Small is not necessarily beautiful

Continuing from yesterday…(see here)

The recently released report of Annual Survey of Unincorporated Small Enterprises (ASUSE 2025) is a detailed report on the current state of the unorganized sector in the country. The headline numbers — 7.92 crore enterprises, 12.81 crore workers, Rs. 19.93 lakh crore in GVA, 11% GVA growth — make an attractive story of expansion and progress.

That story is not false. But it is incomplete. The data, read carefully and with some elementary arithmetic, reveals a picture that the official narrative tends to gloss over: this is a sector where the majority of participants earn incomes that would be considered inadequate by almost any standard, where women's participation often reflects compulsion rather than empowerment, where capital is thin and productivity is low, and where digitization and formalization are advancing from a very modest base. The ASUSE numbers deserve to be read not just with appreciation — but with questions.

 The income problem: Rs. 9,700/month for a self-employed worker

The single most important number in the ASUSE 2025 report is the one that receives the least attention: GVA per worker for Own Account Establishments (OAEs) — the 6.86 crore single-person or family-run units that constitute 87% of all unincorporated establishments. This figure stands at Rs. 1,16,583 per year — or approximately Rs. 9,715 per month.

GVA, it must be remembered, is not take-home income. It is gross value added — output minus intermediate inputs — and it must still cover the owner's own labour, any unpaid family labour, depreciation on assets, and loan repayments before anything resembling a profit or wage reaches the household. The actual monthly income of the typical OAE operator is likely considerably lower than Rs. 9,715. A conservative estimate, after accounting for these deductions, might put it somewhere between Rs. 7,000 and Rs. 10,000 per month.

Compare this to India's per capita net national income for 2024-25: approximately Rs. 1,84,000 per year, or Rs. 15,333 per month. The OAE worker in the unincorporated sector earns, in GVA terms, roughly 60% of the national per capita average — and in take-home terms, possibly 40-50%. This is not prosperity. This is subsistence.

The arithmetic becomes starker at the household level. India's average household size is approximately 4 persons. If an OAE's GVA of Rs. 9,715 per month is the household's primary income — which it frequently is in rural areas — the implied per capita income for that household is around Rs. 2,400 per month, or roughly Rs. 28,800 per year. That is well below the national average, and disturbingly close to poverty-line territory in many state definitions. We are talking about a large fraction of the 6.86 crore OAEs — likely representing over 50 crore people in associated households — living at or near this level.

Even if one takes the aggregate GVA per worker figure of Rs. 1,56,539 per year (Rs. 13,045 per month) — which blends in the more productive Hired Worker Establishments — the picture is not reassuring. This overall figure is still below the national per capita income, and GVA is still not the same as household income.

The ASUSE report duly presents these numbers. It does not dwell on what they imply.

A productivity crisis hidden in plain sight

OAE GVA per establishment — a proxy for establishment-level productivity — is Rs. 1,40,005 per year, or roughly Rs. 11,667 per month. That is the gross value added of an entire enterprise — typically run by an owner who works full time, often with unpaid family assistance.

For context, a single semi-skilled factory worker in the organized sector typically earns more than this in wages alone — before the employer counts any value added the worker contributes to output.

HWEs, by contrast, generate Rs. 10,00,868 GVA per establishment — seven times more than an OAE. The gap tells the story of what scale, hired labour, fixed capital, and formalization can do. But the sector is 87% OAEs. The productivity uplift available at the HWE level remains out of reach for the overwhelming majority.

What traps OAEs at this level? The data offers some clues:

·         Thin capital base: Fixed assets owned per OAE establishment average only Rs. 2,18,431; and a large part of this is likely to be basic tools, a push-cart, a sewing machine, or a modest stock of goods. There is little capital to leverage productivity improvements.

·         Minimal credit access: Outstanding loan per OAE establishment is a negligible Rs. 19,520 — barely enough to cover a month's working capital. Even this small figure is likely inflated by a minority of better-capitalized OAEs. For most, formal or semi-formal credit is not a material resource.

·         Low digitalization among OAEs: Only 34.2% of OAEs use internet for entrepreneurial purposes — versus 72.7% of HWEs. The gap in digital adoption tracks closely with the gap in productivity.

·         Structural isolation: Many OAEs operate within household premises (42% do), are unregistered (about 63% of manufacturing OAEs), and maintain no formal accounts. They are, by design, outside the institutional systems that could help them grow.

The ASUSE 2025 report records 2.85% growth in GVA per establishment and 4.5% growth in GVA per worker, materially lagging the overall GVA growth for the country. At current inflation, this represents roughly zero real productivity gain. The sector is expanding in headcount and in nominal terms. It is not becoming more productive per person.

Female participation: empowerment or compulsion?

The ASUSE 2025 data on women is presented as good news. And in some respects, it is: 27% of proprietors are female, women comprise 29% of the workforce, and female-led HWEs tend to hire other women. These are meaningful facts.

But the headline that demands scrutiny is this: in the manufacturing sector, more than 60% of proprietary OAEs are female-headed.

Manufacturing OAEs, as established above, generate the lowest GVA among all establishment types and categories. They are home-based, capital-light, and almost entirely informal. The top employment categories within manufacturing — wearing apparel, tobacco products, and textiles — are precisely the activities that women in low-income households have historically been pushed into: piece-rate work, home-based stitching, bidi rolling, and handicraft production. These are not typically chosen as entrepreneurial ventures. They are survival strategies.

The data lends itself to a hypothesis that should be tested but cannot be resolved from the ASUSE data alone: a significant share of female OAE proprietorship may reflect economic compulsion — a second household income to supplement an inadequate primary income — rather than entrepreneurial aspiration. This is not a criticism of the women involved. It is a criticism of the conditions that drive the outcome.

The ASUSE survey does not collect data on the occupation or income of the spouse or other household members. This is a significant gap. If such data were available, it would be possible to test whether female OAE participation is correlated with male household member unemployment, low agricultural income, or casual daily-wage work. That correlation — which most fieldworkers would expect to be strong — would fundamentally reframe what the headline female participation numbers mean.

