Speculating post-war world - 4

Continuing from yesterday - Scenario 3: A Multi-Axis World

Last week I shared some of my thoughts about what the world might look like after the latest episode of war in West Asia. I speculated the following three alternative outcome scenarios:

Scenario 1: Deglobalization

Scenario 2: The return of colonialism

Scenario 3: A multi-axis world

In my view, Scenario 3 is the most desirable, but Scenario 1 is the most plausible, under the current circumstances. And the world we actually get is probably a messy hybrid of the two, with regional flashes of Scenario 2 thrown in.

Why scenario 1 is most plausible

Deglobalization already has momentum. This is the critical point. The other two scenarios require discontinuous breaks from the current trajectory. Deglobalization does not — it simply requires the current direction to continue. The friend-shoring of supply chains, the CHIPS Act, MAGA, India’s PLI schemes, the weaponization of SWIFT, the rise of rupee-yuan-ruble trade settlement — these are not responses to the West Asia conflict. They predate it by years. The conflict is accelerating a trend, not creating one. When historians look back, 2018 (the US-China tariff war) may prove to be the actual hinge point, not 2026.

Scenario 2 is real but localized. Return of Colonialism-style behavior is already happening — in Ukraine, in the South China Sea, in Chinese debt infrastructure across Africa — but the constraints on it going global are still formidable. Nuclear deterrence is the biggest one. Great powers cannot annex each other or each other’s close allies without triggering escalation calculus that even the most reckless leaders fear. So, neocolonialism expresses itself at the margins — in small states, in failed states, in economic coercion rather than military occupation. Deeply worrying, but not a systemic reorganization of world order.

Scenario 3’s problem is the collective action trap. Everyone rationally prefers a well-functioning multilateral system. Nobody wants to pay the short-term political cost of reforming one. The UN Security Council has needed reform for forty years. The IMF quota system is visibly anachronistic. The WTO dispute mechanism has been broken since 2019. The reason none of these have been fixed is not ignorance — every policymaker knows what the problems are. It is that the beneficiaries of the current dysfunction (primarily the US and China, in different ways) have no incentive to change it, and the middle powers lack the coercive leverage to force change.

The India angle is worth thinking about carefully. India is the country with the most to gain from Scenario 3 and the most to lose from Scenario 1. A deglobalized world puts India’s IT services, its pharmaceutical export model, and its diaspora remittance architecture under serious stress. A Multi-Axis World, by contrast, is essentially designed for a country of India’s strategic positioning. This is probably why India’s foreign policy establishment has been among the most consistent advocates for multilateral reform — it is not idealism; it is self-interest correctly understood.

The uncomfortable conclusion is that the world drifts toward Scenario 1 not because anyone chose it, but because nobody chose otherwise forcefully enough. That is how most bad historical outcomes happen — not through malice but through the accumulation of individually rational, collectively disastrous decisions.

The question worth watching over the next three years: does the post-war period produce any serious institutional initiative — a genuine reform proposal, a new multilateral framework, something beyond rhetoric — or do governments simply return to their corners and manage the fragmentation? The answer to that question will tell us a great deal about which scenario we are actually in.

I shall be delighted to hear readers’ views on the post-war world, especially if someone foresees alternative scenarios far removed from the three scenarios I envisage.

Also read

Scenario 1: Deglobalization

Scenario 2: The Return of Colonialism

Scenario 3: A Multi-Axis World

 

Scenario 3: A multi-axis world

 Continuing from yesterday - Scenario 2: The Return of Colonialism

Scenario 3: A multi-axis world

A multi-Axis world is the most optimistic outcome of this war, in my view. Unfortunately, it may not be the most likely outcome. Optimism in geopolitics requires more than goodwill — it requires institutional capacity, distributed leadership, and the willingness of major powers to accept constraints on their own behavior in exchange for systemic stability. History suggests these conditions are rare.

Nonetheless, the Multi-Axis World scenario is not wishful thinking. It has strong intellectual foundations and some precedents in the existing architecture of global governance. More pertinently, it represents the trajectory that the world’s middle powers — including India — have the strongest interest in pursuing, and the most agency to shape.

The core argument of this scenario is that the US-Iran conflict, rather than destroying the globalized order, forces it to evolve. The shock is severe enough to delegitimize the old architecture — US-led unipolarity, dollar hegemony, a rules-based order in which the rules were largely written by the powerful — but not severe enough to collapse it entirely. What emerges is not a simpler world but a more complex one: a world of multiple overlapping coalitions, negotiated interdependencies, and reformed institutions that more accurately reflect the distribution of actual power.

What the Experts Say About Multipolarity

The Multi-Axis World draws heavily on the international relations (IR) tradition of complex interdependence, developed by Robert Keohane and Joseph Nye in the 1970s and refined through subsequent decades of scholarship. Their central insight — that in a world of deep economic integration, military force becomes less effective as an instrument of foreign policy, and the costs of disrupting interdependence become prohibitively high — remains one of the more empirically durable propositions in IR theory.

The argument is not that conflict disappears. Keohane and Nye were not naifs. Their claim was more specific: that certain types of conflict — interstate territorial war between economically integrated states — become rarer and more costly. The European Union is the most successful real-world experiment in this proposition. Despite deep historical enmities, Western European states have not fought each other since 1945. The mechanism is precisely the complex web of economic interdependence that makes the cost of war with a trading partner prohibitive.

More recent work by Erik Gartzke on the capitalist peace, and by Bruce Russett and John Oneal on the Kantian peace, adds further layers. Democratic governance, trade interdependence, and membership in international institutions are individually associated with lower conflict probability; together, they are strongly reinforcing. The Multi-Axis World scenario is essentially a bet that these mechanisms survive the shock of the West Asia war and reassert themselves in a reformed institutional architecture.

The Architecture of Overlapping Coalitions

The defining structural feature of the Multi-Axis World is not the absence of blocs — it is the overlapping and partially contradictory nature of those blocs. States belong to multiple groupings simultaneously, with different memberships for different purposes. Trade blocs are not the same as security blocs. Technology coalitions cut across both. Mobility frameworks — governing the movement of people — have their own logic entirely.

