Modi @ 12: The unfinished agenda of India’s development

What gets measured gets managed. What gets obscured gets inherited.

The completion of twelve years of the Narendra Modi-led NDA government has triggered a familiar debate. Supporters point to faster infrastructure creation, digitization of governance, improved tax compliance, stronger foreign policy visibility, record UPI adoption, rising formalization, and India’s emergence as one of the fastest-growing major economies.

Critics argue that beneath these achievements lie deeper structural weaknesses that have either persisted or worsened.

Both narratives contain elements of truth.

India today is larger, more digitally connected, and more visible on the global stage than it was in 2014. Yet the ultimate test of governance is not merely GDP growth or international ranking of GDP number. It is whether the country’s long-term developmental foundations have strengthened.

(I would like to make it clear that this is not an exercise in political partisanship. The purpose here is narrower and, in some ways, more demanding: to assess the domains where the record is objectively weak and the agenda remains unfinished.)

Human capital: The unfinished foundation

India’s most consequential competitive advantage is demographic: a large, young workforce that ought to be highly productive. Whether it will be, depends almost entirely on the quality of education and health systems built now. On this, the twelve-year record is mixed at the primary level and disappointing at the structural level.

Education

As per the Annual Status of Education Report (ASER) 2024 — approximately 50% of Class 5 students cannot read a Class 2-level text — a basic literacy failure at scale, after a decade of policy attention. Secondary education outcomes remain poor. Dropout rates among 15-16 year-olds average 8%, rising to 13% in Uttar Pradesh and 8.6% in Bihar. Teacher training, while expanded, remains syllabus-driven rather than competency-driven. The National Education Policy 2020, whatever its aspirations, has yet to produce measurable system-wide improvement at secondary and tertiary levels.

Public investment in education has consistently fallen short of the 6% of GDP target that NEP 2020 itself mandates. The structural deficit in higher education quality — as measured by India’s dismal showing in global university rankings — has not been meaningfully addressed.

Health

The trajectory on health outcomes shows improvement on legacy indicators: infant mortality has declined from approximately 40 per 1,000 live births in 2014 to 25 by 2023; the maternal mortality rate has improved to 80 per 100,000 live births (compared to 130 in 2014). These improvements reflect the continuation of long-run secular trends, aided by schemes like Janani Suraksha Yojana.

What has not improved is the structural commitment to public health financing. India’s public health spending continues to hover around 1.9% of GDP — well below the National Health Policy 2017 target of 2.5% by 2025. Critically, Union transfers to states for the National Health Mission dropped from 75.9% of the health budget in 2014-15 to just 43% in 2024-25 in real terms. The burden of healthcare costs on households remains severe: out-of-pocket expenditure accounts for approximately 48% of total health spending, pushing an estimated 63 million Indians into poverty annually due to catastrophic medical costs.

Ayushman Bharat is a genuine policy innovation, extending coverage to previously uninsured populations. Its operational effectiveness, however, remains contested — particularly the quality of care delivered and the adequacy of insurance payouts for complex conditions. Access to basic primary care, especially in rural areas, remains structurally underfunded.

The verdict on human capital is that incremental improvements have occurred, but the structural investment required to realize the demographic dividend has not been made. The 2030s will reveal the cost of this underinvestment.

Employment: The disputed ledger

No topic in Indian economic policy discourse is more contested — or more politically charged — than employment. Both the government’s triumphalist claims and the opposition’s ‘jobless growth’ narrative oversimplify a complex picture.

The data from the Periodic Labour Force Survey (PLFS) does show genuine improvement on several headline metrics. The Worker Population Ratio increased by approximately 9 percentage points between 2017 and 2023, implying a 26% rise in employment over the period. Youth unemployment fell from 17.8% in 2017-18 to 10% in 2022-23. Female labour force participation has increased, particularly in rural areas. The employment elasticity of GDP between 2017 and 2023 was approximately 1.11 — suggesting that every 1% increase in GDP was accompanied by a 1.11% rise in employment.

These are not fabricated numbers, and dismissing them entirely would be dishonest. However, the quality of employment created remains the central and largely unresolved concern.

The increase in employment is predominantly in self-employment, unpaid family labour, and informal agriculture — not in the organized manufacturing or formal services jobs that generate the quality of employment needed to absorb India’s approximately 12 million annual entrants to the labour force. The share of manufacturing in total employment has not meaningfully increased. India has not replicated the manufacturing-led employment transformation that propelled East Asian economies. EPFO payroll additions (a proxy for formal employment) remain modest relative to the scale of the workforce.

The absence of a population census since 2011 also introduces genuine uncertainty into employment data — a point that is more than a political talking point. The PLFS itself notes methodological limitations in capturing the full complexity of informal employment.

Assessment: The ‘jobless growth’ narrative is an overstatement. But the quality of employment — formal, productive, adequately compensated — has not kept pace with economic growth. This is not a failure unique to the Modi years, but twelve years of high growth should have delivered a more decisive structural transformation.

Energy security: The widening import gap

India’s energy vulnerability is the most under-discussed structural risk in the country’s economic story. Twelve years of a government that has consistently invoked energy security as a national priority have paradoxically left India more import-dependent than it was in 2014.

The data is unambiguous. Domestic crude oil production has fallen from 36.94 million tonnes in 2015-16 to 28.7 million tonnes in 2024-25 — a 22.3% decline. Simultaneously, crude oil imports rose from 202.85 million tonnes in 2015-16 to 243.22 million tonnes in 2024-25. India’s crude oil import dependence has increased from 84% in 2014-15 to approximately 88-90% in 2024-25. The annual crude import bill reached approximately USD 137 billion in FY2024-25.

