Choose your economic model

In the post-World War II era, two forces have driven economic development more than any other: real estate and exports. Together, they have transported most economies from underdeveloped to middle-income status over eight decades. Technology and productivity gains have played a critical but largely supporting role — improving export competitiveness and raising household affordability for property ownership.

Improvements in social outcomes — inclusiveness, sustainability, equity, and quality of life — have typically followed economic development with a lag, sometimes by decades. It is therefore reasonable to assess any country’s economic model against these two pillars: how well it has built exports, and how well it has developed real estate.

India’s experience on both counts is instructive — and incomplete.

Exports: A story that stalled

As India opened up its economy in 1991, exports began to rise noticeably. Growth then accelerated sharply from around 2004. Much of that momentum can be traced to the structural reforms of the NDA government under Atal Bihari Vajpayee (1998–2004) — aggressive privatization of core sectors, rapid build-out of industrial and trade infrastructure, and the development of engineering and technology capabilities, partly driven by the necessity of surviving international sanctions after the 1998 nuclear tests. Those compulsions produced competencies that later translated into genuine export strength in engineering, technology, and pharmaceuticals.

But after the Global Financial Crisis of 2008–09, the story changed. Exports stagnated. More telling, India’s exports as a share of GDP peaked around 2013–14 at roughly 25% and have been declining since. A sharp post-Covid recovery briefly arrested that trend, but the past three years suggest a resumption of the downward drift.

 

(These figures include merchandise exports, services exports, royalties, and technical fees.)

The structural issues are well known: weak manufacturing competitiveness, logistics gaps, a modest share of global value chains, and a services export base that is deep but narrow. None of these are easy to fix. But the data makes clear that post-GFC India has not been able to sustain the export-led momentum that most successful Asian economies relied upon.

Real Estate: Underdeveloped and under pressure

Granular data on real estate’s direct contribution to India’s GDP is not readily available. The broader category of “Financial Services, Real Estate and Professional Services” under the services classification shows that this group’s share of GDP rose from around 15% in the early 1990s to approximately 22–24% today — a significant structural shift.

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Much of that gain likely reflects financial services rather than real estate itself. A May 2026 KPMG report estimated real estate’s direct contribution to India’s GDP at approximately 7.3%. By comparison, most Asian economies see real estate contributing 13–15% of GDP — a gap that reflects how far India’s urbanization and housing development still have to go.

The enabling conditions for a strong real estate cycle have been present to varying degrees. Since 1991, average lending rates have fallen sharply — from nearly 19% at their 1992 peak to around 9% today — driven by sustained fiscal consolidation, better inflation management, and structural improvements in the current account. Lower rates, combined with rising employment, improving real wages, better connectivity, and expanded urban access, supported a strong real estate growth cycle through the 2000s and early 2010s.

That cycle has since lost momentum. Inflation has proved sticky, the current account remains structurally vulnerable, and real wage growth in the formal economy has slowed. Interest rates, while well below their historical highs, have stopped falling. Without a resumption of the structural improvements that drove the last cycle, the tailwinds for real estate are weaker than they were.​

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 The central question

This brings us to the harder question. If both pillars of the conventional post-war growth model — exports and real estate — are underperforming, what does India do?

One option is to double down: fix the structural constraints on exports, accelerate urbanization, and build the financial depth needed to sustain a larger real estate cycle. This is the well-tested Asian playbook.

The other option is harder to define but not trivial to dismiss. As I argued in a 2014 post on this blog (see Utopia: The Economic Solution), the Gandhian model — grounded in decentralization, labor-intensive production, self-reliance, and the primacy of the individual over capital — has attracted serious academic attention and is not without practical merit. The question is whether India has already travelled too far down the urbanization and integration path to reverse course, or whether elements of that framework can be selectively incorporated into a hybrid model.

Borrowing blindly from western models will not work in the Indian context. India’s economic model needs to reckon with a class structure, an employment challenge, and a rural civilizational inheritance that standard industrialization narratives do not address well. At the same time, a pure retreat to pre-industrial self-sufficiency is not a realistic option for a country of 1.4 billion people with legitimate aspirations.

The answer is likely somewhere in the middle — a model that aggressively rebuilds export competitiveness and develops real estate as a genuine engine of growth, while orienting its social architecture around decentralization, broad-based employment, and sustainability rather than pure GDP maximization.

The policy choice ahead

The data from the three charts above does not make a comfortable reading. Exports as a share of GDP have been falling for over a decade. Real estate is significantly undersized relative to India’s peers. Lending rates, while structurally lower than in the past, are not falling anymore. These are not cyclical problems. They are structural.

Policymakers cannot afford to wait for the globally tested model to reassert itself on its own. A deliberate choice needs to be made — either recommit to the conventional model with genuine policy urgency, or develop a credible alternative suited to India’s specific conditions. Muddling through, which has been the default, is not a strategy.

What that alternative looks like is a conversation India has not yet had at the level of seriousness it deserves.