This is not a hypothetical. The current world already exhibits this structure in embryonic form. India simultaneously participates in QUAD (a security dialogue with the US, Japan, and Australia), SCO (a security and economic grouping dominated by China and Russia), BRICS (an economic forum that includes both China and the West’s adversaries), I2U2 (a technology and infrastructure forum with Israel, the US, and UAE), and G20 (the broadest legitimate forum for global economic governance). India is in all of these simultaneously, and its memberships create both constraints and leverage.

In the Multi-Axis World scenario, this pattern generalizes. Most major and middle powers build portfolios of overlapping memberships. The result is that no single great power can afford to rupture its relationships with others — because doing so would cascade through too many shared institutional memberships. This is complexity as deterrence: not military deterrence, but systemic deterrence. The cost of unilateral action rises with the density of the interdependence web.

Democracy Survives — But Changes

One of the more counterintuitive claims in this scenario is that democracy not only survives the post-war shock but actually strengthens over the medium term. This requires explanation, because the short-term trend clearly runs the other way: the West Asia conflict has boosted nationalist and authoritarian politics in multiple countries, as crises typically do.

The longer-run logic, however, draws on the democratic resilience literature. Research by Milan Svolik at Yale on the survival of democracies under stress suggests that democracies facing external threats tend to consolidate — both internally, as citizens rally around institutions, and externally, as democratic states deepen security cooperation with each other. The post-war period, in this scenario, becomes a catalyst for democratic solidarity rather than democratic retreat.

The more plausible mechanism is economic. The multi-axis world is one in which growth returns, trade recovers, and middle classes expand — particularly in the large developing economies that successfully navigate the transition. Historically, sustained economic development is the single strongest predictor of democratic consolidation. South Korea, Taiwan, and Chile all made democratic transitions at income levels that India, Indonesia, and Nigeria are now approaching. If the multi-axis world delivers development, democracy follows.

The Demography Dividend — Managed This Time

The demographic dimension of the Multi-Axis World scenario is among its most interesting and most practically important features. The scenario posits material demographic shifts driven by regulated immigration from developing to developed countries.

This is not just a hopeful extrapolation — it is a structural necessity. The developed world faces a demographic crisis of its own making. Europe’s total fertility rate has fallen to 1.5, well below the 2.1 replacement level. Japan’s population has been declining in absolute terms since 2008. South Korea’s fertility rate, at 0.72 in 2023, is the lowest ever recorded for any country. Without immigration, these economies face unsustainable dependency ratios: fewer workers supporting more retirees, with cascading effects on pension systems, healthcare, and GDP growth.

The developing world, meanwhile, has the opposite problem: abundant young populations and insufficient domestic capital and institutional capacity to employ them productively. The match is obvious in theory. The challenge is political. Immigration has been one of the most destabilizing political forces in Western democracies over the past decade, and for understandable reasons — rapid, unmanaged demographic change produces genuine social disruption.

The Multi-Axis World scenario’s bet is that the post-war shock creates the political conditions for a new social contract around managed migration. Not the chaotic, crisis-driven flows of the 2015 Syrian refugee wave, but structured bilateral agreements — skilled labor corridors, circular migration schemes, and portable social security arrangements — that meet the developed world’s labor needs while preserving the sending country’s human capital base through remittance flows and diaspora investment.

The Neutral Currency Question

Perhaps the single most consequential institutional change in the Multi-Axis World scenario is the emergence of a neutral global reserve currency — one that is not the liability of any single sovereign state and cannot be weaponized through sanctions or exclusion.

The dollar’s dominance has been both an extraordinary privilege for the United States and an increasingly resented asymmetry for the rest of the world. The use of dollar clearing as a sanctions mechanism — most dramatically against Russia in 2022 — has convinced virtually every non-Western central bank that holding reserves in dollars is a geopolitical risk as much as a financial asset. The search for alternatives is now serious and well-funded.

The academic literature on reserve currency transitions — including Barry Eichengreen’s work on the dollar’s exorbitant privilege — suggests that transitions are rare but not impossible. Sterling’s loss of reserve status in the mid-twentieth century is the relevant precedent. What replaced sterling was not another national currency — it was a multilateral institution, the IMF’s SDR system.

In the Multi-Axis World scenario, a reformed and genuinely representative IMF administers a reserve asset — whether an enhanced SDR, a commodity basket, or a jointly-managed digital currency — that provides a neutral settlement mechanism for cross-bloc trade. This is technically achievable. The political obstacles are formidable but not insurmountable, particularly if the US calculates that losing the reserve currency privilege through geopolitical overreach is worse than negotiating an orderly transition.

Reforming the Institutions That Failed

The United Nations Security Council structure, designed in 1945 to reflect the power distribution of a world that no longer exists, has been one of the most persistent sources of institutional dysfunction in global governance. A council in which the US, China, Russia, the UK, and France each hold a veto was barely functional during the Cold War and has been increasingly paralyzed in the post-Cold War era.

The Multi-Axis World scenario requires reformed global institutions that command genuine legitimacy — which in practice means institutions that give adequate voice to the world’s emerging powers. India, Brazil, Nigeria, Indonesia, and others have been making this argument for two decades without result. The West Asia conflict, by demonstrating the limits of the existing system so dramatically, may have created the political window for reform that decades of incremental advocacy could not.

What would reformed institutions look like? The proposals are not new — they have been debated in academic and policy circles for years. Expansion of the Security Council’s permanent membership to include regional powers. Weighted voting in the IMF that reflects current economic realities rather than 1945 GDP shares. A reformed World Trade Organization dispute settlement mechanism. A genuine global climate governance body with binding enforcement. The content of reform is less uncertain than the political will to achieve it.

What India Stands to Gain — and Lose

For India, the Multi-Axis World scenario is the most congenial of the three. It is a world that rewards India’s existing strategic architecture: a country too large and too democratic to be a client state, too pragmatic to be confined to a single bloc, and too development-hungry to accept the deglobalization scenario’s growth penalty.