The situation is made structurally worse by a depletion of domestic reserves. India’s proved crude oil reserves fell from 762.73 million tonnes in 2014 to 672.07 million tonnes — a 12% decline. Natural gas reserves fell more sharply, from 1,427 BCM in 2014 to 1,073 BCM in 2025, a 25% reduction. Despite opening the oil and gas sector to 100% FDI, India attracted only about USD 8.19 billion in upstream FDI between April 2000 and September 2024 — a rounding error by global exploration standards.

The renewable exception — A genuine achievement

The solar power story is, without qualification, a significant achievement of the Modi years. India’s installed solar capacity increased from just 3 GW in 2014 to approximately 130 GW by 2025 — a more than 40-fold increase. Overall renewable capacity grew from 76 GW in 2014 to over 233 GW in 2025. India now ranks third globally in solar capacity. This is real, meaningful, and strategically important.

The limitation, and it is a significant one, is that renewables’ share of actual electricity generation (~16%) remains well below their share of installed capacity (~50%), due to the intermittency problem and inadequate storage infrastructure. Coal-fired generation still accounts for over 80% of actual power produced. The structural energy vulnerability — particularly to Middle East geopolitics — therefore persists. The West Asia disruptions of early 2026 demonstrated this with painful clarity.

Crude import dependence (2014-15): 84%

Crude import dependence (2024-25): ~89%

Domestic production decline: -22.3% (2015-16 to 2024-25)

Solar capacity (2014): 3 GW

Solar capacity (2025): ~130 GW

Income and wealth inequality: The inconvenient numbers

India’s growth story has generated enormous aggregate wealth. The distribution of that wealth is a separate, and far less comfortable, conversation.

The top 10% of Indians hold approximately 57% of national income; the top 1% hold approximately 22%. The bottom 50% account for roughly 13% of national income. Wealth concentration is even more extreme: the top 1% own approximately 40% of total national wealth, while the bottom 50% hold just 3%. The wealth Gini coefficient rose from 81.2% in 2008 to 85.4% in 2018 and has remained elevated since.

The government has pointed, with some justification, to the Household Consumption Expenditure Survey of 2022-23 showing a Gini Index of 25.5 — a relatively low figure. This requires context: this is a consumption-based measure, not an income or wealth-based measure, and is not comparable to the income-Gini figures cited by most international institutions. The World Bank itself noted this distinction in its April 2025 Poverty & Equity Brief. Consumption surveys structurally understate the true inequality in income and wealth.

There is a legitimate discussion to be had about methodology. But the direction of travel is not seriously in dispute: labor’s share of national income declined from approximately 32% in the 1990s to roughly 22% by 2024, per ILO data. CEO pay rose 50% between 2019 and 2024, while worker wages grew by less than 1%. The billionaire class has expanded dramatically; Asia’s two wealthiest individuals are Indian. This has occurred during a period of strong aggregate GDP growth — which is precisely the point. Growth has not been distributionally neutral.

The government’s narrative on inequality leans heavily on poverty reduction data, which is real and significant. But poverty reduction and widening inequality can coexist — and in India’s case, they have.

Ecological vulnerabilities: Progress and denial

India’s ecological stress represents the compound interest on decades of growth-at-all-costs development — and the Modi government has managed this inheritance with mixed results.

Forests and Biodiversity

The global annual rate of net forest loss has declined from 10.7 million hectares (1990-2000) to 4.12 million hectares (2015-2025), reflecting global improvements in forest governance. India’s official forest cover figures show a modest increase in recorded forest area. However, independent analyses consistently note that the definitional inclusion of monoculture plantations and agroforestry distorts the picture. Net natural forest loss continues, biodiversity pressures remain acute, and forest clearances for infrastructure projects have been expedited rather than constrained under the current regime, including significant amendments to the Forest Conservation Act.

Water

India’s water stress is accelerating. The country accounts for approximately 17% of the world’s population but has access to only 4% of its fresh water. Groundwater depletion continues at alarming rates across the Indo-Gangetic plains and peninsular India. The Jal Jeevan Mission, which aims to provide tap water connections to all rural households, has achieved impressive connection numbers (over 80% coverage reported). Independent assessments, however, note significant gaps between connections and functional, quality water supply. The deeper structural challenge of aquifer depletion has not been addressed.

Air Quality

India contains 42 of the world’s 50 most polluted cities by PM2.5 concentration. Delhi’s air quality routinely reaches hazardous levels for months each year. The National Clean Air Program has set targets; measurable progress at the population level remains elusive. This is an area where 12 years of policy attention has yielded insufficient results.

Against these challenges, the renewable energy transition is a genuine bright spot. India’s commitments under the Paris Agreement have been largely honored, and the clean energy deployment trajectory is one of the world’s more credible energy transitions.

Institutional credibility: The slow erosion

Democratic health depends not only on elections — which India continues to hold — but on the credibility of the institutions that make those elections meaningful and that arbitrate between citizens and the state. This is where the twelve-year record raises the most serious concerns.

Judiciary

The formal independence of India’s judiciary is constitutionally guaranteed, and the Supreme Court has delivered important rulings that constrain executive power. But the perception of increasing politicization is not limited to partisan critics. Freedom House’s 2024 report notes that while the judiciary is formally independent, ‘courts have shown signs of increasing politicization’ and government judicial appointments have been considered political in nature by observers. Several high-profile Supreme Court rulings have been favorable to the ruling party on politically sensitive matters. The pace of judicial appointments and the government’s posture toward the collegium system have been sources of institutional friction.

Election commission and democratic institutions

The Election Commission of India has faced unusually sharp credibility questions during this period. Opposition parties, civil society organizations, and a growing body of expert opinion have raised concerns about the Commission’s assertiveness in enforcing the Model Code of Conduct evenhandedly. The 2024 Lok Sabha elections were considered broadly free and fair — the outcome itself was proof of that, with the BJP performing worse than projected. But the process, including VVPAT verification controversies and the appointment process for Election Commissioners, has drawn sustained scrutiny.