The finding that 72% of female-led HWEs employ at least one other female hired worker is more genuinely positive — HWEs represent greater scale, deliberate employment, and somewhat higher productivity. But female-led HWEs are a small fraction of the total. The dominant story is OAEs.

An additional concern: female workers in this sector are concentrated in precisely the activities with the lowest pay. Wearing apparel manufacturing (48.4% of manufacturing female workers), retail trade (95% of trade female workers), and personal services — these are not high-paying segments. The feminization of the sector, at the OAE level, is occurring disproportionately in its least remunerative corners.

Formalization: progress too slow to matter

The ASUSE 2025 report notes that 37.5% of establishments are now registered under some act or authority, up marginally from 37.2% in the previous survey. Internet use has risen sharply, from 27% to 39%. Bank accounts are held by 82.5% of establishments. These are presented as signs of growing formalization and digitization.

Let us consider what 37.5% registration actually means. More than 62% of unincorporated establishments — over 4.9 crore enterprises — remain entirely outside any regulatory framework. In manufacturing, the registration rate is only 16.4%, meaning more than 5 out of every 6 manufacturing units operate with no formal recognition whatsoever. This matters not just for tax compliance, but because unregistered establishments have no legal standing to enforce contracts, access formal credit, or participate in government procurement.

The 0.3 percentage point increase in registration between surveys — covering roughly a year — implies that at the current pace, it will take many decades to bring the sector into even a minimal formality. The Udyam registration scheme and similar initiatives have made it easier to register. But ease of registration has not translated into a meaningful acceleration in the rate of formalization.

The internet numbers are more genuinely encouraging — a 12% jump in one year is substantial. But a closer look is warranted. 'Use of internet for entrepreneurial purposes' in a largely cash-based, low-margin sector may often mean a basic WhatsApp group for customer communication or using a UPI QR code — both genuinely useful, but a far cry from e-commerce integration, digital bookkeeping, or participation in online marketplaces. The survey does not break down what internet use comprises.

Geographical concentration: The same states, the same story

Uttar Pradesh, West Bengal, and Maharashtra together account for 35% of all unincorporated establishments and about 35% of the sector's employment. These same three states have topped the distribution in every ASUSE. What is missing from the data is any serious analysis of whether the unincorporated sector in these states is a springboard to something better, or a holding pattern for labour that cannot find formal employment.

Uttar Pradesh has the most establishments and the most workers — but Delhi, Haryana, and Tamil Nadu have the highest GVA per establishment and per worker. This divergence between labour concentration and productivity concentration is a structural problem. The states with the most informal workers are not the most productive states; they are states where the formal economy has not generated enough employment to absorb the workforce.

In that sense, the unincorporated sector's size is not merely a reflection of entrepreneurial energy. It is also a measure of formal economy failure. The sector expands, in part, because there is nowhere else for labour to go.

Moreover, if we juxtapose the problem of unauthorized construction by small households and shopkeepers and commercial activities run from residential premises with this survey outcome, the drive to demolish such houses/shops by UP State and other governments might seem extremely unjust.

The data we do not have

ASUSE 2025, to its credit, is a serious survey. But several gaps in what it measures limit its analytical value for policymaking:

No household income linkage: The survey does not connect enterprise income to household income. It is therefore impossible to assess the actual living standard of an OAE proprietor's family, or to determine whether the enterprise is the primary or supplementary income source.

No longitudinal tracking: Enterprises are not tracked over time. We do not know what fraction of OAEs from the previous survey have closed, grown into HWEs, or migrated to the formal sector. The sector looks stable across surveys, but behind that stability may be enormous churn — a revolving door of enterprises entering and exiting subsistence.

No income distribution within categories: The GVA per worker figures are averages. The distribution within each category is likely highly skewed — a small number of more successful establishments pulling up the mean, with a large majority well below it. Medians would be far more informative than means.

No occupational history of proprietors: We do not know whether proprietors were previously employed in the formal sector (and lost that employment), were always self-employed, or are recent entrants to the labour market. This matters enormously for understanding what the sector represents.

No welfare outcome data: Dietary adequacy, housing conditions, access to healthcare, children's schooling — none of these are linked to enterprise data. A sector that employs 12.81 crore workers should be evaluated not just on GVA growth but on whether it is actually improving lives.

What does it all add up to?

The unincorporated sector is not a problem to be solved. It is a reality to be understood. For hundreds of millions of Indians, it is the only economy they have access to. The ASUSE data shows that this economy is growing — in number of enterprises, in employment, and in nominal GVA.

But growing from a very low base, at roughly the rate of nominal GDP, is not the same as transformation. The sector's productivity per worker — at Rs. 1,56,539 per year overall, and Rs. 1,16,583 for the dominant OAE segment — has not broken out of the low-income trap. The gains in GVA per worker, at 4.5% in nominal terms, are likely negative in real terms given inflation.

What India needs from this sector is not just more of the same — more OAEs at Rs. 9,700 a month — but pathways out: credit access that enables capitalisation, registration processes that are genuinely low-cost, skilling that is aligned with market demand, and a formal employment ecosystem large enough to absorb workers who want it. Without those, the unincorporated sector will continue to do what it has always done: absorb everyone the formal economy does not want, and pay them accordingly.

The 12.81 crore workers counted in ASUSE 2025, and the 50-odd crore people in their households, deserve a more honest accounting than the headline numbers provide. The data is there. The questions are obvious. The honest conversation is overdue.

Also read

State of unorganized sector in India

State of unorganized sector in India

The unincorporated sector — comprising millions of small and micro manufacturers, traders, and service providers — is the backbone of India's economy. While informal in structure, it is deeply formal in impact: generating livelihoods, fostering entrepreneurship, and contributing significantly to the country's GDP.

