Do it yourself

Continuing from my previous post (Bull fatigue or bear charge), I would like to share some of the important things I am presently watching closely to assess whether we are passing through a bull market correction or a proper bear market cycle is underway.

Rural income: The recent corporate commentary has highlighted green shoots seen in the rural demand recovery; while the urban demand continues to remain under pressure. For meeting the latest earnings estimates, continued recovery in the rural demand is, therefore, important. Earnings growth of some sectors like consumers, automobile, textile agri inputs & equipment, etc. materially depend on the continued rural demand recovery.

I note that there are some worrisome signs for the rural economy.

First, the 2024-25 winter has been unusually warm and dry. Several states have witnessed drought-like situations and warm weather. Reportedly, Wheat farmers in the northern regions could be staring at a sharp decline in rabi production. Some farmers are expecting upto 50% fall in wheat production due to warmer winter. Pulses and oilseed crops are also feared to be adversely impacted. (see here).

Second, present El Niño-Southern Oscillation (ENSO) weather forecasts are not indicating a strong preference for La Nina (excess rains) or neutral (normal rains) during the Indian monsoon season (July September). These conditions can change materially over the next three months. Given the importance of a normal monsoon for the Indian economy, especially the rural economy, ENSO developments need to be watched closely.

Liquidity: Banking system liquidity bears a good correlation with stock markets. Post Covid-19 monetary and fiscal stimulus resulted in over Rs12.50 trillion of surplus liquidity in the Indian financial system. This massive liquidity surplus resulted in a sharp surge in asset prices, especially stocks and real estate. That liquidity has completely dried. The Reserve Bank of India (RBI) has systematically withdrawn liquidity over the past couple of years. The system liquidity continues to be in deficit despite the measures (50bps CRR cut and Rs1.5 trillion sustainable liquidity infusion through OMO) taken by the RBI. (see here) A further USD10 billion three-year swap (buy/sell) has also been announced to augment the system liquidity.

However, even after these measures, system liquidity continues to be in deficit, as the RBI liquidity injection has been mostly neutralized by USD15bn sale in open market by RBI to check fall in USDINR; and the rise in the government balance with RBI. Given the persistent selling by FPIs in YTD2025 and worsening CAD, the pressure on USDINR may sustain. Under these circumstances, it is important to see how RBI manages to inject sufficient liquidity in the market. A change in policy stance from “neutral” to “accommodative” may be an important hint.

In the global markets, the US and Japan money supply (M2) has started to rise again in 1Q2025 after falling in 4Q2024; while the money supply in China remains at all-time high.

Inflation: The incumbent US President appears to be quite unpredictable. Regardless, his latest actions, in tandem with his commitment to safeguard USA’s economic and strategic interests at all costs, indicate that the US may impose sharply higher tariffs on imports from key suppliers like China, India, EU etc. These tariffs, if not fully absorbed by the suppliers through a mix of currency devaluation and margin adjustments, could be inflationary for the US. Consequently, we may see higher inflation, higher policy rates and bond yields and a much stronger USD. This could eventually be deflationary for the global economy as a whole.

A stronger USD and JPY, and higher bond yields, could result in further unwinding of carry-trades. Emerging markets economies and assets may face strong headwinds.

India, in particular, could be vulnerable due to slowing growth, expanding CAD, declining FDI, higher relative valuations (continuing FPI outflows), slowly depleting Fx reserve, and contracting yield gap with the US, etc.

A poor monsoon, on the back of below par Rabi crop, could halt the RBI easing cycle, as food inflation picks up and food import bill also rises.

It is therefore important to keep a close watch on the US trade policy, and the inflation trends.

Corporate earnings: the past couple quarters have been disappointing in terms of the corporate earnings, triggering a wave of earning downgrades. After the latest (3QFY25) results, Nifty EPS has witnessed 2-3% downgrade. If this trend continues in 4QFY25, the earning downgrades could accelerate. A leading stock brokerage firm (Kotak Securities) now expects Nifty EPS of Rs 1032 in FY25E, Rs 1179 in FY26E and Rs 1348 in FY27E with the Nifty trading at 22.2x FY25E, 19.5 x FY26E and 17.0 x FY27E.