India’s ambition to be a Vishwaguru — a civilizational anchor — fits naturally into a multipolar world where no single power dominates the normative agenda. India’s diplomatic tradition, from Nehru’s non-alignment through the current strategic autonomy doctrine, is essentially a bet on a world like this. India has been preparing for the Multi-Axis World for seventy years. If it arrives, India is better positioned than almost any other country to benefit.

The risks are internal rather than external. A Multi-Axis World that rewards institutional quality, democratic governance, and human capital development will expose India’s internal contradictions more sharply than either of the other scenarios. Governance quality, judicial independence, minority rights, and the rule of law are not just domestic concerns in a multi-axis world — they are competitive assets that determine how seriously other members of the system take you.

The Most Hopeful Bet

The Multi-Axis World is the hardest to achieve of the three scenarios. It requires institutional innovation, distributed leadership, and the willingness of major powers to accept genuine constraints. These are demanding conditions. But the alternatives are more costly, and the major powers know it. A deglobalized world imposes large economic losses on everyone. A neocolonial world risks escalation to great-power conflict. The Multi-Axis World, for all its complexity, is the outcome that all major powers can rationally prefer — even if none of them is willing to lead the way to it.

In 1945, after the worst war in human history, the major powers built the United Nations, the Bretton Woods system, and the Marshall Plan. These were imperfect institutions, designed partly to serve the interests of the powerful. But they also reflected a genuine, hard-won understanding that the alternative — a world of pure great-power competition — had just killed fifty to eighty million people.

The West Asia conflict has not killed tens of millions. But it has reminded the world of what unconstrained great-power competition looks like. That reminder may be enough.

Concluding part on 5^th May 2026.

Also read

Scenario 1: Deglobalization

Scenario 2: The Return of Colonialism

Speculating post-war world -2

Continuing from yesterday - Speculating post-war world-1

Scenario 2: Rise of colonialism

There is a moment in the decline of every multilateral order when the strongest player realizes that the rules no longer constrain them — and that being constrained while others cheat is simply irrational. We may be approaching that moment. The US-Iran conflict has demonstrated, for any remaining doubters, that international law and UN Security Council resolutions are effective only insofar as the most powerful nations choose to observe them.

This is the premise of this second scenario: a world in which the post-war environment triggers not a retreat into national fortresses, but an aggressive outward expansion by two or three major powers — a resource grab dressed up in the language of security, development, and alliance. A second scramble, this time for rare earth minerals, water, arable land, deepwater ports, and human capital, in addition to the traditional prizes of oil and gas.

It is the darkest of the three scenarios I am exploring in this series. It is also, historically speaking, one of the most precedented.

The Historical Mirror: 1885 and 2026

In 1885, the major European powers convened the Berlin Conference to divide Africa among themselves. There were no African representatives at the table. In roughly three decades, 90% of the African continent passed under European colonial rule. The trigger was not malice alone — it was industrial capitalism’s insatiable demand for raw materials combined with the military and technological superiority of European states over African polities.

The parallel to 2026 is not exact but it is instructive. The trigger today is not coal and rubber — it is lithium, cobalt, rare earth elements, and water. The technologies that the developed world is betting its future on — electric vehicles, semiconductor fabrication, renewable energy infrastructure — all depend critically on mineral inputs that are geographically concentrated in politically unstable regions. The Democratic Republic of Congo holds an estimated 70% of the world’s cobalt. Chile, Argentina, and Bolivia command the Lithium Triangle. China controls 85% of global rare earth processing capacity.

In a post-war environment where the fiction of a rules-based international order has been further punctured, the temptation to secure these resources through coercive means — military bases, puppet governments, debt traps with real teeth, or outright annexation — becomes more politically viable.

The Race for Resources: What We Already See

The Return of Colonialism scenario does not require an imaginative leap. Its infrastructure is already being built, quietly and methodically, by multiple actors.

China’s Belt and Road Initiative, now in its second decade, has created a network of infrastructure debt across Africa, Central Asia, and South Asia that critics characterize as a form of strategic dependency. The Hambantota port in Sri Lanka — leased to China for 99 years after Sri Lanka could not service its debt — is the most cited example, though scholars debate whether it represents a deliberate strategy or opportunistic exploitation of fiscal distress. Either way, the outcome is the same: a foreign power with effective control over strategic infrastructure in a sovereign state.

Russia’s territorial expansion — Crimea in 2014, eastern Ukraine in 2022, and its post-war positioning in the South Caucasus — follows a different but related logic. It is the assertion that geographic proximity plus military superiority confers the right to determine the political status of neighboring territories. This logic, once normalized, is extraordinarily difficult to contain.

The United States, meanwhile, has used financial infrastructure — SWIFT exclusion, dollar clearing dominance, secondary sanctions — to exercise a form of economic coercion that functions as soft annexation of policy space. The imposition of oil sanctions on Iran, Venezuela, and Russia are exercises of sovereign power over third-country economic decisions.

The Weaponization of Technology and Space

The Return of Colonialism scenario has a twenty-first century dimension that the nineteenth century version lacked: the race for technological and space dominance. The scholar Alfred McCoy, in his work In the Shadows of the American Century, argues that control of the global commons — sea lanes, cyberspace, and now space — is the modern equivalent of controlling trade routes. Whoever dominates these commons sets the rules for everyone else.

The US-China competition in semiconductors, artificial intelligence, and space capabilities is already a defining feature of the current era. The CHIPS Act in the US, the EU’s semiconductor sovereignty push, China’s Made in China 2025 and its successor initiatives — these are not merely industrial policies. They are assertions of technological sovereignty that carry unmistakable echoes of nineteenth century imperial competition for industrial advantage.

In space, the Artemis Accords — championed by the US and now signed by over 30 nations — essentially propose a framework for lunar resource extraction that mirrors the Berlin Conference logic: the major powers agree among themselves on the rules, and others are invited to accept them or be excluded. China has refused to sign and is building a parallel space architecture with Russia. The militarization of space, already underway with anti-satellite weapons testing by the US, China, Russia, and India, adds a military dimension to what was once framed purely as scientific competition.