Press Freedom

The Reporters Without Borders World Press Freedom Index ranked India 159th in 2024 and 157th in 2026 — among the lowest-ranked democracies in the world. The methodology of this index is contestable, and the government has credibly argued that India’s 900+ television channels and thousands of print outlets constitute genuine media plurality. The concern, however, is structural: media ownership has consolidated dramatically. The acquisition of NDTV by the Adani Group in 2022 and the creation of JioStar through a Reliance-Disney merger have raised well-documented concerns about editorial independence in the concentrated ownership environment.

India has moved from ‘Free’ to ‘Partly Free’ in the Freedom House classification, a designation maintained since 2021. The V-Dem Institute classifies India as an ‘Electoral Autocracy.’ These designations are contested and carry Western institutional biases. But the direction of the trend — even adjusting for methodological limitations — is difficult to dismiss.

Law enforcement and the corruption paradox

Perhaps the most difficult section to write — and the most important for institutional credibility — concerns the use of investigative agencies and the government’s relationship with political corruption.

India’s Corruption Perceptions Index score was 36 in 2013 (when the Modi government inherited the UPA’s record). It stood at 38 in 2024 — a marginal deterioration that prompted the government itself to distance itself from the methodology. The government’s rhetoric has been consistently and emphatically anti-corruption. The substantive record is more complicated.

The Indian Express conducted an investigation in 2024 that documented 25 opposition politicians facing central agency investigations who crossed over to the BJP since 2014. Of these, 23 received reprieve — with three cases closed entirely and 20 stalled or placed in cold storage. In contrast, the same investigation noted that between 2014 and September 2022, 121 prominent political leaders came under the ED’s radar, of whom 115 were from opposition parties.

The pattern is not entirely new in Indian politics — the weaponization of investigation agencies predates Modi. But the scale and systematicity of the ‘washing machine’ phenomenon (as it has come to be called across party lines, including by a former BJP state president who first used the metaphor) is unprecedented. This is not partisan allegation; it is documented by the country’s most respected investigative journalism.

The corrosive effect on institutional credibility is twofold: it undermines the legitimacy of genuine anti-corruption action when it occurs, and it normalizes a transactional relationship between political loyalty and legal jeopardy. This is not a foundation on which rule of law can be built.

A government that came to power on an explicit anti-corruption mandate and has expanded the remit and resources of the ED must be held to a higher standard on this dimension. The ‘washing machine’ pattern represents a material failure against that standard.

Conclusion: The 12-year balance sheet

The Modi government’s achievements are real and should not be elided in an honest assessment. The physical infrastructure build-out, digital public infrastructure, formalization of the economy through GST and DBT, and the renewable energy transition are all genuine program successes.

But twelve years is long enough for structural failures to be owned. The human capital foundation — in education quality and public health investment — remains inadequate for the ambitions of a country claiming to be a future economic superpower. Energy import dependence has worsened despite ambitious rhetoric. Income and wealth inequality have increased materially, even as poverty has been reduced. Ecological stress is unaddressed at systemic scale. And the credibility of democratic institutions — judiciary, election commission, investigative agencies, and a free press — has declined by most independent measures.

The investment implications of this assessment are not trivial. An economy with deteriorating human capital quality, rising inequality, deepening energy import dependence, and weakening institutional credibility faces compounding structural headwinds that will eventually show up in growth sustainability, FDI attractiveness, and market valuations.

The next election cycle will offer a fresh mandate — to this government or to an alternative. The structural challenges catalogued here, however, are not election-cycle problems. They are generational ones, and they will require a generational commitment of political will and public resources that Indian politics, across all parties, has thus far found difficult to sustain.

FCNR(B) – What does this domino effect mean for banks

(Continuing from yesterday…see here)

The implications of a successful FCNR(B) campaign for the banking sector are far-reaching.

First, and most directly, FCNR(B) deposits will not attract CRR or SLR requirements on the incremental amounts. This is not a new concession — the same dispensation applied in 2013 — but it means that every dollar raised through this route translates almost entirely into deployable liquidity. A $40 billion inflow, at a spot rate of approximately Rs 93-95 per dollar, would inject Rs 3.7-3.8 lakh crore into the system. This is a very large number. For context, the entire banking system’s liquidity deficit through most of early 2025 was in the range of Rs 1.5-2 lakh crore.

Second, the scheme addresses the CD ratio problem in a way that domestic deposit mobilization efforts cannot quickly replicate. NRI deposits are not cannibalizing domestic savings — they represent an external infusion. Banks that succeed in raising substantial FCNR(B) deposits could see their CD ratios ease meaningfully, reducing the pressure to offer higher domestic deposit rates and thereby protecting net interest margins.

Third, as one analyst report aptly noted, successful mobilization “should have a sobering effect on loan pricing and other market-based yields across commercial papers, certificates of deposit, and government securities, helping in true transmission.” Put simply, additional liquidity should reduce the cost of credit across the economy — something that rate cuts alone have struggled to deliver in a tight liquidity environment.

Fourth, the scheme provides a measure of protection against wholesale deposit instability. When a bank can replace jumpy institutional deposits with longer-tenor (three to five year) NRI money, the structural fragility of its liability side reduces meaningfully.

The BoP dimension: Managing the external account

The FCNR(B) scheme is as much an external account management tool as it is a banking sector liquidity measure. India’s balance of payments position is at risk of marked deterioration. The current account deficit could widen on account of sustained elevated crude oil prices and widening trade deficit with major partners. Simultaneously, Foreign Portfolio Investment (FPI) flows into Indian equities turned volatile and net negative through significant portions of FY26, as global investors rotated away to developed markets and other emerging markets.

The rupee, consequently, bore the brunt. Having crossed 90 against the dollar in early 2026 and continuing to slide toward 94-95 in subsequent months, the currency’s weakness threatened to become self-reinforcing through imported inflation, higher oil import bills, and corporate balance sheet pressures for those with unhedged foreign currency liabilities.