The National Statistics Office (NSO) recently released the Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2025, covering the period from January to December 2025. This is the most comprehensive annual stocktaking of the sector, and the numbers tell a story of steady expansion, rising productivity, growing female participation, and accelerating digital adoption.

Key Points

·         The unincorporated sector now comprises over 7.92 crore establishments — an 8% jump in a year.

·         Employment crossed 12.81 crore workers, with more than 74.5 lakh new jobs added.

·         Overall GVA of the sector grew by nearly 11% to Rs. 19.93 lakh crore.

·         Internet usage for business purposes surged from 27% to 39% in a single year.

·         Women now head 27% of all unincorporated establishments, and account for nearly 29% of the workforce.

Scale and Spread

Enterprises: The total number of unincorporated non-agricultural establishments grew from 7.34 crore in ASUSE 2023-24 to 7.92 crore in ASUSE 2025, a growth of approximately 8%. This expansion was broad-based: rural establishments grew by 6.71% (to 4.24 crore) and urban establishments grew at a faster 9.45% (to 3.68 crore).

Of these, 6.86 crore are Own Account Establishments (OAEs) — units run by working owners, typically without hired labour — while 1.06 crore are Hired Worker Establishments (HWEs), each employing at least one paid worker.

Sectoral composition has remained largely stable. Other Services leads with 42.37% of all establishments, followed by Trade at 30.56% and Manufacturing at 27.07%.

Who Runs These Enterprises?

Ownership structure: Around 95% of all unincorporated establishments are proprietary — run by a single owner. This dominance of sole proprietorship holds across rural and urban areas and across all three broad sectors. Uttar Pradesh records the highest share of proprietary establishments among major states, at 99.2%.

Social profile: Other Backward Classes (OBC) own the largest share of proprietary and partnership establishments at 51%, followed by Others (30.7%), Scheduled Castes (13.3%), and Scheduled Tribes (4.7%).

Market orientation: Almost all (99.5%) informal establishments operate as market-oriented units — selling goods or services at economically meaningful prices — reinforcing the sector's integration into the mainstream economy.

Geographic concentration: Uttar Pradesh (13.8%), West Bengal (13.1%), and Maharashtra (8.29%) together account for about 35% of all unincorporated establishments. Together with Tamil Nadu, Bihar, Gujarat, Madhya Pradesh, and Rajasthan — each with a share of 5% or more — a handful of states dominate the sector's landscape.

Employment Generation

The unincorporated non-agricultural sector employed approximately 12.81 crore workers during January-December 2025, up from 12.06 crore in ASUSE 2023-24 — a growth of 6.2%, adding over 74.5 lakh jobs. Employment rose in both rural areas (from 5.61 crore to 6.00 crore, up 6.9%) and urban areas (from 6.45 crore to 6.80 crore, up 5.6%).

Other Services leads employment generation at 39.5% of the total workforce, followed by Trade (33.2%) and Manufacturing (27.3%). Within these broad categories:

·         In manufacturing, wearing apparel (31.8%), food products (13%), and textiles (12.9%) are the top three employers, together accounting for nearly 58% of manufacturing jobs.

·         In trade, other retail trade overwhelmingly dominates with 82.9% of all trade-sector employment.

·         In services, social and personal activities (24.1%), food and accommodation (17.4%), and land transport (16.2%) are the top three job-generating activities.

Emoluments: Average annual emoluments per hired worker stood at Rs. 1,46,550 in 2025, up about 4% over the previous survey. Urban hired workers earned more (Rs. 1,56,143) than their rural counterparts (Rs. 1,24,516). Among broad sectors, 'other services' offered the highest pay. Uttarakhand topped the chart among major states with average emoluments of Rs. 2,14,237 per hired worker, followed by Kerala (Rs. 1,98,204) and Telangana (Rs. 1,90,390).

Female Participation

Women's engagement in the unincorporated sector is on an upward trajectory, both as entrepreneurs and workers.

As entrepreneurs: About 27% of all unincorporated establishments are headed by female proprietors. This is particularly striking in manufacturing, where more than 60% of proprietary establishments are female-headed — a share that rose 2% from the previous survey. Telangana leads with 38.55% of its establishments headed by women (and a remarkable 80.45% in manufacturing). Gujarat and West Bengal also report high female entrepreneurship.

As workers: Female workers make up 28.71% of the total workforce in the unincorporated non-agricultural sector during ASUSE 2025, slightly up from 28.12% in the prior survey. Women constitute 34.24% of the OAE workforce and 18.72% of the HWE workforce. In manufacturing alone, women account for 48.3% of workers.

Multiplier effect: Female-led hired-worker establishments show a strong tendency to employ other women — nearly 72% of such establishments engaged at least one female hired worker. This signals a virtuous cycle where women in leadership create opportunities for other women.

Digitization and Formalization

Registration: 37.5% of unincorporated establishments are now registered under some act or authority, a marginal improvement from 37.2% in ASUSE 2023-24. Among sectors, services lead (47.8%), followed by trade (41.8%) and manufacturing (16.4%).

Bank accounts: Financial inclusion in the sector has strengthened significantly. The percentage of establishments maintaining accounts with financial institutions rose from 76.1% in ASUSE 2023-24 to 82.5% in ASUSE 2025. About 94% of HWEs maintain a bank or post office account.

Internet use: This is where the leap stands out. Internet usage for entrepreneurial purposes jumped from 27% to 39% overall in a single survey cycle — a gain of 12 percentage points. In rural areas, the rise was from 18% to 31% (13 points); in urban areas, from 37% to 49% (12 points). Among hired-worker establishments, 72.7% now use the internet for business. Delhi, Haryana, and Assam recorded the highest digital adoption rates among major states.

Productivity — GVA and Fixed Assets

Overall GVA: The total Gross Value Added (GVA) of the unincorporated non-agricultural sector grew by about 11% to Rs. 19.93 lakh crore in 2025 (from Rs. 17.97 lakh crore in ASUSE 2023-24). Rural GVA grew 11.86% and urban GVA grew 10.32%.