Democracy’s Retreat

One of the most consequential features of the Return of Colonialism scenario is its impact on governance forms. The liberal democratic model assumed, for three decades after the Cold War, that it represented the end point of political evolution — Francis Fukuyama’s famous thesis. That assumption has been steadily eroding since 2016, and the West Asia conflict may have dealt it a serious blow.

The research of Larry Diamond at Stanford’s Hoover Institution documents what he calls a democratic recession — a global decline in the quality and scope of democratic governance that has been underway since approximately 2006. The Freedom House index has recorded seventeen consecutive years of declining global freedom. The post-war environment, characterized by security anxiety and resource competition, tends to favor strongman governance, where decisiveness and control are valued over accountability and rights.

Theocracy — which the author of the original text flags as potentially regaining prominence — deserves particular attention. In the Middle East and parts of South and Southeast Asia, the failure of secular nationalist models to deliver economic security has consistently strengthened Islamist political movements. The Iranian revolution itself was a response to the perceived corruption and Westernization of the Pahlavi dynasty. In Turkey, Egypt, Pakistan, and Tunisia, the pattern has repeated with variations. A post-war environment that further delegitimizes Western liberal values will strengthen these alternatives.

The Human Cost: Mass Death in the Periphery

Perhaps the most disturbing feature of the Return of Colonialism scenario is its demographic consequence. The nineteenth century scramble was accompanied by famines, forced labor, and population collapse across colonized territories. King Leopold’s Congo lost an estimated half of its population. The Bengal famine of 1943 killed between 2 and 3 million people under wartime colonial governance.

The twenty-first century version would not take the same form — there are no colonial governors and no official labor extraction regimes. But the functional outcome could be similar. A world in which the great powers prioritize resource extraction over human development, in which climate change is weaponized through food system disruption, in which war becomes endemic across multiple theatres simultaneously — this is a world where mortality in poor countries rises sharply.

The Lancet and WHO projections on climate-related mortality already suggest tens of millions of excess deaths by 2050 under high-emissions scenarios. Add armed conflict, disrupted food systems, and collapsed health infrastructure — all consistent with the Return of Colonialism scenario — and the demographic catastrophe in the developing world becomes very large indeed.

Meanwhile, the developed world faces the opposite problem. Low fertility rates in Europe, Japan, and South Korea have created structural labor shortages. In a neocolonial world, the solution is not open immigration — it is selective import of skilled labor under conditions that favor the receiving country and strip the sending country of its human capital. Brain drain, rather than population growth, defines the demographic story of the periphery.

What This Means for India

India occupies a peculiarly vulnerable but also strategically interesting position in the Return of Colonialism scenario. It is large enough that no great power can simply ignore it or coerce it into submission — 1.4 billion people with nuclear weapons and a credible military are not a compliant client state. But it is also resource-dependent enough — particularly on oil, critical minerals, and increasingly on semiconductor imports — to be vulnerable to supply-chain coercion.

India’s strategic response — the policy of strategic autonomy, membership in multiple overlapping groupings like QUAD, SCO, BRICS, and the G20 — is well-suited to a transitional world. But in a world that has definitively split into two or three imperial blocs, strategic ambiguity becomes increasingly costly. India will eventually face pressure to choose sides, and the terms of that choice will be set by others.

The optimistic reading is that India’s scale, its democratic legitimacy, and its geographic position make it an indispensable partner for any great power coalition — not a client but a swing state. The pessimistic reading is that a neocolonial world respects scale only when backed by coercive capability, and that India’s internal fractures — economic inequality, communal tension, institutional stress — reduce its effective bargaining power.

A World Nobody Should Want — But Might Get

The Return of Colonialism scenario is not inevitable. It requires a specific set of conditions: the failure of multilateral institutions to adapt, the escalation of resource competition to the point of military coercion, and the replacement of democratic governance by authoritarian alternatives across enough major states to normalize the new order.

But history’s lesson is that these conditions have been met before, and more than once. The first globalization ended in a world war. The interwar period produced fascism, Stalinist terror, and colonial famine. The comfortable assumption that we have evolved beyond these outcomes rests on institutions and norms that are, right now, under serious strain.

In the final post of this series, I explore the most hopeful of the three scenarios: a Multi-Axis World in which the conflict forces not fragmentation or domination, but a genuine restructuring of the global order around more equitable and durable foundations.

Also read

Scenario 1: Deglobalization

 

Speculating post-war world

The latest episode of the war in West Asia may end in the next few weeks. I would like to leave it to the academics, politicians and studio experts to declare the winner(s) and loser(s) of this two-month long episode. Nonetheless, I do believe that this war marks a watershed in global economics and geopolitics. After the Second World War (WWII), this war has perhaps affected most countries, geopolitically and/or economically.

As the troops return to barracks, warships anchor at the home ports, warplanes come to rest in their hangers, war managers get busy in making accounts of the losses and gains, and the governments of countries affected by this war shall go back to situation rooms and redraw their respective strategies to meet the challenges thrown by this episode and the challenges that might be presented by the subsequent episodes of this conflict.

Obviously, I do not believe that this conflict that started over three millennia ago with Persian empires (Achaemenid, Safavid, Afsharid) invading and plundering neighbors, including Greece, Egypt, India (Mughal Empire), Mesopotamia, Turkey (Ottoman Empire), Georgia, Oman and other regional Arab emirates; is likely to end anytime soon.

In my view, the end of the current episode of war will result in material changes in the global economy and geopolitics, with long term repercussions. Over seven decades of carefully constructed multilateral architecture — from the WTO to SWIFT, from Bretton Woods to Basel — has been quietly unraveling. This war may have simply accelerated what was already underway.

It might be little early to define the contours of the post 2026 world as of this morning as there are too many variables that need to settle first; nonetheless, I would like to speculate various alternative scenarios.

Scenario 1 - Deglobalization

This scenario assumes that countries respond to this conflict by turning inward? By trading only within trusted networks, building walls around their supply chains, and measuring security not by alliances but by self-sufficiency?