The RBI has been intervening, but at a cost. Since February 2026 alone, over $38 billion of foreign exchange reserves were deployed to cushion rupee depreciation — drawing down reserves from their peak of $728.49 billion. At $681-682 billion, reserves remain substantial (covering approximately 11 months of merchandise imports, per the RBI Governor), but the rate of attrition is a concern.

The FCNR(B) inflows would replenish that buffer without requiring the RBI to buy USD in the open market. In effect, the scheme converts long-term NRI savings into a direct reserve-building exercise — a far more durable source of forex inflows than short-term portfolio capital. In 2013, the $34 billion raised through FCNR(B) was widely credited with stabilizing the rupee and turning the BoP position around. The hope is for a similar impact, though the quantum and speed of inflows will determine the ultimate efficacy.

The 2013 Comparison: What is different this time

The 2013 FCNR(B) episode under Raghuram Rajan is rightly remembered as a masterclass in crisis management. Within weeks of the announcement, market sentiment turned, the rupee stabilized, and $34 billion flowed in — far exceeding initial expectations. But 2026 is not 2013, and a few important differences merit attention.

In 2013, the episode was triggered by a single, identifiable shock — the Fed’s taper tantrum. Once the global environment stabilized and the RBI acted decisively, confidence returned quickly. The current challenge is more diffuse: a mix of geopolitical risks (the West Asia war and its oil price consequences), US tariff uncertainty, structural domestic demand softness, and a banking system that is adjusting from a period of unusually high credit growth. There is no single event to “catch.”

Additionally, while NRI depositors have always been rate-sensitive, the global interest rate environment today offers them competitive alternatives that did not exist in 2013 in the same way. US Treasury yields, for instance, remain elevated. The deposit and lending rates in countries like the US, the UAE, and Singapore are also much higher as compared to 2013. The spread offered by FCNR(B) deposits may not be compelling enough to overcome home country inertia and alternative opportunity costs.

Finally, the RBI’s hedging cost today — borne at approximately 2.9% per annum — represents a meaningful cost to the central bank’s balance sheet and, by extension, to its future surplus transfers to the government. If $40-50 billion is raised, the annual hedging cost borne by the RBI could be in the range of $1.2-1.4bn. That is not a prohibitive number given the BoP stability it purchases, but it is not insignificant either, if we consider that the annual budget of ISRO is US$1.4bn.

Another point to be noted is that in 2013 most of the incremental FCNR deposits were used to augment the reserves. Besides, other measures, e.g., reduced LSR remittance limits, were also used to limit the outflows. This time, much of the incremental deposits could just end up replenishing the FII and Net FDI outflows.

Investment Implications: What Should the Analyst Track?

For investors in Indian banking stocks, the emerging picture suggests a period of transition rather than resolution. Several themes are worth tracking.

On the positive side, if FCNR(B) inflows are substantial — say in excess of $30bn — the banking sector will be a meaningful beneficiary. System liquidity improvement will reduce reliance on expensive wholesale deposits, compress deposit costs, and allow for better NIM protection. Banks with stronger NRI relationships and international banking capabilities — notably the larger private sector banks and SBI, which has an extensive overseas network — may be better positioned to capture these flows.

The rupee stabilization effect, if it materializes, will reduce the import cost burden for the economy broadly and ease inflationary pressures, which would in turn support the RBI’s ability to maintain accommodative monetary conditions.

On the risk side, investors should remain cognizant that the FCNR(B) scheme creates a large matured liability for banks for three to five years hence. When these deposits mature — between 2029 and 2031 — the banks must return the foreign currency. If India’s external account is under stress at that point, the rollover risk could be significant. This is precisely what happened when the 2013 FCNR(B) deposits matured in 2016: the RBI had to manage a significant outflow, though it did so without incident. The lesson is that today’s relief is tomorrow’s contingent liability.

The fiscal trajectory remains a key watch item. A government that continues to miss its tax revenue targets while facing disinvestment underperformance will compete with the private sector for available savings — keeping yields higher than they otherwise would be and limiting the NIM upside from liquidity improvement. Resolution of the fiscal challenge is a necessary condition for a durable easing of banking sector stress, not a sufficient one in isolation.

FCNR(B) inflows – the likely scenario

Most large banks have announced rates for 3-year FCNR(B) deposits in excess of US$1mn in the range of 6-6.15%. Some smaller banks have even offered 7%.

The actual inflows would largely depend on the domestic credit franchise (how much of the mobilized USD it can lend/sell under LRS to the domestic borrowers) of the mobilizing banks.

The actual deal is the NRI depositor borrows from the overseas banks and deposits as FCNR(B) with an Indian branch.

The rate of lending to the depositors would depend on one-month SOFR and 3-year interest rate swap, expected credit cost provision and profit margin for the bank. Considering a 19x leverage (5% margin), the net return to the depositor could be in the range of 13-15% p.a. on the principal amount invested.

Conclusion

RBI, facing a multi-dimensional challenge — banking liquidity, currency weakness, BoP stress — has done well to use a time-tested measure. The FCNR(B) scheme could addresses all three simultaneously, while supplementing it with USD/INR swaps that ease domestic liquidity without burning down reserves. This is not panicked firefighting; it is deliberate central banking.

The banking sector will benefit, but investors should resist the temptation to extrapolate from 2013. The structural challenges that created the problem — a financializing household saving base that increasingly prefers non-bank instruments, a fiscal deficit that crowds and constrains, a growth model that generates more credit demand than the deposit base can organically support — will not dissolve with a single scheme, however well-designed.

The CD ratio will ease. The wholesale deposit overhang will moderate. Liquidity conditions will improve. But the medium-term question — how India’s banking system funds a $5 trillion economy when households are increasingly choosing the mutual fund and corporate debt over the fixed deposit — remains open. That is the question the banking sector and its regulators will have to answer over the coming decade, one policy measure at a time.