GVA per establishment: The average annual GVA per establishment has risen to Rs. 2,52,699 (up from Rs. 2,45,687), reflecting a 2.85% improvement in establishment-level productivity. HWEs are far more productive — averaging Rs. 10 lakh per establishment versus Rs. 1.40 lakh for OAEs. Delhi, Haryana, and Tamil Nadu lead states in GVA per establishment. Among the top GVA contributors at the national level are Uttar Pradesh (11.74%), Maharashtra (11.22%), and Tamil Nadu (8.20%).

GVA per worker: The sector-wide average is Rs. 1.6 lakh per worker. OAEs average Rs. 1.2 lakh per worker; HWEs average Rs. 2.3 lakh per worker.

Capital investment: Fixed assets per establishment rose to Rs. 3.4 lakh (from Rs. 3.2 lakh in ASUSE 2023-24), indicating better capitalization of the sector. Outstanding loan per establishment stood at Rs. 42,776 at the all-India level, with about 80% of borrowing channeled through institutional sources.

Rural vs Urban

Rural establishments at 4.24 crore represent 53.5% of the total. Rural employment — at 6.00 crore — has grown meaningfully, reflecting an expansion of non-farm livelihoods. Most rural establishments (44.7%) operate within household premises, while urban establishments are more likely to have fixed premises outside the home.

The urban sector is where scalable, hired-worker activity concentrates: 75 lakh of the 1.06 crore HWEs are located in urban areas. Urban establishments also show higher formalization and digital adoption.

…more on this tomorrow

Rein your horses

In the past three months, a quiet but consequential story has been playing out in the Indian equity markets. While the benchmark Nifty 50 has ground along with minimal enthusiasm, the broader market has put on a spectacular show. The Nifty Midcap 100 has outperformed the Nifty 50 by ~10% in this period, and the Nifty Smallcap 100 has done even better, outperforming Nifty 50 by ~15%. This material outperformance of the broader markets implies that “greed” has been a dominating sentiment in the past three months, decisively beating fear.

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This dominance of greed, against a backdrop of elevated geopolitical tensions — an ongoing conflict in West Asia and persistent uncertainty around US trade policy — is noteworthy. The question worth asking, carefully and honestly, is whether the market is reading the future correctly or simply repricing hope.

What has been driving the broader market outperformance?

The outperformance of mid and smallcap indices is not entirely irrational. There are identifiable, structural reasons behind it — even if the magnitude of the move warrants some scrutiny.

To begin with, Foreign Portfolio Investor (FPI) selling has been persistent and, critically, concentrated in large cap stocks. FPIs sold over Rs2trn worth of Indian equities in the past three months, and a disproportionate share of that selling was absorbed by Nifty 50 constituents. When the biggest sellers in the room target the biggest names, the smaller names benefit from neglect — and sometimes, from active rotation by domestic investors seeking alternatives.

The second factor is sectoral de-rating at the index heavyweight level. IT services and private sector banking together account for close to 40% of the Nifty 50’s weight. Both have faced meaningful valuation compression. IT has struggled with demand visibility in a slowing global environment, while private banking has grappled with margin compression and asset quality concerns in select pockets. When the two most influential sectors in a benchmark underperform, the benchmark itself cannot outperform, regardless of what else is happening elsewhere.

Third, and perhaps most interesting from a structural standpoint, is the massive valuation re-rating of stocks connected to what markets have come to call “sunrise themes” — Data Centers, energy transition (renewables, green hydrogen, EV infrastructure), and defense indigenization. These sectors are populated almost entirely by mid and smallcap companies. A defense electronics company that was trading at 25x earnings two years ago may now trade at 60-80x on the back of record order books and a government policy tailwind that shows no signs of reversing. The same logic applies to several renewable energy plays and select data center infrastructure names. Domestic institutions and retail investors have piled into these themes, and the resulting re-rating has been dramatic.

Finally, there is an earnings growth divergence that has provided at least partial fundamental justification for the rally. Aggregate earnings growth for Nifty Midcap 100 constituents has tracked in the 18-22% range over recent quarters, while Nifty 50 earnings growth has been closer to 10-12%. When earnings diverge, price divergence follows. The question is whether the divergence in price has now exceeded the divergence in earnings — and that is where the story gets uncomfortable.

The valuation question that cannot be deferred

Let us look at where valuations actually stand. The Nifty Midcap 100 is currently trading at approximately 35-38x trailing twelve-month earnings, a significant premium to its own historical average of around 26-28x. The Nifty Smallcap 100 presents an even starker picture, with the price-to-earnings multiple in the 40-45x range for several constituents, well above any sensible reading of long-run sustainable earnings multiples for companies of this scale and quality.

In the “sunrise theme” stocks, the valuation conversation becomes even more challenging. Several defense stocks now trade at price-to-earnings multiples north of 80-100x on the back of order book-driven earnings projections that extend three to five years into the future. Data center plays have been accorded valuations that imply an almost frictionless execution of extremely ambitious capacity expansion plans. The market is not merely pricing in optimism — it is pricing in perfection.

This is not to say that the underlying businesses are unworthy of investor attention. India’s defense order pipeline is real. The energy transition is real. The data center buildout is real. But markets have a long and well-documented history of taking genuine structural stories and extrapolating them to valuations that assume everything goes right and nothing goes wrong. The honest investor’s job is to separate the story from the price.

The sharp correction this week: A warning shot, not a blip

The sharp correction witnessed this week — the Nifty Midcap 100 fell approximately 3.5-4% in a matter of two sessions, with several momentum favorites dropping 7-10% from recent highs — deserves to be read not as a buying opportunity in isolation, but as a revelation of the fragility that had been building beneath the surface.

When markets correct sharply on relatively modest triggers — in this case, a combination of slightly disappointing earnings from one sector, a modest uptick in geopolitical risk premium, and a political gesture by the prime minister — it typically signals that positioning has become crowded and valuations have left little room for disappointment. The high-beta, high-momentum trade in mid and smallcaps had attracted significant participation from retail investors through SIP flows into sectoral and thematic funds, many of which had concentrated exposure to exactly the names that corrected the hardest.