While it sounds extreme, there is substantial academic and historical precedent to suggest it is entirely plausible.

The era of hyperglobalization was always an anomaly. The world before 1914 and the world after 1973 both suggest that open trading systems are fragile, not inevitable.

Empirical studies

Dani Rodrik's 2011 work The Globalization Paradox outlined what he called the fundamental trilemma: you cannot simultaneously have deep economic integration, national sovereignty, and democratic politics. Something has to give. For two decades after the Cold War, nations compromised on sovereignty. The post-2016 world — Brexit, the rise of economic nationalism, trade wars between the US and China — suggested that sovereignty was being reclaimed at the cost of integration.

The Heckscher-Ohlin framework, which underpins most of our thinking about trade flows, assumes peace and stable property rights as preconditions. Neither is assured in the post-war environment. Barry Eichengreen's research on the interwar period (1919-1939) is instructive: a world that chose autarky and beggar-thy-neighbor policies after a period of deep trade integration did not simply slow down — it collapsed. The Great Depression was partly a deglobalization event.

More recently, researchers like Pinelopi Goldberg and Tristan Reed have documented the fragility of global value chains under geopolitical stress. The COVID-19 pandemic showed that a supply chain optimized for efficiency is catastrophic under disruption. The US-China semiconductor rivalry has since become exhibit B. A US-Iran war involving energy supply routes adds exhibit C.

The Architecture of a Fragmented World

In the Deglobalization scenario, the defining feature is not the absence of trade — it is the restructuring of trade into closed networks, each with its own currency, its own security umbrella, and its own technology stack.

Think of it as a world of three or four blocs: a dollar-bloc centered on North America and parts of Europe; a yuan-bloc encompassing China, much of Southeast Asia, and parts of Africa; a rupee or rial or rouble-adjacent bloc covering the non-aligned middle powers; and perhaps a fragmented collection of smaller economies that attach themselves to whichever bloc offers the best terms. For transactions between blocs, a neutral intermediary — perhaps a revived gold standard, perhaps a commodity basket, perhaps a BRICS-designed unit of account — fills the role that the dollar plays today in global settlement.

This is not a theoretical fantasy. The architecture of such a world already exists in embryonic form. India is conducting oil trades in rupees. China has expanded its Cross-Border Interbank Payment System (CIPS) as an alternative to SWIFT. The Gulf states have been quietly expanding non-dollar settlement mechanisms since 2022. The war may simply have provided the political cover for what was technically already possible.

Strategic Defense Becomes National Religion

In a fragmented world, no nation can outsource its security. NATO's relevance diminishes. The concept of collective defense gives way to national deterrence. We already see the early signs: South Korea has dramatically expanded its domestic arms industry and is now the world's fourth-largest weapons exporter. India's defense indigenization policy reflects the same impulse. Saudi Arabia's Vision 2030 includes a domestic defense manufacturing target.

The deglobalization of security has profound implications for defense budgets worldwide. Research by the Stockholm International Peace Research Institute (SIPRI) shows global military spending hit an all-time high even before the West Asia conflict. In a post-war deglobalized world, that trend accelerates — not out of aggression but out of the rational pursuit of national deterrence. And military spending crowds out social spending, which has downstream consequences on demographics and human capital.

What Happens to Trade — and to Growth

The historical record on deglobalization and growth is unambiguous and brutal. The period from 1914 to 1945 — the last great episode of deglobalization — saw global trade collapse from roughly 30% of world GDP to under 10%. Per capita income growth stagnated or fell across most of the world. The benefits of comparative advantage — the productivity gains from specialization, the welfare gains from lower prices, the innovation spillovers from cross-border technology flows — evaporated.

Modern economists estimate that undoing the trade liberalization since 1990 would reduce global GDP by 5 to 8% in the medium term. For developing economies that are deeply integrated into global value chains, e.g., Vietnam, Bangladesh, Mexico, the shock would be far more severe. For energy exporters dependent on global commodity markets, the impact could be transmitted through price and volume volatility.

For India specifically, a deglobalized world presents a mixed picture. On the one hand, India has one of the world's largest domestic markets and a broad-based manufacturing base — conditions that would allow it to weather deglobalization better than more trade-dependent economies like Singapore or South Korea. On the other hand, India's IT and services sector, which is deeply integrated into global talent and capital flows, would face significant disruption. The BPO and GCC story assumes an open world.

Demographics in Reverse

One of the more sobering projections in the Deglobalization scenario concerns demography. The global population growth story of the past century was partly enabled by global trade in food, medicine, and technology. Norman Borlaug's Green Revolution depended on global seed and fertilizer supply chains. Modern vaccines are manufactured and distributed globally. The UNICEF and WHO's supply chain infrastructure is a form of humanitarian globalization.

In a deglobalized world, the most vulnerable populations — those in low-income countries that are net importers of food and medicine — face the sharpest declines in welfare. A combination of climate-related agricultural disruption, reduced access to global medical supply chains, and the withdrawal of international development finance would put enormous pressure on demographic stability in Sub-Saharan Africa, South Asia, and parts of the Middle East. The UN's medium fertility projections, which assume continued globalization, would need to be revised downward.

The socialist state — the welfare state model dependent on tax revenues from a growing, globalized economy — also faces an existential crisis. Without the growth dividend of open trade, the fiscal arithmetic of universal healthcare, public pensions, and social security deteriorates rapidly. Europe's generous welfare states were built on the assumption of perpetual GDP growth. Deglobalization undermines that assumption at the foundation.

Oil's Diminished Crown

There is a bitter irony at the heart of the Deglobalization scenario: the very war that may trigger it is a war partly fought over energy. Yet the post-war world is likely to be one in which oil's strategic importance diminishes. Not because the world becomes greener overnight — but because nations that have been humiliated by energy dependence will redouble efforts to achieve energy autonomy.