Also read – Utopia: The economic Solution

 

After the ceasefire: Why the uncertainty does not end here

Markets appear relieved. The US and Iran have reached an understanding to pause the hostilities that escalated earlier this year, and negotiations for a formal peace treaty are expected to unfold over the next two months. The financial world is, for the moment, pricing in stability.

I would encourage caution. As I argued in an earlier post (Exercise Caution in the Peace Trade), the probability is high that markets have already priced in the bulk of the peace dividend. What lies ahead is not a clear road to recovery but a landscape with multiple overlapping sources of tension — geopolitical, structural, and domestic. Investors would do well to incorporate these into their thinking.

This post is not a forecast. It is a map of the risks I think are being underweighted.

The MAGA domestic pivot

A ceasefire in West Asia does not suit every political narrative. For the Trump administration, the outcome of a conflict in which Iran appears to have extracted meaningful concessions — sanctions relief, asset releases, recognition of Strait of Hormuz leverage — may not sit comfortably with the Make America Great Again agenda. With US mid-term elections approaching, the political incentive to redirect attention is strong.

The most plausible redirections include a reignition of the tariff war, confrontation with NATO allies who did not participate in the Iran campaign, or attempts to exercise influence over Cuba and other near-hemisphere targets. Any of these would reintroduce uncertainty into financial markets.

A stronger Iran and a fragile West Asia

If early reports are accurate, Iran emerges from this episode with economic sanctions lifted and frozen assets released. More importantly, the conflict demonstrated to the world the latent leverage embedded in Iranian control over the Strait of Hormuz — leverage that Iran will not be inclined to relinquish quietly. How Tehran deploys this newfound strategic confidence will be critical to watch.

The two paths are clear. Iran pursues a Persian-imperial vision — enhancing support to Houthis, Hezbollah, Hamas and allied proxy networks — or it pivots toward economic pragmatism and regional co-existence. History suggests the former is more likely in the near term, even if the latter is in Iran's long-run interest. A rising Turkey, increasingly positioning itself as an alternative patron for these groups, complicates matters further.

On Israel, I will simply note what the June post observed: a meaningful and lasting peace requires structural change that goes well beyond a ceasefire. The depth of grievance on multiple sides — accumulated over decades and sharpened by recent events — means that conflict in the region will remain a background condition for years, not months.

Japan: The guilt fades, the ambition stirs

In November 2023, I wrote about the world shedding the guilt of the two world wars and gradually reverting to the competitive, nationalist norms that characterized the pre-1945 era. Japan is, in my view, one of the more significant expressions of this trend. There are faint but discernible signals that Japan — which carried the burden of WW2 guilt for eight decades — is beginning to reassert a martial identity. Shinzo Abe's assassination in 2022 accelerated political shifts in that direction; subsequent defence budget expansions and the revision of Article 9 constraints have continued that trajectory.

If Japan's strategic ambition continues to harden, the Indo-Pacific becomes a materially more volatile neighborhood. For India, which is simultaneously managing Chinese pressure on its northern and maritime borders, this is not an abstract geopolitical observation — it has direct implications for defence budgets, alliance posture, and the cost of maintaining strategic autonomy.

India's unfinished preparations

Near home, China continues to expand its presence in the seas around India, arming and supplying neighbours including Pakistan and Bangladesh. South Asia is unlikely to be a quiet region regardless of what happens in West Asia.

And India's own preparations for a more contested world remain incomplete. Energy security is a work in progress. Our external balances are heavily dependent on services exports and remittances from the West — both structurally exposed to disruption. We rely materially on China for critical chemicals, minerals, and APIs that underpin our pharmaceutical and electronics export industries. Defence indigenization, while underway and accelerating, is a decade or more away from delivering genuine self-reliance.

None of this is to be pessimistic about India's long-run prospects. It is to be clear-eyed about the gap between where we are and where we need to be.

What this means for investors

The short conclusion is this: a secular bull market in Indian equities is not around the corner. The macro environment will stay complex, headlines will remain stress-inducing, and the temptation to make large directional bets on peace, normalization, or a global risk-on cycle should be resisted.

That said, decent wealth compounding opportunities are always present, even in difficult markets. They are just not at the index level. The more productive approach is to focus on specific businesses with growth and earnings visibility that is not dependent on a benign macro outcome.

Volatility will stay elevated and stress inducing. Brace for it, and invest accordingly. 

Who will teach the next generation?

Every week, a new wave of articles warns us that AI is killing jobs. The argument is always the same: automation replaces human work, and workers lose. It is a tidy story. It may also be the wrong one.

The real problem may be quieter, slower, and more damaging. AI is not destroying jobs. It is destroying the willingness of organizations to grow people. And that distinction matters enormously — for firms, for the economy, and especially for anyone entering the workforce today.

