively not because the news is bad, but because it introduces new unknowns.

This explains the persistent premium commanded by companies with stable franchises, even when growth appears modest. It also explains why speculative narratives struggle to sustain valuations when uncertainty dominates.

Reducing uncertainty matters more than stimulus

Stimulus can boost growth temporarily. Rate cuts can support asset prices. But neither is a substitute for clarity. Reducing uncertainty—through consistent rules, credible institutions, and transparent communication—has a more durable impact on investment behaviour than short-term incentives.

Countries that offer predictable frameworks often attract capital even during global slowdowns. Conversely, economies with strong growth potential but unclear rules struggle to convert opportunity into investment.

For investors, this distinction is critical. Growth stories matter less than governance quality during uncertain periods.

A world likely to remain uncertain

Looking ahead, there is little reason to expect uncertainty to disappear quickly. Structural transitions—technological, geopolitical, demographic—take time to resolve. Competing policy objectives will continue to create trade-offs.

Recognizing this helps explain why markets behave as they do—and how investors should respond. The goal is not to eliminate uncertainty, which is impossible, but to distinguish between known risks and unknowable ones.

In a world where rules are evolving and narratives shift quickly, the most valuable asset may not be information, but judgement—the ability to remain invested without forcing certainty where none exists.

Understanding why markets fear uncertainty more than bad news is not just an academic exercise. It is a practical guide to navigating the years ahead. 

US, China, and the myth of a new cold war

The rivalry between the United States and China is often described as a new Cold War. While the comparison is tempting, it is also misleading.

The Cold War (US vs USSR) was characterized by ideological separation (Communism vs free market), minimal economic interaction, and rigid alliances (NATO vs Warsaw). Present conditions are materially different.

The US and China are deeply economically intertwined. Trade volumes are substantial. Supply chains are integrated. Financial markets are linked. Neither side can afford full disengagement without significant self-inflicted damage.

What is happening instead is selective rivalry to gain advantage in the terms of trade and control over resources.

Both countries are focusing on the sectors they consider strategically sensitive, e.g., advanced technology, defense-related manufacturing, data infrastructure, and critical resources. In these areas, they are adopting a policy of control rather than cooperation. In other sectors, pragmatic engagement continues.

Indubitably, this selective approach is creating complexity for businesses and investors. Regulations are becoming unpredictable and volatile. Logistic problems are cropping up more frequently. Policies are being guided often by strategic compulsions rather than economic prudence.

Companies that operate across jurisdictions are required to navigate conflicting regulatory expectations. Investors face uncertainty that cannot be easily priced. Policies shift incrementally, often without a clear endpoint.

Unlike the Cold War, today’s competition lacks clear boundaries. There are no committed allies or adversaries. Countries chose sides based on issues and expediency rather than ideology or strategic commitments. Geopolitical alignments are temporary and vary by issues, sectors, and moment in time. This ambiguity in international relations is not accidental. It reflects deeper and wider mutual dependence and the high cost of confrontation.

Framing this rivalry as a Cold War simplifies reality but obscures risk. The real challenge lies in managing partial decoupling without triggering systemic instability. For markets, this means prolonged uncertainty rather than abrupt rupture. Understanding this distinction helps avoid overreaction to headlines while remaining alert to structural shifts.

India has traditionally followed a policy of non-alignment. It has mostly maintained good transactional relationships with the US, China, Japan, GCC and Europe. The relations with Russia (and erstwhile USSR) had been strategic without any commitment or ideological alignment. In the past 15 years this relationship has also become incrementally transactional.

The current trade negotiations with the US and other countries must be seen in this context. Tariff and non-tariff measures taken by the US, Mexico, Canada etc. are guided by the immediate considerations and are temporary. These do introduce some degree of uncertainty in business outlook, but treating them as permanent might be an expensive overreaction.

How the paradigm of power is shifting

For much of modern history, power was mostly measured by military strength. Borders shifted through conquest, and influence was enforced through force.

In the past couple of decades, there has been a gradual shift in this paradigm. While military capability still matters, the primary instruments of power today are economic and technology.

In the contemporary world, access to capital, technology, markets, and resources often determines outcomes more effectively than armies. Trade rules can shape behavior. Financial sanctions can immobilize economies. Control over technology standards can define the future of entire industries.

Unlike traditional warfare, economic power operates quietly. There are no declarations, no battlefields, and no formal endings. Yet its effects can be just as lasting. The latest events in Venezuela also need to be looked at from this Lense.

Export controls, tariffs, financial restrictions, and regulatory barriers are now routine tools of statecraft. They are justified as measures of national security or economic protection, but they also create dependencies and asymmetries. Countries that control key nodes—finance, energy, technology, or logistics—gain leverage over others.

This does not resemble old-style colonialism. There is no direct rule or occupation. Instead, influence is exercised through terms of access.

Who can trade? Who can borrow? Who can build?

From an economic perspective, intent matters less than outcomes. When countries or firms are forced to align behavior to retain access, power has been exercised—whether or not it is acknowledged as such.

The replacement of military power with economic power has not made the world more peaceful. It has made conflict less visible, more persistent, and harder to resolve.

Understanding this reality is essential for anyone trying to assess long-term risks in a changing global system.

For markets, this shift has important implications. Economic decisions are no longer evaluated purely on cost and efficiency. Political alignment, regulatory risk, and strategic sensitivity increasingly shape investment outcomes.

The conventional principles of economics that advocate efficient use of factors of production to maximize economic output are being overlooked for strategic reasons. The developed countries like the US, which outsourced manufacturing function to the more populous countries (lower wage cost) and resource rich countries (lower logistic cost) are aiming for relocating their industrial ecosystem onshore.

In view of this shift, India has two choices to make. One, to focus on fiscal discipline and compromise on capex or increase capex and let the deficit stay high. Two, carve out a space of its own in the emerging multipolar global order, or chose to become a vassal state of one of the major powers. These choices will define the investment opportunities available for the Indian investors.