The post-war acceleration in energy transition has clear precedent. The 1973 Arab oil embargo triggered the most serious peacetime investments in energy efficiency, nuclear power, and renewable research in history. The current war is a far larger shock. IEA projections already show oil demand peaking in the mid-2020s under current policy. Under a deglobalized scenario with heightened energy security imperatives, that peak comes sooner, and the decline is steeper.

For oil-exporting economies — including several parties to this conflict — the deglobalization scenario is doubly dangerous: they face both lower demand and reduced ability to invest petrodollars in globally diversified assets.

The Bottom Line: A Smaller, Harder World

The Deglobalization scenario is not a comfortable one. It is a world of slower growth, smaller networks, and higher prices for tradeable goods. It is a world where the gains from specialization are sacrificed at the altar of security. It is a world where the developing country growth story — which lifted a billion people out of poverty in the three decades after 1990 — slows or reverses.

But it is not an impossible world. Humans adapted to the fragmented world of the interwar period. Nations rebuilt after 1945. And in the rubble of deglobalization, new regional champions emerge — countries that are large enough to sustain domestic markets, diverse enough to build self-sufficient supply chains, and politically stable enough to attract intra-bloc investment.

Whether India is in that category is the question worth asking. The honest answer is: it could be, if it makes the right choices in the next five to ten years. Defense indigenization. Domestic manufacturing depth. Agricultural productivity. Energy transition leadership. Demographic management. These are not abstract policy goals — they are the building blocks of resilience in a deglobalized world.

In the next post in this series, I explore Scenario 2: the Return of Colonialism — what happens when deglobalization is not peaceful, and the great powers decide that the most efficient way to secure resources is simply to own them. 

Banking on banks may not be great idea - 2

Continuing from yesterday (see here).

In my previous post, I invited investors’ attention to the impact of banking sector underperformance on their portfolios and a need to carefully assess the challenges being faced by the Indian banking sector presently, particularly from the growth and valuation viewpoints.

The following points, for example, make this review pertinent in my view.

Credit and Deposit need a close watch

At first glance, the credit data is impressive. Bank credit grew at 16% year-on-year to reach Rs 219 lakh crore as of March 31, 2026. Deposit growth came in at 13.4% to reach Rs 267.8 lakh crore. The headline numbers are healthy.

But dig a little and the picture gets more complicated. As recently as mid-FY26, the credit-deposit gap had widened to 263bps, with credit growing at 12% while deposit growth slipped to just 9.35%. The credit-to-deposit ratio, which stood at 53% in 2000-01, has now climbed to 82% — a multi-decade high. This means banks are increasingly stretching their deposits to fund lending.

More importantly, look at where the stress is building. Unsecured personal loans and credit card borrowings, which had been growing at CAGRs of 22% and 25% respectively in the three years to FY24, have slowed sharply — to 11% and 18% — after the RBI tightened risk weights. That is the right policy move, but it means the high-margin, high-growth engine of retail banking is now running at a lower speed. Stress in unsecured retail loans accounted for roughly 52% of new bad retail loans in the first half of FY25.

The home loan market is stable and growing, but competition has crushed spreads. Every major bank now offers floating rate home loans linked to the repo rate, with 50–75 basis point cuts being passed on almost immediately. In the rush to grow the mortgage book, margins on this segment are getting thinner every year.

Real estate sector lending has picked up, but commercial real estate and construction loans carry higher provisioning requirements under the Expected Credit Loss (ECL) framework that banks are now transitioning to. This transition is a key monitorable that the market seems to be ignoring.

The Cost Line is Getting Harder to Control

Banking is supposed to be an operating leverage play — as business grows, costs grow slower, and profits grow faster. That story worked beautifully from 2020 to 2023. It is now becoming complicated.

Employee costs remain sticky. The top private banks have been expanding branch networks aggressively — including HDFC Bank’s massive post-merger expansion — and with that comes increased headcount, salaries, and retirement benefit obligations. Wage settlements with unions at public sector banks add another layer of fixed cost increases every few years.

“Despite a nearly five-times increase in information technology spending of banks over the last decade, actual productivity gains for Indian banks have been just 1%.” — BCG Report, August 2025.

The AI and technology cost story is particularly worth examining closely. Banks are spending heavily — the Indian banking sector’s IT spending is projected at $14.5 billion in 2025. A BCG report noted that IT costs have grown at a CAGR of 17.4% over the decade to FY25, leading the pack in operating expense growth. In other words, tech spending is rising fast, but the productivity payoff is still modest.

Generative AI adoption is now accelerating in earnest. Banks are deploying voice bots, workflow automation, AI-powered credit underwriting, and fraud detection. The EY-estimated productivity gain from GenAI is 34–46% by 2030 — a promise, not a delivered result. Until then, banks must spend to build these capabilities. The incremental IT capex through FY27–28 will be substantial before the savings materialize. Think of it as a valley before a hill.

The net effect: operating expense ratios are unlikely to compress meaningfully in FY27. Margins from efficiency gains remain a story for later.

Asset Quality Is Near Its Best — That Means It Can Only Stay or Worsen

Indian banks have done extraordinary work cleaning up their balance sheets. Gross NPAs, which peaked at a distressing 11.2% in FY18, have fallen all the way to 2.0–2.1% by March 2026 — a near two-decade low. Net NPAs are at just 0.5%. These are genuinely good numbers.

But here is the investment catch: when you start from a place of historically good asset quality, where exactly do you go from here?

Crisil projects gross NPAs will be range-bound at 2.0–2.2% by March 2027. MSME stress from global trade disruptions (including the West Asia conflict and US tariff volatility) is already being flagged. The RBI’s own stress tests indicate NPAs could inch back toward 3% in adverse scenarios. Recovery-driven earnings tailwinds are now largely behind us.

For years, banks benefited from lower credit costs — the money set aside for potential loan losses. As NPAs fell, provisioning requirements fell with them, giving a boost to profitability that was not really “operational” in nature. That one-time tailwind from improving asset quality has now run its course.