The Nifty valuations are presently close to their long-term average (10yr). However, as another brokerage (nuvama) highlighted, most sectors are already close to their peak margin. Hence the prospects of a PER re-rating are remote, while PER de-rating are real.

Indian equities have witnessed a decent correction in the past five months. The correction has been regular, deep and broad. As per the historical trends, in a regular market correction, the broader markets usually correct 1.5x to 2.5x relative to the benchmark indices. This trend seems to be sustaining in the ongoing correction also.

It is debatable how long and deep this correction would eventually be, there should be no doubt that the markets will find a floor and commence a fresh up move.

To estimate a bottom, we need to first assume whether the current correction is a usual bull cycle pull back or a bear market cycle.

·         In case of bull market corrections, Nifty50 usually corrects between 8%-15%, and fully retraces the lost ground in a maximum of 26 weeks from logging the bottom. In a complete bull market, the bottoms made during the intermittent corrections could be tested several times.

·         In case of a bear market cycle, the usual Nifty 50 corrections have been between 20%-35%. Once the bear market ends and a new bull market commences, Nifty50 takes between 35 to 70 weeks to fully retrace the lost ground and rises to a much higher level. The bottom made in a complete bear market is usually never tested again.

If we assume the current market fall to be a bull market correction, Nifty might bottom anywhere between 21900-22600 range and make a new high by the end of year 2025.

However, if we assume it to be a bear market cycle, Nifty may be far from hitting the rock. After a few zigzag (up and down) moves it may slide towards 20000 levels (or even lower) to form a cycle bottom. A sustained up move could start only after it hits the rock.

The trading and investment strategy for the next couple of years would depend upon what assumption an investor or trader makes.

If the assumption is that it is just a regular bull market retracement, the time to unwind short positions and take aggressive buy calls may be nearing. The risk reward over one year horizon may already be positive. The strategy in this case would be to use cash position for buying on every dip; hold good quality stocks regardless of the fall; and convert weaker stocks into stronger stocks regardless of the cost of acquisition.

If the assumption is that it is a bear market cycle, we may just be half way through the cycle. The risk reward over one year horizon may still be negative or neutral. Capital preservation should be the primary concern in this case. The strategy would, therefore, be to de-risk portfolio by (i) skewing the asset allocation towards debt and cash; (ii) using rise in prices to raise cash; (ii) avoid leverage completely; (iii) convert all low quality or high beta stocks to high quality or low beta stocks; and (iv) kill FOMO and let market to hit the rock and gain first 5%. Remember, a new bull cycle usually lasts 3-4 years and could yield substantial return.

As of this morning, there are strong arguments in favor or against both the assumptions. It is, therefore, the personal choice of individual investor/trader to choose one of these. Traders may also choose to reject both these assumptions and work with a daily or weekly technical view on the market. I am still in the process of gathering information to make a firm choice.

If social media posts are any guide to the popular sentiments, then definitely the Indian equity markets have frustrated even most seasoned investors. In particular, the young investors and traders who had their first tryst with the equity investing/trading are sounding completely disillusioned.

The seasoned investors who have experience of negotiating bear markets multiple times, are mostly frustrated due to the lack of adequate policy support and regulatory overbearance. In my view, insofar as the policy support (or lack of it) is concerned, it is mostly due to misplaced expectations and persistence denial of actual execution. The issue of regulatory overbearance is however a matter of debate.

However, the new class of investors is disillusioned for multiple reasons. First, many of them had committed to investing/trading as their preferred full-time occupation. After this severe market correction, their capital has materially depleted and their confidence is badly shaken. The worst part is that many of them appear clueless as to why the prices of the stocks they own are falling sharply; or why the technical analysis that was working so perfectly for the past four years has suddenly stopped yielding any results.

For the benefit of these investors/traders, I would like to highlight a few points that might help in a slightly better assessment of the current market situation.