The data on retail participation is instructive here. Monthly SIP contributions have crossed ₹25,000 crore, with a meaningful and growing share directed into midcap, smallcap, and thematic funds rather than diversified large cap or flexi-cap vehicles. This is not inherently bad — systematic investing in the broader market has a sound long-term logic. But when that flow becomes heavily concentrated in momentum themes and elevated valuations, the market structure becomes vulnerable. A correction feeds on itself as stop-losses are triggered and sentiment sours quickly.

The rally since February 2026, which took the Nifty Midcap 100 up approximately 18% from its lows, was built on a narrowing base of momentum names. Breadth — the proportion of stocks participating in the rally — had been declining even as the headline index climbed. This is a classic warning sign that a rally is running on borrowed time rather than broad fundamental support.

Is it time to rebalance?

The correction this week is a useful reminder that markets do not move in straight lines, and that the fragility of a rally built on multiple expansion rather than earnings delivery is always greater than it appears while the momentum is intact. Geopolitical uncertainty has not been resolved. Earnings growth in momentum sectors still needs to be delivered, not just projected. And the global environment — with US monetary policy, dollar strength, and West Asia risk all unresolved — provides ample triggers for further volatility.

For investors who have ridden the midcap and smallcap rally well, this is a moment for honest portfolio review rather than celebration. The question is not whether India’s broader market will outperform over the next decade — it very likely will, on the back of genuine structural growth drivers. The question is whether one’s current portfolio is positioned to capture that outperformance at an acceptable price, or whether the enthusiasm of the past three months has led to concentration risks that deserve attention.

The rebalancing question is one that every serious investor should be asking at this point, and answering honestly rather than in the hope that momentum themes will rescue a concentrated portfolio from a correction.

Austerity vs. Reform: Which way are we headed

The Appeal — and the Controversy

The Prime Minister recently called upon citizens to embrace austerity as a means of helping India navigate its current balance-of-payments (BoP) stress. The appeal had two broad asks. First, curtail fuel consumption — work from home where possible, use public transport, avoid discretionary travel, and prefer virtual meetings over in-person ones — in the interest of energy security. Second, conserve foreign exchange by forgoing overseas vacations, deferring gold jewelry purchases for a year, and moderating consumption of plant-based edible oils, most of which India imports.

The appeal has drawn sharply divided reactions. Supporters have characterized it as a statesman-like call to national duty, drawing parallels with similar appeals made by Prime Ministers Jawaharlal Nehru, Lal Bahadur Shastri, and Indira Gandhi during periods of national stress. Critics, however, have dismissed it as hypocritical, pointing to the Prime Minister’s own busy schedule of large-scale road shows, public rallies, and overseas travel — arguing that the ask for restraint rings hollow when the loudest voice in the room is not leading by example.

I do not intend to adjudicate this political debate. What I do find worth reflecting on, from an investor’s standpoint, are the broader signals this episode sends.

Five Things Investors Should Consider

1. India’s External Position Is Fragile

India’s external balance is under meaningful stress. While the current situation may not yet match the severity of the crises of 1979–80, 1990–91, or 2013, the trajectory is concerning. Each of those earlier BoP episodes was followed by a notable economic slowdown, social unrest, and a change in the political dispensation. Investors would do well to not dismiss the present stress as merely cyclical.

2. The Unfinished Business of 1991

The economic reforms of 1991 were transformative. They shifted policy’s center of gravity from consumption control — the hallmark of India’s post-independence socialist era, characterized by licensing and rationing — to supply-side expansion. Massive capacities were built across telecom, automotive, cement, steel, power, textiles, and chemicals. Yet three critical sectors were left largely unreformed: petroleum, natural gas, and edible oils. Import dependence in these areas has remained dangerously high, leaving the Indian economy perennially exposed to global energy price shocks triggered by geopolitical or climatic events.

3. A Return to the Pre-1991 Playbook?

The PM’s tone could be read as signaling a preference for consumption control over supply augmentation — a reversion to pre-reform thinking. If that reading is correct, investors may need to brace for regulatory measures targeting fuel consumption (steep price hikes or formal rationing), restrictions on gold purchases and holdings, and tighter controls on outward remittances under the RBI’s Liberalised Remittance Scheme (LRS). Some of these instruments were deployed briefly in 2013. The critical question is whether India’s economy today is as structurally vulnerable as it was then — or in 1991.

4. Has the Government Thrown in the Towel on Reform?

The tone of the PM’s address may have deepened the anxiety of investors who were already watching the reform pipeline closely. Many will now be asking whether the government has quietly abandoned its reform agenda. The actions taken — or not taken — in the coming weeks will be telling. Will the government revert to interventionist, consumption-curbing measures reminiscent of the pre-1991 era? Or will it demonstrate resolve by executing a set of tough supply-side reforms that have been deferred for reasons of political expediency? The answer to this question will likely set the tone for equity markets over the next twelve to eighteen months.

5. The Popularity Barometer

Finally, and I assign this relatively less weight as an investment signal, the public response to the PM’s appeal will serve as an organic indicator of his political capital — one that cuts through the noise of recent electoral outcomes. India has seen before what genuine mass mobilization looks like: in November 2016, citizens stood in hours-long queues to exchange their own hard-earned cash, rang bells and lit lamps during the most stressful Covid pandemic time, and still returned the Prime Minister to power with a thumping mandate. Whether this appeal generates even a fraction of that voluntary compliance will be worth watching.

Conclusion

The PM’s austerity appeal is, on one level, a routine political gesture. On another, it is a potential inflection point. India’s BoP vulnerability is real, the import dependency in energy and edible oils remains a structural Achilles’ heel, and the reform pipeline has been thinning. If the government’s response to external stress is to reach for the pre-1991 toolkit of controls and rationing, the implications for long-term growth — and for equity valuations — could be materially negative.