Meanwhile, the transition to Expected Credit Loss (ECL) norms — a more forward-looking provisioning framework that the RBI is phasing in — means banks will be required to set aside provisions for loans that are still performing but carry elevated risk. This could require a meaningful one-time uplift in provisions and suppress near-term profitability, even if banks’ underlying credit health is fine.

In the retail segment, stress from over-leveraged borrowers holding multiple unsecured loans is clearly visible. Borrowers with three or more personal loans are showing higher default rates. Credit cards outstanding and small ticket personal loans — the highest-yield part of banks’ retail books — are also the highest-risk segments today.

Net Interest Margins Have Peaked — The Rate Cycle Is Not a Friend Right Now

The RBI has been on a rate-cutting cycle, with cumulative cuts of 125 basis points in 2025 alone and further cuts likely in FY27. Lower rates are good for borrowers and for credit growth — but they compress what banks earn on their loan books.

NIMs (Net Interest Margins — the difference between what a bank earns on loans and what it pays on deposits) have already been under pressure. ICRA noted that the December 2025 rate cut delayed NIM recovery to at least Q1 FY27. HDFC Bank’s CASA ratio dipped to 34.14%, down from 34.79% last year — indicating that cheaper deposits are getting replaced by higher-cost term deposits as savers chase better rates from fixed deposits.

In this environment, the NIM compression story is unlikely to reverse quickly. Banks will see some relief as deposit repricing happens on the way down, but this takes quarters to fully work through. Meanwhile, competitive pressure in lending rates — especially in home loans and corporate credit — keeps asset-side yields under check.

Simply put: margins have seen their best levels. The next 12 months are likely to see flat to marginally lower NIMs, which directly hits the profitability narrative.

Fee Income Is Getting Squeezed by the Regulator

Banks have historically supplemented their interest income with a wide range of fees — distribution of mutual funds and insurance, processing fees, forex income, card-related charges, and the like. Many of these are now under regulatory pressure.

UPI transactions carry zero MDR — neither the merchant nor the bank earns a fee on these. As UPI volumes have exploded into the billions of transactions per month, this zero-MDR policy has effectively eliminated a significant revenue pool. RuPay debit card transactions also carry no MDR. Banks absorb the infrastructure cost of maintaining these payment networks without a corresponding fee income.

There is ongoing debate about whether a modest MDR should be introduced for large-value UPI transactions. But the political economy of reversing zero-MDR — a policy celebrated as a win for digital inclusion — is very difficult.

The RBI has also been tightening the screws on mis-selling of insurance and investment products, bancassurance practices, and customer fee disclosures. Each of these tightening moves reduces the scope for high-margin fee income that banks had been growing aggressively over the past decade.

Banking Products Are Getting Commoditized

This is perhaps the most structural and underappreciated risk of all.

Think back to the 1990s and early 2000s. ICICI Bank was known for project finance and capital markets. HDFC Bank was the pioneer in salary accounts and consumer banking. Kotak was the equipment financing specialist. Foreign banks like Citibank dominated private banking and credit cards. Each institution had a genuinely differentiated identity.

Now visit the website or app of any of the top 15 banks. They all offer:

•           Credit cards with airport lounge access and cashback

•           Personal loans in under 60 seconds

•           Home loans at competitive floating rates

•           MSME loans with digital underwriting

•           Savings accounts with high interest rates (with conditions, of course)

•           Mutual fund and insurance distribution

•           AI chatbots and digital-first platforms

When financial products are commoditized, the competitive edge shifts to cost of funds, distribution scale, and brand trust — all of which tend to favor the largest players and erode the pricing power and growth premium of mid-sized private banks. The niche differentiations that once justified large private banks trading at 4-5x their book value are rapidly disappearing.

The AI/tech convergence is actually accelerating commoditization, not reversing it. Every bank has cloud infrastructure. Every bank has a chatbot. Every bank has instant loan disbursal. Technology was supposed to be the moat — instead, it is becoming a minimum requirement, a table stake rather than a differentiator.

The investment question then becomes: if banking is increasingly a commodity business, why should private banks trade at 3x–4x price-to-book when global banking peers trade at 1x–2x? The valuation premium is a legacy of the differentiation era. As that era fades, so should the premium.

What Does This Mean for Bank Nifty vs. Nifty 50?

Bank Nifty already underperformed Nifty during the period 2021 to 2024. The Nifty Bank rose 41% from September 2021 to September 2024, against a 47% rise in Nifty 50 — this despite banking sector EPS growing 135% versus 77% for Nifty companies. Superior earnings, inferior stock performance. That is a classic de-rating play book — the market awarded a lower multiple to the same rupee of bank earnings.

The setup for the next twelve months is similar, and in some ways worse:

•           Earnings growth for banks is likely to moderate as NIMs stabilize at lower levels and credit cost tailwinds dry up.

•           The sectors most likely to outperform Nifty — capital goods, infrastructure, pharmaceuticals, defence, new-age technology — carry earnings growth visibility that banks simply do not have today.

•           Global tariff and trade uncertainty disproportionately hurts MSME credit quality, a growing portion of bank books

•           Regulatory tightening (ECL norms, fee income restrictions, UPI zero-MDR) keeps compressing profitability without a clear reversal in sight.

•           The valuation premium for private banks, while partially corrected, still has room to compress as commoditization plays out.

To be clear — I am not arguing that bank stock may correct sharply, or that their fundamentals are broken. Indian banking is structurally sound. Credit demand is real. NPA levels are the best in two decades. Capital adequacy is comfortable at 17.24% system-wide. These are not the conditions for a banking crisis.

I am making a narrower, more specific argument: the easy money in banking stocks has been made. The sector is now priced for outcomes that will be hard to deliver. In a market where capital flows will increasingly chase sectors with genuine earnings acceleration — and banking might not be among them in FY27 — Bank Nifty’s relative underperformance versus Nifty 50 is the most likely outcome.

The Bottom Line

Banking stocks had their moment — and it was a good one. Clean balance sheets. Record profitability. Massive re-rating. But each of those drivers has now run most of its course.