Also Read

How the Indian financial sector is navigating a perfect storm

 

How the Indian financial sector is navigating a perfect storm

In the financial sector, structural problems have a way of announcing themselves quietly, through incremental data, technical jargon, and central bank circulars buried in the weekend briefing. Then, one day, the accumulated weight of those problems demands a policy response that is anything but quiet. India’s banking sector appears to be at exactly such an inflection point.

Several stress points have converged in a relatively short period: a yawning credit-deposit gap, a skewed and fragile deposit base, a fiscally stretched government, a weakening rupee, and balance of payments pressures that have forced the Reserve Bank of India’s hand. The RBI’s latest set of measures — including dollar-rupee swaps and an unconventional FCNR(B) deposit scheme — are its response to a multi-pronged challenge.

The Credit-Deposit gap: A problem that would not go away

For much of the post-pandemic period, Indian banks grew their loan books at a pace that comfortably outpaced deposit mobilization. Credit growth averaged north of 15% year-on-year through FY23 and FY24, fueled by a recovering economy, retail borrowing, and robust corporate demand. Deposits, however, did not keep pace. Indian households, increasingly sophisticated in their financial behavior, began gravitating toward mutual funds, equity, and insurance products that offered inflation-beating returns. Bank deposits — stodgy, taxed, and offering real rates that were often negative — lost their relative appeal.

The result was a relentless rise in the system-wide Credit-Deposit (CD) ratio. From a historical average closer to 74%, the ratio climbed to 82.5% by May 2026 — a level last seen over six decades ago. The HDFC-HDFC Bank merger in mid-2023 provided a mechanical push of about 2.2 percentage points, but the underlying trend was independent of that event.

A CD ratio in the low 80s is not, in itself, catastrophic. Banks in developed economies routinely operate at higher ratios. The concern in India’s context is the speed of the ascent and the structural nature of the constraint. Banks cannot simply decree that households return their savings to fixed deposits. They can only raise rates, which compresses net interest margins, or curtail lending, which slows economic activity. Neither is a comfortable choice.

The wholesale deposit trap

Faced with the deposit shortfall, Indian banks did what bankers typically do under pressure: they improvised. Over the past two years, banks have aggressively mobilized wholesale deposits — large-ticket certificates of deposit (CDs) and bulk fixed deposits typically placed by corporates, mutual funds, and other institutional investors. These deposits are easier to raise, faster to mobilize, and carry no branch overhead. They are also deeply problematic.

The IMF, in its Article IV consultation and Financial Sector Assessment Programme (FSAP) report for India in 2025, flagged systemic risks from concentrated deposit structures and wholesale funding reliance among Non-Banking Financial Companies (NBFCs). The same logic applies, with some modification, to commercial banks. When a bank’s deposit book is dominated by a small number of large depositors, its vulnerability to liquidity stress increases dramatically. A handful of institutional depositors pulling funds — in response to a market event, a rating action, or simply a better rate elsewhere — can create an outflow event of a magnitude that retail deposit bases rarely produce.

As per the latest data, 0.05% accounts hold ~35% of India’s term deposits. All these deposits are Rs5cr and above. Deposits of Rs1cr and above are now ~46%. Moreover, Term deposits paying below 7% are now up at ~62% from ~27% a year earlier.

The concentration problem is further compounded by the incentive structure. Wholesale depositors are rate-sensitive and relationship-agnostic. They move quickly and in large sizes. Banks that have used wholesale deposits to bridge the CD gap have, in effect, borrowed structurally short to lend long. This is the classical maturity mismatch that precedes funding crises. The risk is not imminent, but it is real and growing. The RBI has taken note.

A material rise in yields in alternative sources could potentially see a sharp deceleration in the bank’s deposit base.

The fiscal overhang: crowding out and indirect pressure

The banking sector does not operate in a fiscal vacuum. The state of government finances has direct implications for banking system liquidity, the level of interest rates, and the depth of the bond market.

India’s fiscal trajectory has been broadly disappointing relative to its consolidation targets. Tax revenue shortfalls have been a recurring theme — FY26 saw a significant contraction in net tax revenues in the early months, compounded by a one-off extension of income tax return filing deadlines. Disinvestment, a perennial underperformer relative to budget targets, has once again failed to deliver meaningful receipts. Subsidy spending, including food and fertilizer, continues to exert pressure on the expenditure side.

April 2026 fiscal deficit accounted for 21.4% of FY27BE (vs 11.8% in April 2026). Though the higher April 2026 could be attributed, to a large extent, timing-related moderation in receipts, rather than a broad-based deterioration in government finances, higher subsidy bill due to the West Asia crisis, and potentially lower tax revenue cloud the overall fiscal strength of the government.

For banks, a wider-than-expected fiscal deficit matters in at least two ways. First, higher government borrowing pushes up sovereign yields, which compresses the mark-to-market value of banks’ bond portfolios (held as SLR assets) and limits their appetite for further bond holdings. Second, and more indirectly, a government that struggles to raise non-tax revenues via disinvestment or other asset sales becomes more dependent on deficit financing, which crowds out private credit at the margin. The RBI’s job of managing system liquidity becomes correspondingly harder.

The RBI’s toolkit: Swaps, Liquidity, and the Rupee

Against this backdrop of a stretched banking system and a weaker rupee — which breached the 90-per-dollar mark in early 2026 and touched unprecedented levels amid geopolitical pressures from the West Asia conflict and elevated crude oil prices — the RBI has been unusually active.

The central bank executed a $5 billion, three-year USD/INR buy-sell swap in May 2026, at a total premium of 9.1%. In this transaction, banks sell dollars to the RBI and receive rupees at the spot rate, committing to reverse the transaction three years hence. The swap injected approximately Rs 42,000-43,000 crore of durable rupee liquidity into the banking system. It is worth noting that this was one in a series of such operations — the RBI had also conducted a $10 billion three-year swap in early 2025, which saw demand of more than twice the amount offered, underscoring the system’s liquidity thirst.