Investors should not be paralyzed by this uncertainty, but they should certainly be paying attention.

Indian economy – at an inflection point

In the past twelve months, Indian equities have been one of the worst performing asset classes globally. The benchmark Nifty 50 (+1%) has been flat in the past twelve months, whereas Asian peers like South Korea’s KOSPI (+270%), Japan’s Nikkei 225 (+68%) and Brazil 50 (+36%) have yielded superlative returns. Even on three basis Nifty50 (+32%) has been sharply lower than its EM peers.

Several experts have cited a variety of reasons for India’s underperformance. For example—

·         Many experts have blamed lack of adequate investment opportunities in the sunrise sectors like Artificial Intelligence and Semiconductors, for lack of investors’ interest in the Indian equities. Global investors have been consistently exiting Indian equities for the past three years, selling over Rs4trn worth of equities. Domestic HNIs have also increased their overseas portfolio investments materially.

·         Some investors have cited the “very high” cost (STT + Capital Gain Tax) of investing in India as one of the key factors behind lack of investors’ interest in the Indian equities.

·         Consistently depreciating INR has also discouraged most overseas investors. Pertinent to note that Nifty50 in USD terms (-9%) has massively underperformed INR denominated Nifty50 (+1%) in the past twelve months.

But in my view, the reason behind India’s underperformance is far more structural and fundamental than these micro and cyclical issues. The government policies and corporate behavior in the past 10 years have severely diminished the growth potential of India. The government has completely failed to invest in human capital and rent seeking corporations have focused on exploiting government subsidies and natural resources rather than investing in innovation. This has not only slowed down India’s growth momentum, but has crippled the growth drivers clouding any acceleration in the near term.

In this context, I would like to highlight the view of two reputable top economists – Chief Economic Advisor Dr. V. A Nageswaran and former RBI governor Raghuram Rajan.

Why Did India's Growth Falter?

From FY21 to FY25, corporate net profits tripled to ₹7.1 lakh cr (FY25) as corporate taxes were reduced by one-third and strong government investments pushed GDP growth.

Corporate India retired its debt instead of investing profits in CapEx. Debt-to-Equity ratio for companies declined from 139% to 94%.

Corporate cash reserves increased from ₹9L cr in FY21 to ₹16L cr in FY26. Private Investment to GDP ratio declined to a 20-year low from 16% during 2004-08 to 12% in FY23. FY26 investment halved from FY25.

As per Dr. V.A. Nageswaran, CEA, this reluctance of corporates to invest in growth has contributed to demand uncertainty (broken consumption) in India. Post-Covid, corporate profits of NSE 500 companies have grown at 30.8% annually. But investment has been disappointed.

The promoters and their next generations are accumulating profits and setting up family offices elsewhere rather than investing in real assets (factories, technologies, R&D etc.)

With a weakened rupee, the gap between Indian and Chinese currencies (real effective exchange rate or REER) is closing. This is the moment when Indian industry can compete in the global markets at a level footing with China.

Recent Free Trade Agreements (FTAs) have also created a level-playing field for Indian exports. Yet, India’s FTA utilization record remains poor compared to other countries.

Developed countries achieved so much because their industry acted in national interest. Now they are aggressively securing supply chains, refusing technology transfers, while India is heavily exposed to risks.

Rent seeking over innovation

In a recent newspaper article Dr. Raghuram Rajan, former RBI governor, highlights-

India’s largest “AI hub” on a 600-acre site is coming up in Visakhapatnam. LLM Models: Owned by Google; Chips: designed in California, fabricated in Taiwan; India’s Contribution: Land, Electricity, Construction, and Labour.

30 years ago we celebrated IT labour services the same way. But we did not build the next layer of technology, did not invest in R&D and deep-tech, and did not develop manufacturing depth. Now the bill is coming due in the form of AI.

Worse than 30 Yrs Ago: This time the mistake India is making is with stronger lock-in to the foreign tech owners. For every inference running on a foreign LLM model from a server in Vizag, a small rent will go to California on infra built by Adani. Same game, worse rules.

India’s AI strategy can be summed up as follows: Acres of land, tons of concrete, and gigawatts of power for a foreign-owned data center. No industry investments in AI research, labs, and scientists.

India’s Attitude: Since we are not investing in frontier AI, we tell ourselves frontier AI does not matter. Since we are good at secondary work (AI diffusion or AI services), we tell ourselves diffusion is enough.

Growing disparities

Between 2019 and 2025, the number of Indian billionaires grew by 77%, and their total wealth jumped by 227%. Now India has the world's highest number of billionaires per trillion dollars of GDP. Meanwhile, for the middle and lower income populations, real wages stagnated in the last 10 years. No GDP growth happened in their households.

There is no evidence in human history where a bunch of self-serving oligarchs have made an economy “developed”.

Conclusion

India is not yet in an economic crisis — it remains one of the world’s fastest-growing major economies. But it is certainly at an inflection point. The policy and corporate choices of the next five years will determine whether it replicates the high-investment, broad-based development trajectories of East Asia’s success stories, or settles into a middle-income equilibrium characterized by elite wealth concentration, technology dependency, and unrealized demographic potential.

The structural problems— the profit-investment gap, the AI dependency risk, the human capital quality deficit, and the inequality-consumption feedback loop — are serious and compounding. They are also solvable, provided the political economy can be shifted away from rent protection and toward productive investment. That shift requires institutional reform, credible commitment mechanisms, and leadership willing to challenge entrenched interests. It is a demanding agenda. The cost of not pursuing it, however, is considerably higher.

Where does AI fit in the business paradigm

A few days ago, I had an interesting interaction with some technology students. The discussion was primarily meant to be about the businesses these students can do. However, midway the discussion took an interesting turn and veered towards artificial intelligence (AI) – the business of AI; and AI in business. I would like to share a gist of the discussion with the readers.

In my view, there are primarily three kinds of businesses in the world.