What lies ahead is a period where deposit growth lags credit, margins are flat at best, AI spending front-runs the productivity savings, fee income is regulated away, and the valuation premium for differentiation gets questioned because the differentiation itself is fading.

If you’re holding a Nifty index fund, you’re indirectly holding about 25–30% of your money in banks and financial companies. That’s probably fine. But if you’re actively overweight Bank Nifty or banking stocks relative to Nifty — this might be a good time to ask yourself: what is the specific catalyst that will drive banks to outperform from here?

I failed to find a compelling one over the next twelve months.

Banking on banks may not be great idea

Banking sector has ~25% weightage in the benchmark Nifty50 index. Consequently, banking stocks invariably find a prominent place in the portfolios of most funds and large HI portfolios. The overall performance of equity investment portfolios thus materially depends on the performance of banking stocks.

In the post global financial crisis (GFC) period, despite all the challenges, the Bank Nifty index has notably outperformed the Nifty50. However, in the past six years, BankNifty has broadly lagged the performance of Nifty50. This long phase of underperformance needs to be examined in some depth by investors.

 ​

​

In my view, the tailwinds that drove the sector’s re-rating post GFC and then again over 2019–2023 are either exhausted or reversing. Meanwhile, fresh headwinds are emerging — on costs, margins, regulations, and the very nature of banking as a differentiated business. Put together, these factors build a case that Bank Nifty, and banking stocks broadly, may underperform the Nifty 50 over the next twelve months.

In particular, the following factors indicate that the performance of banking sector might continue to lag in the next 6 to 12 months:

·         Widening credit-deposit growth gap

·         Sticky cost to income ratios

·         Asset quality close to peak

·         NIMs peaking

·         Regulator squeezing fee income

·         Banking products getting commoditized, driving away valuation premium

I will share my views on these key concerns tomorrow.

War or No-war

The benchmark Nifty 50 fell over 11% in the month following the outbreak of the US-Israel-Iran war on 28th February 2026. Since then, Nifty has clawed back most of those losses over the past three weeks — even as it has continued to lag most of its global peers by a wide margin.

The mood on the street appears to be turning cautiously optimistic. The conditional ceasefire announced on 8th April, and the subsequent Islamabad talks — the first direct US-Iran contact since 1979 — have given markets something to hope for. The working assumption seems to be that a more durable truce may be around the corner, that shipping through the Persian Gulf will normalize, and that energy supplies from GCC countries will be restored within a few months. Several technical indicators are also pointing to the possibility of the market climbing further from current levels.

This naturally brings us to the central question every investor is now wrestling with: what should you actually do?

The options, broadly, are three: (i) sell into this rally and move more into debt, gold, or cash; (ii) buy more equities, perhaps liquidating some debt or bullion to do so; or (iii) do nothing and stay the course. The right answer will differ for each investor based on their time horizon, risk tolerance, liquidity needs, and current asset allocation — and they should ideally work through this with their financial advisor. That said, a few general observations are worth sharing.

The structural problems pre-date the war — and will outlast it.

Indian equities have been underperforming global peers for the better part of two years. The reasons are well-known: weak earnings momentum, a widening current account deficit, a weakening rupee, sluggish private capex, public capex that has fallen short of stated targets, declining household savings, elevated borrowing costs, stretched valuations, and persistent selling by both promoters and foreign investors. None of these are war-induced. And none of them will be resolved by a ceasefire.

If anything, the situation may remain structurally worse than it was on 27th February — even if peace breaks out tomorrow. Crude oil prices are unlikely to return to pre-war levels for many months. Supply chains, once disrupted, take time to heal. And there is a leg of the story that doesn't get discussed enough: India has nearly 9 million citizens living and working in the Gulf, sending home roughly $50 billion in remittances every year — close to 3% of our GDP. The economic stress on Indian workers in the region, even in a low-intensity conflict environment, is a real and underappreciated risk to household incomes and the balance of payments.

The domestic headwinds are compounding.

Weather has been unkind. Untimely rains have damaged standing Rabi crops across parts of North and West India. Weather agencies are forecasting a strengthening El Niño and a below-par monsoon this summer — which would deal a blow to Kharif output, rural incomes, and food inflation just as energy costs remain elevated. The RBI's own growth forecast of 6.9% for FY27 rests on assumptions that both rabi and kharif seasons deliver close to expectations. If either disappoints materially, that number starts to look optimistic.

On the political economy front, the NDA government appears to have less fiscal headroom — and potentially less political confidence — than it did a year ago. The probability of the fiscal consolidation path being set aside in favour of more populist spending is not negligible. For equity markets, that adds another variable to an already complicated picture.

So what does the ceasefire really change?

Mirza Ghalib put it best:

उन के देखे से जो आ जाती है मुँह पर रौनक़
वो समझते हैं कि बीमार का हाल अच्छा है

(Her presence does briefly bring radiance to my face — but the illness has not been cured.)

The prospect of a ceasefire may be triggering some short-covering and lifting sentiment. But the fundamental factors weighing on Indian equities, the rupee, and debt markets were all present before the war began — and they remain present today. A ceasefire does not restore earnings momentum. It does not revive private capex. It does not strengthen the household balance sheet or the currency. It brings temporary relief to energy and supply chain pressures, but even that will take months to fully work through.

The practical takeaway

For investors sitting on cash or looking to deploy, the current rally is worth approaching with discipline rather than enthusiasm. A gradual, staggered entry — rather than going all-in on a ceasefire-driven bounce — is the more prudent path. For those who were underweight equities before the war, some re-entry is reasonable. But piling into cyclicals or rate-sensitives on the assumption that the worst is behind us looks premature.

For investors who are overextended in equities and were already uncomfortable with their allocation, this rally may offer a useful window to bring exposure back to a level that lets you sleep at night — without panic-selling at the bottom.

And for those who are positioned sensibly for their own circumstances? The case for doing nothing — staying the course, continuing SIPs, and not second-guessing a well-constructed portfolio based on short-term news — remains as strong as ever.

War or no war, the underlying work of investing remains the same: own good businesses, stay diversified, and don't let short-term noise — in either direction — make your decisions for you.