These swaps serve multiple purposes simultaneously. They inject rupee liquidity without the RBI having to run down its foreign exchange reserves through outright sales. They also improve the forex reserve position at least technically — the RBI receives dollars which bolster reserves, while providing rupees that ease banking sector tightness. The premium paid by banks represents the carry cost, and at 9.1% for three years, the implied 2.95% annualized cost signals the degree of tension in the system..

The FCNR(B) Gambit: A 2013 playbook, revisited

The most consequential of the RBI’s recent measures, however, is the revival of the FCNR(B) deposit scheme with full hedging support. This is a page directly from 2013, when then-Governor Raghuram Rajan deployed a similar instrument to arrest a rupee freefall during the taper tantrum-induced BoP crisis.

The mechanics are straightforward. The RBI has permitted authorized dealer banks to raise fresh three-year and five-year FCNR(B) deposits from Non-Resident Indians (NRIs) and is bearing the full hedging cost — estimated at approximately 2.5% per annum for the contract period — until September 30, 2026. Since banks no longer need to absorb the hedging cost, they can offer NRI depositors rates that are 150-200 basis points higher than currently available, making Indian FCNR(B) deposits more attractive in a global context.

However, it may be little early to estimate the scale of inflows under this route. The market estimates of US$50bn might be a little optimistic, considering that unlike 2013, this time the deposit and lending rates in the key markets like the US, the UAE, Singapore etc. are much higher. Most large Indian banks are offering 6.0-6.15% interest rate on a 3-year FCNR(B) deposit.

…to continue tomorrow)

 

Hope Fading, Prices Rising

The Reserve Bank of India (RBI) recently released the results of its latest forward-looking surveys (May 2026 Round). Based on the feedback received from respondents, the survey results provide important insights with respect to consumer confidence — both urban and rural — inflationary expectations and economic growth expectations from professional forecasters.

Urban Consumer Confidence – A third successive decline

Consumer confidence for the current period declined for the third successive round, with the Current Situation Index (CSI) falling sharply to 90.7 from 95.7 in the previous round. A value below 100 indicates a state of pessimism, and on this measure, urban households are now firmly in negative territory on their assessment of present conditions.

The deterioration is broad-based. Perceptions on the general economic situation worsened considerably — the net response on economic conditions fell by 7.9 points to -16.5, as nearly 48% of respondents felt conditions had worsened compared to a year ago. Sentiment on employment also deteriorated sharply, with the net response on employment falling to -14.4 from -9.1 in the March 2026 round. Income perceptions barely stayed positive, with a net response of just 0.9.

The forward-looking Future Expectations Index (FEI) also weakened, dropping 1.5 points to 118.7 — the lowest reading since September 2023. While the index remains in optimistic territory (above 100), the trajectory is concerning. Households have revised down their expectations on economic situation, employment, income and spending across both time horizons. The waning of confidence is primarily driven by ebbed sentiment on discretionary expenditure, with non-essential spending expectations falling sharply: the net response on future non-essential spending collapsed to 15.9 from 21.1 in the previous round.

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Rural Consumer Confidence – Similarly Strained

Rural confidence tells a similar story. The Current Situation Index (CSI) for rural households fell further to 95.2, declining for the second successive round from a recent peak of 100.9 in September 2025 — a fall of nearly 6 points over three survey rounds. Current perceptions on the economic situation moved into negative territory (net response of -2.5), and employment sentiment also turned negative (-1.2). Income perceptions remain weak at -5.8.

The Future Expectations Index (FEI) for rural households fell sharply to 119.3 from 125.1 in March 2026, with worsening conditions across all parameters except prices. Forward expectations on income fell to a net response of 38.9, down from 45.7. Spending expectations also softened notably, with non-essential spending expectations falling to a net response of just 42.6, from 59.5 in the previous round — a significant pullback suggesting rural households are tightening their belt.​

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Household Inflation Expectations – Rising Sharply

Urban households’ current median inflation perception jumped by 60 basis points (bps) to 7.8% compared to the previous round. Inflation expectations for the next three months and one year both edged up by 80 bps and 50 bps respectively, reaching 9.3% for both horizons. The proportion of respondents anticipating higher prices inched up across all product categories, with food products, non-food products and housing all seeing increased price pressure expectations.

The rural picture is consistent. Median inflation perception among rural households rose by 30 bps to 5.9%, and one-year-ahead inflation expectations climbed 40 bps to 7.2%. Across age and occupation groups, the upward drift in inflation expectations is widespread — particularly notable among retired persons, who now expect inflation of 8.6% over the next year.

Professional Forecasters – GDP revised down, inflation revised up

GDP: Real GDP is now expected to grow at 6.5% in FY27, revised down by 40 bps from the previous round. For FY28, the forecast stands at 6.9%, modestly lower by 10 bps. Forecasters have assigned the highest probability to GDP growth in the 6.5-6.9% range for FY27, while for FY28, the modal outcome is also the same band. Annual growth in real PFCE and GFCF for FY27 are expected at 6.8% and 6.5% respectively, with GFCF revised down by 60 bps — a signal of tempered capital formation expectations.

Real GVA growth for FY27 is pegged at 6.6%, with services (7.7%) and industry (6.8%) doing the heavy lifting, while agriculture is expected to contribute a modest 2.4%.

Inflation: This is where the story turns uncomfortable. Annual headline CPI inflation is expected at 4.9% for FY27 and 4.5% for FY28. The quarterly path, however, reveals a more concerning picture: CPI is forecast at 4.0% in Q1 FY27, rising to 4.9% in Q2, accelerating to 5.5% in Q3, and easing only marginally to 5.2% in Q4. Core CPI (excluding food and fuel) is expected to rise from 3.9% in Q1 to between 4.4-4.7% through the rest of the year.