The Jevons Paradox is not the point

Most commentators reach for the Jevons Paradox when discussing AI and jobs. Jevons observed in the nineteenth century that more efficient steam engines led to more coal use, not less — because efficiency unlocked demand. Applied to AI: if AI makes workers more productive, we will want more output, not fewer workers.

That is a reasonable argument in some contexts. But it sidesteps the real question. This is not a story about wanting more output. This is a story about who would pay to grow people — and right now, the answer is: nobody.

The training problem nobody wants to own

Here is the economic reality that most commentators might be missing. Training a junior employee is expensive. It takes senior time, patience, and a long horizon. The company that invests in training a twenty-two-year-old today may collect the benefit in seven years — long after the person who did the training has moved on, and long after the manager who approved the budget has left for another firm.

AI changes this calculus sharply. With AI tools, a small team of experienced people can produce what used to require ten. The temptation to stop hiring and training juniors is not irrational — it is the logical response to short-term incentives. Every individual manager, evaluated on this quarter’s output, makes the same rational choice. Stop building the bench. Use the tools. Ship faster.

The result is a collective action problem. Every firm does what makes sense for them individually, and the system as a whole would stop producing the experienced mid-level talent it will need in a decade.

A few firms will win big — Later

There is an investment angle here worth watching. A small number of firms with genuinely long-time horizons will continue to train juniors, precisely because everyone else has stopped.

In five to seven years, when the hollowing out becomes visible, experienced mid-career professionals will be scarce. You can poach a few senior people. You cannot manufacture an entire generation of capable thirty-year-olds who simply were never trained. The firms that built bench strength quietly during the AI adoption frenzy will collect a meaningful scarcity premium. The firms that cut training entirely will find themselves unable to grow — not because they lack capital or technology, but because they lack people who know how to do things.

This is not speculative. It is a predictable consequence of the incentive structure described above. The only uncertainty is timing.

 So, what should a young person do?

If the market has stopped training you, the question becomes: how do you train yourself? And here, of all places, the Bhagavad Gita offers the clearest answer available.

Chapter 4, verse 34:

तद्विद्धि प्रणिपातेन परिप्रश्नेन सेवया |

उपदेक्ष्यन्ति ते ज्ञानं ज्ञानिनस्तत्वदर्शिन: ||

 

Seek this knowledge through humble surrender, sincere inquiry,

and devoted service — the wise who have seen the truth will teach you.

Shankaracharya, in his commentary on this verse, is precise about what each word means. He is not offering a general sentiment about being a good student. He is describing a method.

The three-part method

Pranipata — prostration. Not the performance of humility, but the actual thing. Approaching someone who knows more than you without the armor of your credentials, your opinions, or your need to appear capable. This is harder than it sounds, especially for people who are technically skilled and used to being the smartest person in the room.

Pariprasna — inquiry. Not asking surface questions to seem curious. Asking the real ones: Why did you make that call? What were you wrong about? What does this look like when it goes badly? These are the questions that extract genuine knowledge rather than polished answers.

Seva — service. Making yourself genuinely useful to the person you are learning from. Not networking. Not managing up. Actually doing work that helps them, so that the relationship is built on something real.

Those three words describe the entire apprenticeship model. And it is precisely this model that is being dismantled by the current AI adoption cycle.

Jnani versus Tattva-Darshi

The sharpest line in Shankara’s commentary is a distinction he draws between two kinds of knowers.

The jnani is the person who is learned, credentialled, fluent, and well-read. In today’s terms: someone who can produce polished output on any topic, speak confidently in meetings, and appear competent across every domain.

The tattva-darshi is different. Shankara says the word means one who has seen the truth. Not read about it. Not synthesized it from other sources. Seen it — through direct experience, through having done the work long enough to understand where it actually breaks.

His point is direct: knowledge imparted by those who have seen the truth takes effect. Knowledge from the merely learned does not, or not in the same way.

This is the whole game now. AI will make everyone look like a jnani. Fluent, articulate, able to produce output on anything within seconds. What AI cannot manufacture is the tattva-darshi: the person who has done the work long enough to know when the confident answer is wrong, to make a sound call on incomplete information, to see the thing beneath the surface that the tool cannot access.

The practical implication

For young people entering the workforce, the advice follows directly from the analysis.

Do not optimize your first job for title or brand name. Optimize it for how fast you get good — which means: how close you are to people who have actually seen the truth in your field.

A well-known firm where you spend three years producing AI-assisted output with minimal senior exposure will leave you fluent and shallow. A less prestigious role where you sit next to someone who has been doing this for twenty years, who makes real decisions and lets you watch — that will make you rare.

Approach those people through pranipata, pariprasna, and seva. Stay low. Ask the real questions. Earn your place by being useful. This is not advice about networking or impression management. It is a description of how knowledge actually transfers between people.

The market is quietly eliminating the apprenticeship. Your job is to find one anyway.

(This piece is mostly based on a post written by a dear friend, who is a great exponent of Shrimad Bhagwat Gita, and regularly delivers talks on Gita.)

 

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.

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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)