1.    Businesses designed to serve the needs of the people. Some of these businesses actually manufacture needs for people, mostly in the form of aspirations, and then serve to fulfil these needs/aspirations. Fashion, digital entertainment, luxury tourism etc. are some examples of such businesses.

2.    Businesses to protect the lives and property of people. Some of these businesses, manufacturing of arms and ammunition, both threaten and protect the lives and property of people.

3.    Businesses that serve the institutions and structures created to organize, govern, grow and manage people. Examples would be social & physical infra developers, universities, etc. There are certain businesses which are mostly based on systemic inefficiencies and corruption. Private coaching and general medical practice for example are two such businesses that should not exist in an efficient governance system.

These are of course broader and porous categories. For example, a hospital serves human needs and also anchors a healthcare system that is an institutional structure.

The framework of business

In my view, the business schools need to teach why businesses exist, not just how they make money. That is the more interesting question and the less taught one. Business schools spend a great deal of time on revenue models and competitive strategy and almost no time on the prior question: what is this business actually for?

The idea that a business can manufacture the very need it then profits from satisfying, is the defining feature of modern consumer capitalism. A clothing company does not simply clothe people. It constructs an anxiety — you are not dressed correctly, you are not current, you are not who you could be — and then sells the relief. Instagram does not simply connect people. It engineers a particular kind of loneliness that its own product then temporarily addresses.

Most of these businesses run on a variety of revenue and profitability models. Traditionally, the businesses that understood the human needs most and created a business model that would serve those needs in the best possible manner were the most successful. However, in the modern times, the businesses that inspire the human aspirations and manage to successfully fulfil these aspirations. Economists often ignore an uncomfortable principle - the demand curve is not always discovered. Sometimes it is built.

The business of arms is structurally about threat-and-protection simultaneously. It requires the world to be dangerous in order to justify its own existence.

Scarcity – a governance failure or arithmetic

In my view, in a country with good and equitably distributed public education, private tutoring would shrink dramatically.

A counter argument however could be that the problem in India is not merely that public schools are poor. The problem is that the gates are narrow. There are more people who want to be engineers and doctors and civil servants than there are seats in the institutions that confer those identities. Private coaching exists not just because teaching is bad — it exists because competition is intense and the stakes of that competition are high. You could fix every government school in the country tomorrow and still have a Kota. Scarcity is not a governance failure. It is arithmetic. And businesses that serve people navigating scarcity are not parasitic — they are, for better or worse, responding to something real.

It is a valid argument, but I would like to disagree.

What actually makes businesses succeed

Ideally, the businesses that understood the human needs most and created a business model that would serve those needs in the best possible manner were the most successful. Of course, it certainly does not mean that the most empathetic business always wins. The structural positioning of the business plays a major role in its success. The most durable competitive advantages in history have rarely been rooted in sensitivity to human desire. They have been rooted in control of chokepoints — physical, digital, regulatory, or social.

The uncomfortable truth is that many of the world's most profitable businesses have made their money not by understanding what people want, but by making it structurally difficult for people to want anything else.

Standard Oil did not succeed because John Rockefeller understood human needs more sensitively than his competitors. He succeeded because he controlled pipelines. The railways did not win because they grasped the human desire to travel — they won because once you owned the track, nobody could run a train without your permission. Google did not become the default portal to human knowledge because it was the most empathetic company — it became that because once you are the search engine everyone uses, you are the search engine everyone uses. Network effects are not about understanding needs. They are about structural position.

And so: where does AI go?

An interesting question was asked, “which of the three categories should we place the business of developing in selling Artificial Intelligence?"

The honest answer is that AI fits comfortably in all three of his categories — and that this is precisely what makes it unusual.

·         It serves human needs directly: it reads your scans, drafts your contracts, translates your documents, helps you write the email you have been putting off for a week. Category one.

·         It is already deeply embedded in the security and protection business: surveillance systems, autonomous weapons research, fraud detection, cyberdefence. Category two. And like the arms trade, it simultaneously creates and addresses certain threats — deepfakes being perhaps the most visible example.

·         It is becoming infrastructure for institutions: government systems, healthcare bureaucracies, financial regulators, universities that now have to decide what a degree means when a machine can write the essay. Category three.

But here is what I think is actually interesting. AI is not just a business that fits across these categories. It is a technology that is changing what each category means.

When AI enters healthcare, the question of what general medical practice is for becomes more complicated. When AI enters education, the question of what a coaching centre is actually teaching becomes more complicated. When AI enters governance, the question of what institutions are even supposed to do becomes more complicated. It is not slotting into the existing structure. It is pulling at the joints.

The closest historical analogy I keep returning to is electrification. Electricity was not a business in any of the mentioned three business categories. It was a medium that transformed every business in every category — what manufacturing could do, what medicine could do, what governments could do, what entertainment could do. You could not place it in a taxonomy of 1880 because it was in the process of making that taxonomy obsolete.

I suspect AI is doing the same thing. Which means the question — which category does AI belong in? — may be a wrong question. The right question might be: what do the categories look like after AI has been inside them for twenty years?

I do not know the answer. But I think the students who ask this question are well ahead of most people who are simply using the product.

Roads are not enough, we need smarter infrastructure thinking

A journalist’s question about the newly opened Ganga Expressway caused more outrage than reflection last week. After officials announced that the road connecting Meerut to Prayagraj would cut travel time by five hours, he asked simply: “What will people do when they arrive five hours earlier?” Critics piled on immediately, calling him anti-development and politically motivated.

That reaction is telling. In India, large infrastructure announcements have become almost sacred — to question them is to invite accusations of obstructing progress. But civic scrutiny of public spending is not obstruction. It is a democratic obligation. And when a government spends thousands of crores of public money on a single road, the public is entitled to ask hard questions about what they are getting in return.

The journalist’s question was clumsy, and his critics were not entirely wrong to push back. But the debate it triggered is worth having — carefully, honestly, and without political point-scoring on either side. Because the real question is not whether expressways are good or bad. It is whether we are building them well, for the right reasons, with the right safeguards. On that score, India’s record is genuinely mixed.