WPI inflation forecasts have been revised up sharply. WPI All Commodities is projected at 8.9% in Q1 FY27, 9.0% in Q2, before moderating to 7.9% in Q3 and 6.5% in Q4.

External Sector: Merchandise exports are expected to grow 5.0% in FY27 and 4.7% in FY28 in US dollar terms. Imports, however, are forecast to grow much faster at 10.5% in FY27, before normalizing to 4.6% in FY28. This asymmetry pushes the current account deficit (CAD) to 2.1% of GDP in FY27 — a significant deterioration of 60 bps from the previous round’s estimate — narrowing to 1.2% in FY28. The median USD/INR rate is pegged at around 95.4-96.6 across the quarters of FY27, with crude oil (Indian basket) expected in the $85-105/barrel range across quarters.

The takeaway

Taken together, the May 2026 round of RBI’s surveys paints a picture of an economy that is growing at a reasonable but moderating pace, against a backdrop of rising inflation pressures and rapidly eroding consumer confidence — across both urban and rural India.

The triple squeeze is hard to miss: households feel worse off today than a year ago, they expect prices to be significantly higher a year from now, and they are pulling back on discretionary spending. Professional forecasters have simultaneously marked down growth and marked up inflation. The widening CAD and sharp upward revision in WPI forecasts add to the headwinds.

Hope was the dominant sentiment in previous survey rounds. In this one, it is fading. The optimism that characterized forward expectations — buoyant FEI readings, resilient income outlook, strong discretionary spending intentions — is giving way to something more sober. If the quarterly CPI trajectory plays out as forecast, with inflation touching 5.5% in Q3 FY27, the RBI will face an uncomfortable policy tradeoff, even as growth edges lower.

For investors, the signposts are clear enough: demand recovery may disappoint consensus, margin pressures from higher input costs are likely to persist, and the consumer staples vs discretionary divide may widen further. The surveys may not move markets directly, but they sharpen the lens through which to read the earnings season ahead.

 

India’s fading premium

The 3Ds: A Framework That Needs Revisiting

In a post in May 2017 (see here), I had argued that Democracy, Demography, and Demand — the 3Ds that global investors had long cited as India's structural pillars — were in fact the key challenges for sustainable economic growth, not straightforward advantages. I had warned then that "pseudo-socialist and quasi-feudal" political incentives often led to capital misallocation, that young demography uncoupled from skill formation was a liability not an asset, and that aspirational consumption driven by political promises rather than income growth was neither desirable nor sustainable.

Nine years later, that assessment has aged uncomfortably well.

The 3Ds remain the rhetorical foundation of every India pitch deck. But in practice, each of the three pillars has shown meaningful stress:

Democracy: Stability without predictability

The political stability that investors valued has been real. But stability of government and predictability of policy are different things, and the distinction matters enormously for long-term capital allocation.

Policy unpredictability — retroactive regulatory changes, sudden sectoral interventions, judicial reversals of contracts — has become a recurring theme in India's investment narrative. Enforcement agencies, whose independence from political direction is a minimum requirement for credible rule of law, have been perceived by many foreign investors as instruments of selective pressure rather than neutral arbitration. Whether or not this perception is entirely fair, it exists, and perceptions drive capital flows.

The consequences are visible in the data. India's share of global market capitalization has fallen to 3% in May 2026 — a 50-month low, down from a peak of 4.6%. Foreign portfolio investors have recorded outflows for three consecutive months, with CY26 YTD outflows from Indian equities totaling $25.9 billion. Large-scale FDI — the kind that reflects genuine confidence in contract enforcement and regulatory stability — has not arrived in the volumes the India growth story would logically support.

The weak contract enforcement mechanism and the perceived misuse of enforcement agencies may not be the headline reasons cited in FII exit reports. But they are the background conditions that make it easier for a global portfolio manager to reallocate to Korea or Taiwan when those markets begin to offer more compelling near-term returns. The institutional trust that transforms a structural growth story into sustained capital inflows requires more than a good narrative. It requires consistent, rule-bound behavior over many years. That work remains incomplete.

Demography: Dividend deferred

India has the world's largest young population. This is an extraordinary potential asset. It is also an extraordinary potential liability if not channelized properly — a point I made in 2017 & 2019 (see here) and which has not become less true in the interim.

The demographic dividend requires a specific set of preconditions: quality education at scale, practical skill formation aligned with the labour market, employment generation that absorbs new entrants faster than the workforce grows, and social infrastructure — healthcare, housing, transport — that keeps a young population productive rather than frustrated.

India's record on these preconditions has been mixed. The headline growth in formal employment has not kept pace with the scale of the young population entering the labour market each year. Real wages for a large segment of the working population have not kept pace with food and services inflation, eroding purchasing power and suppressing the consumption-led growth that was supposed to be the demand side of the demographic story.

The rise of aspirational consumption driven by credit and political transfers — rather than genuine income growth — has created demand that is more fragile than it appears. When that fragility is tested by food inflation, fuel price hikes, or job uncertainty, the consumption numbers disappoint. Which is precisely what has been happening.

Demand: The engine that stuttered

The third D — Demand — is where the recent underperformance is most directly visible in corporate earnings.

The Nifty 50 registered only 5% EPS growth in FY26, following a 16%-plus CAGR in the five years from FY20 to FY25. The 4QFY26 result season marked the eighth consecutive quarter of single-digit earnings growth for the Nifty since the pandemic era.

The Consumer sector P/E, at 38.5x, sits at a 10% discount to its 10-year average. FMCG companies are taking calibrated price hikes, reducing grammages, and cutting marketing spend — the classic playbook of businesses navigating margin pressure from both sides. Companies need crude to remain below $90/bbl to protect margins; it is currently running at $106/bbl.