FPI selling

This is the single most popular reason cited for the correction in stock prices. For record, as per final SEBI data, since 27 September 2025 (when Nifty 50 recorded its all-time high level of 26277) the foreign portfolio investors (FPIs), have net sold appx Rs2.6 trillion worth of Indian equities on stock exchanges. Adjusted for inflows in the primary market, this net sale number is appx Rs two trillion.

In this period, domestic institutions have net bought over Rs 2.75 trillion worth of equities in the secondary market alone.

The key points that the market participants are missing are—

·         The stock prices at any given point in time are determined by the forces of demand and supply. The net institutional buying (demand) has been positive on almost all days (except 5 days) since 27^th September.

·         Most of the damage has occurred in small and microcap stocks. FPI participation in this segment of the market is usually very low. On the other hand, the domestic mutual funds have the highest amount of asset undermanagement (AUM) in midcap and smallcap categories. Moreover, as per the latest available AMFI data, the retail participation is the highest in the midcap and smallcap categories. So technically, retail investors should be the strongest mover of prices of this category

So, blaming FPI selling for the fall in stock prices may not be justifiable.

Hike in capital gain tax

In the final budget for FY25, the finance minister hiked the long-term capital gains (LTCG) tax to 12.5% (from 10% previously) and short-term capital gains (STCG) tax to 20% (From 15% earlier). Almost every market participant on social media has cited this as one of the primary reasons for the underperformance of the Indian equities in the past 5 months.

In this context, it is important to note that—

·         In the budget for FY19 (presented on 1^st February 2018), the then finance minister had hiked the LTCG from 0% to 10%. After a small correction, one month later in March 2018, the benchmark Nifty was at the pre-budget level and 2x in 30 months (October 2021) despite pandemic related issues. FPIs net sold Rs530 billion worth of Indian equities (secondary market) in 2018, but bought Rs 1720 billion in the subsequent two years.

Obviously a 10x hike in LTCG neither hurt the stock markets nor prevented FPIs from pumping in huge money in the Indian equities. This time the hike is just 25%.

In my view, the reason for the current decline in stock prices is a combination of several factors. Some of these could be listed as follows:

Economic slowdown – the GDP growth is declining for the past few quarters and now appears to be settling in the 6-6.5% range. This is insufficient for sustaining the current level of government spending, which has been a primary driver of growth in the past few years.

Earnings slowdown – The corporate earnings that have been growing at a rate of 18-19% CAGR for the past four years (FY21-FY24), are peaking. FY25 earnings growth is expected to be in low single digits, while next couple of years the earnings are expected to grow at a rate of 10-14% CAGR. These estimates are also subject to downgrade. With lower economic and corporate growth, the European and Chinese equities with much cheaper valuations and stronger growth visibility (assuming peace deal between Russia and Ukraine) become relatively more attractive.

Liquidity squeeze – Covid-19 related fiscal and monetary stimulus resulted in abundant liquidity in the Indian financial system. At peak the banking system liquidity surplus exceeded Rs 10 trillion in September 2021. In April 2022, the RBI accelerated withdrawal of the surplus liquidity, resulting in the widest liquidity deficit of over Rs 3 trillion in January 2024. This massive liquidity squeeze, coupled with fiscal tightening (Fiscal deficit cut from 9.5% in FY21 to 4.8% in FY25RE), and persistent positive real rates have definitely resulted in lower leverage available to traders and punters in the equity markets. Moreover, the regulatory measures to curb excessive speculation (including stricter margin norms and enhanced surveillance measures) also removed a lot of froth from the market.

Unwinding of leverage of market participants and promoters (active in the market) is the primary reason for the fall in stock prices, not the hike in LTCG or selling of FPI.

Fortunately, the regular household flows (SIP and other wise) to the Indian equities have helped the domestic institutions to absorb all the FPI selling, unlike in 2000 and 2008 market falls. Besides, stronger regulatory measures that resulted in lower issuance of Participatory Notes (PNs) (a kind of derivative instrument on underlying Indian equity stock with obscure beneficial ownership), made sure that the selling was orderly and volatility did not spike. But for these two factors, we could have witnessed much sharper fall and higher volatility in the market, just like 2000 and 2008 when even the benchmark indices fell 10-15% in a single day.