What the research actually says

Let us start with something the connectivity sceptics rarely acknowledge: there is substantial evidence that roads work. A large body of economic research from developing countries, including India, shows that improved road access correlates with reduced rural poverty, higher agricultural incomes, better school attendance, and greater access to healthcare. The World Bank’s studies on India’s rural roads programme (PMGSY) found measurable improvements in wages and consumption for villages that received paved road connections.

The Mumbai–Pune Expressway, for all its early controversies, is now widely credited with catalysing the growth of Pune as a technology and manufacturing hub. The Delhi–Jaipur corridor has made Rajasthan more accessible to investment and tourism. These are not trivial outcomes. Connectivity, done well, genuinely changes economic geography.

So “improved connectivity” is not a hollow justification. It is a legitimate development goal with a real evidence base. Anyone building a critique of expressway policy needs to engage with this evidence honestly, rather than dismissing it.

…and yet, something is missing

Acknowledging that roads can work is not the same as concluding that every road will work, or that every road is being built responsibly. India’s expressway program, impressive in its scale, has real and documented failures that deserve honest examination.

Financial viability has been a persistent problem. Several private developers have walked away from projects or gone bankrupt, not because the infrastructure was unwanted, but because of poor traffic projections, mispriced tolls, and land acquisition delays that the original models never accounted for. These are not just business failures — they strand half-built roads, strand displaced communities, and waste public money through guarantees and bailouts.

Environmental review has been inconsistently applied. The Char Dham road-widening project in Uttarakhand became a national controversy because planners pushed ahead with designs that geologists and ecologists warned were unsuitable for fragile Himalayan terrain. The Supreme Court had to intervene. That a project of such environmental sensitivity could proceed as far as it did reflect a planning culture where speed is rewarded and caution is treated as an obstacle.

Safety awareness is almost entirely absent. This is perhaps the most damaging and most easily correctable failure. When a new expressway opens, NHAI and its concessionaires invest enormous sums in construction and virtually nothing in educating the communities that suddenly find themselves living beside a high-speed corridor. The results are predictable and tragic: helmetless riders on expressway lanes, wrong-side driving to avoid distant U-turns, pedestrians crossing where no crossings exist. These are not failures of local people. They are failures of institutional responsibility.

The two-way street nobody talks about

The most genuinely original idea in the public debate around expressways — and one that receives almost no attention — is that connectivity is not a one-way gift from cities to villages. Roads move things in both directions.

Yes, expressways give rural communities access to larger markets, better hospitals, and educational institutions. But they also open those communities to the full force of urban commercial culture: processed food in non-biodegradable packaging, aggressive consumer marketing, and a torrent of digital content that has arrived in villages faster than the institutions — schools, libraries, community centers — needed to help people engage with it critically.

This does not mean rural communities need to be protected from the outside world — that would be paternalistic and wrong. People have the right to make their own choices about what to consume and how to live. But it does mean that policymakers should think seriously about whether new infrastructure is accompanied by investment in the social and institutional capacity that allows communities to benefit from connectivity rather than simply being swept along by it. A fast road to a city is most valuable when the village at the other end has functioning schools, healthcare, and economic opportunity to anchor its residents.

What the Instagram reels argument gets right and wrong

The journalist’s original question — what will people do with five extra hours? — was trying to make a real point, but it made it badly. The implication that saved travel time is worthless unless people use it productively is not only elitist; it is also historically shortsighted. People did not immediately know what to do with electricity, the telephone, or the internet either. The value of infrastructure often takes a generation to fully materialize.

But the underlying concern is not entirely without merit. If five hours of saved travel time accrues primarily to people who are already mobile, already connected, and already economically active — if it is, in practice, a subsidy to freight logistics and middle-class car owners rather than a transformation of life for the rural poor — then the distribution of benefits matters. Infrastructure that predominantly serves the already-advantaged, while displacing the poor and degrading local environments, is not neutral. It is a policy choice about whose lives we are prioritizing.

The right question is not “should we build expressways?” but “who benefits from this expressway, who bears its costs, and what are we doing to ensure the benefits are broadly shared?” These are harder questions. They take longer to answer. But they are the questions a serious development conversation demands.

A framework for better infrastructure decisions

Rather than either celebrating every expressway as a triumph of national ambition or dismissing them as vanity projects, we need a more rigorous public conversation. That conversation should center on five questions:

·         Who benefits, and how? Traffic modelling should be transparent and independently verified. The distribution of economic gains across income groups, regions, and communities should be projected and monitored.

·         Who bears the costs? Land acquisition, displacement, environmental degradation, and cultural disruption are real costs. They should be quantified, minimized, and fully compensated — not treated as acceptable collateral damage.

·         Is the financial model honest? Traffic projections for toll roads in India have historically been over-optimistic. Unrealistic forecasts lead to developer failures, public bailouts, and stranded assets. Independent scrutiny of financial models should be mandatory.

·         What complementary investments are planned? A road without safety awareness programmes, without access roads to villages, without integration with public transport, and without local economic development planning delivers a fraction of its potential value.

·         How will we measure success? Not ribbon-cuttings. Not traffic volumes. But changes in rural income, school attendance, healthcare access, and quality of life for the communities the road was meant to serve. These should be measured, published, and held up against the promises made at the inauguration.

Conclusion: scrutiny is not cynicism

India needs infrastructure. It needs better roads, faster connections, and bolder investment in its physical backbone. Nobody serious disputes that. But need alone does not make every project good, every design sound, or every cost acceptable.

The journalist who asked what people would do with five saved hours was reaching for something important, even if he reached clumsily. The critics who shouted him down were defending something real too. But neither side actually answered the question that matters: are we building this road in a way that will genuinely improve the lives of the people who live along it?

That question is not anti-development. It is the most pro-development question you can ask. Because infrastructure that fails the people it was meant to serve is not progress — it is just very expensive concrete.