IT — historically the sector that combined India's demographic and educational advantages with global demand — has delivered a structural rather than cyclical disappointment. Technology trades at 16x, a 26% discount to its 10-year average. Infosys guided for 1.5-3.5% constant currency revenue growth for FY27. HCL Tech guided 1-4%. AI-led pricing pressure, early signs of revenue deflation in legacy services, and the recognition that previously assumed-stable revenue pools may be "deflatable" have reframed the sector's growth narrative. The dividend yield for technology has risen to 4.7% — the market's way of saying it expects income, not growth, from these businesses going forward.

Private sector capex — the investment cycle that was supposed to follow the post-COVID infrastructure push — has not materialized with the breadth and depth anticipated. Corporate balance sheets are healthier, but the willingness to commit to large expansionary investments in an environment of demand uncertainty and elevated input costs is limited.

The fourth D that was missing: Depth

There is a fourth argument that has historically been made for India's valuation premium — the argument of market depth and breadth. India has one of the largest equity market ecosystems among emerging markets, with hundreds of listed companies, a developed institutional framework, robust retail participation through the SIP culture, and a regulatory infrastructure that compares well against peers.

This argument has real merit. The domestic institutional base — DII inflows of $41.4 billion in CY26 YTD — has been the primary shock absorber in a year of intense FII selling. Without this structural domestic bid, the market's correction would have been considerably deeper. The SIP culture is genuinely transformative and represents a democratization of equity ownership that has few parallels in emerging market history.

But the depth argument has a counterweight that is harder to dismiss: only a handful of Indian companies have achieved genuine global scale and performed consistently across cycles. The ambition to be a technology and innovation powerhouse has not translated into companies that compete at the frontier globally. India seems to have lost ground in the race for new technologies — semiconductors, AI infrastructure, advanced manufacturing — that are reshaping where global capital flows. The result is material liquidation of foreign portfolio and private equity investments, as global allocators redirect capital toward markets where those technology bets are being won.

India's equity market is deep in breadth but not yet in the kind of globally competitive corporate quality that sustains a premium over decades. Until that changes, the premium will remain contested.

The honest assessment

The two-year time correction in Indian equities is not a market failure. It is the market performing its basic function — pricing out a premium that was built on expectations that were not met.

The 3Ds that justified India's premium were not fictional. Demographics remain real. Domestic demand potential remains real. The political stability that enables long-term planning remains intact. The institutional market infrastructure is better than it has ever been.

But structural potential is not the same as structural delivery. The gap between what India's story promises and what it consistently delivers — in earnings per share, in globally competitive companies, in predictable regulatory environments, in real income growth for the median household — is the gap that the derating is closing.

Investors who bought the India story at 25x or 28x forward earnings were paying for a future that is arriving, but later and more modestly than they assumed. That is not a new lesson. It is the same lesson that Indian equity markets have administered, periodically and without apology, to those who confuse a compelling narrative with a guaranteed outcome.

The current period of underperformance may be nearing its end. Valuations are more reasonable. The domestic institutional base is structurally supportive. The FY27 earnings cycle, if it delivers, could re-establish the growth narrative that justifies a premium over peers.

But the condition of a sustained return to premium is clear: India must begin delivering on the scale that the narrative has always promised. Companies of genuine global quality. Policy environments that attract rather than frighten long-term capital. Real income growth for the majority, not just the top decile.

Until those conditions are met, the premium will remain, at best, moderate.

And moderate is not what India's story was supposed to be.

Also read

What’s bothering Indian equity markets

Overcome the inertia first, rest will follow

Democracy, Demography and Demand

New 3Ds - disappointment, dismay and disillusion

Demographic accountability

What’s bothering Indian equity markets

There is a particular kind of pain that is harder to bear than an outright crash. It is the slow, grinding disappointment of a market that refuses to go anywhere — up or down — for so long that investors begin to wonder whether they have misread something fundamental. Indian equities have been delivering precisely that experience for the better part of two years.

For the 24 months ending 5th June 2026, the Nifty 50 and the Nifty Smallcap 100 have yielded essentially nothing — zero return, net of the daily noise. The Nifty Midcap 100 has managed a modest positive, but even that flatters a journey that included a sharp crash and an equally sharp recovery in the intervening months, implying a CAGR of less than 5% for the period. This is what a time correction looks like. Not a bear market. Not a recovery. Just stagnation, dressed up in daily volatility to keep you from sleeping.

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The global context makes the domestic picture worse. In a period when most of the world's major equity markets have delivered strong returns — Korea up 93% in USD terms year-to-date, Taiwan up 55%, Japan up 29%, MSCI EM up 25% — Indian equities have fallen 15% in USD terms in 2026 alone. And on the ten-year measure that strips out shorter-term noise: MSCI EM has now outperformed MSCI India with a 10-year CAGR of 8.1% versus India's 7.4%.

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For an index that has historically commanded a 73% P/E premium over EM — a premium built on three decades of structural optimism about India's potential — this is a significant and humbling reckoning.

The valuation picture

Before asking why this has happened, it is worth being precise about what has happened to valuations.

As per the Motilal Oswal Bulls & Bears Valuations Handbook for June 2026:

·         The 12-month forward P/E of the Nifty 50 stands at 18.6x, against a 10-year average of 21x — an 11% discount to history.

·         The 12-month forward P/B ratio is 2.7x, against a 10-year average of 2.9x — a 5% discount.

·         India's market cap to GDP ratio has corrected from 129% in March 2024 to 115% in March 2026. Still above the long-term average of 87%, but no longer in the exuberant territory of 2024.

·         The PE premium of MSCI India over MSCI EM has collapsed from a historical average of 73% — and a peak of 150% in November 2022 — to a moderate 17% as of end-May 2026.

These are not crisis-level numbers. The Nifty is not cheap in any absolute sense. But the direction is unambiguous: the premium that India has historically commanded over its peers is being systematically stripped away.

It is time to ask the question; we have avoided asking for a long time — is the India premium still deserved?

…to continue tomorrow