If you are looking for reversal of trend in the market trend, look for a reversal in trends of growth, earnings and liquidity not FPIs flows; for FPI flows are effect not the cause.

In the past couple of days, some readers have uncharitably criticized me for being excessively paranoid; and some others have even accused me of fear mongering. It has been pointed out that I was writing the same stuff in the spring of 2022, while markets did much better in the subsequent two and a half years.

Though I need not respond to every criticism, I would take this opportunity to reiterate my view that the economic conditions in India started to worsen from FY23. Now it is reflecting conspicuously in data. The cyclical improvement in corporate earnings post Covid stimulus and unexpected onslaught of ‘revenge consumption’, was erroneously assumed to be a structural and durable earnings cycle. These erroneous assumptions have actually resulted in a valuation bubble; bursting of which shall cause more pain than timely realization of error and course correction would have.

Remember, over a longer period, stock prices do always converge with the economic realities. However, in the interim phase, stock prices may diverge and stay elevated for a much longer period than a rational mind would assume. But as Friedrich Nietzsche famously said, “The irrationality of a thing is no argument against its existence, rather a condition of it.”

Three consecutive years of superlative returns from the stock market does, in no way, change the fact that Nifty 50 has yielded a return of ~10% CAGR over the past 10 years and ~12% CAGR over the past twenty years. This return is the same or marginally lower than the growth in nominal GDP of India during these periods. In the past five decades, in no period of consecutive 10 years, stock market returns have exceeded the nominal GDP growth by 10%. Excess returns, if any, made in a period of 1-3 years, invariably get normalized over the next couple of years.

The question that everyone needs to honestly answer is “whether you bought stocks, or invest in a business?”

·         If you bought a stock, you were purely speculating about the likely demand and supply dynamics of the market over a near time horizon. You were not bothered about things like the economy and business then; and you should not be bothered about such things now. Stay true to your thesis and respect your risk appetite.

·         If you invested in a business; carefully assessing the intrinsic value and the future growth prospects of such a business, you should be focusing on the business and let the stock price converge to the business fundamentals in the due course. You should exit if your assumptions fail.

If you try to jump between these two boats midstream, you are certain to drown, regardless of your swimming skills.

How much more downside is left?

Under the current circumstances, it is common to hear, “This stock is down 50% from its recent highs. How much more could it fall?” I do not have any straight answer to this question. Actually, I believe that no valid answer exists for this question.

For example, at the close of the market on 12th February 2025 we could say that if the market sustains 22835 for two days and manages to close above 23110, we could see it going again to 23800 level. Else, it would fall to 22425 and then to 22070 level. However, if 4QFY25 results disappoint or February sales figures for auto and cement continue to remain sluggish we may see earnings downgrade and potential market de-rating as macro indicators are likely to remain weak.

If this does not make sense to you, well it actually does not.

The potential downside in a falling market and upside in a rising market are always daily rolling targets. Technical targets are usually conditional (e.g., “if market falls below this level, it could go to that level else…) and generally do not account for exceptional moves. Price targets based on fundamental valuation and historical discounting trends are dependent on materialization of a multitude of complex forecasts regarding likely revenue, profitability, cash flows, capex, project execution, policy environment etc.

As of this morning, the market price of 360/500 constituents of the NSE500 index is down 25% to 75% from recent high levels; the rest 140/500 are down 3% to 25%. If you ask me “how much more these stocks could fall?” I would say, “I do not know”.

Nonetheless, I may highlight, in the 2011-2013 period about 150 NSE500 stocks fell more than 95% from their recent high levels, and most of them could not recover their loss even after ten years. These were the stocks which fell 80% or more after first falling 75% from their recent high levels (from Rs.100 to Rs.25 and then to Rs5). I can just say that there is nothing to suggest that this could not happen again.

Little did Edward A. Murphy, Jr., an American aerospace engineer, realize that one of his design advice would become one of most popular epigrams and be termed Murphy’s Law. In the late 1940s, Murphys told his team that “If there are two or more ways to do something and one of those results in a catastrophe, then someone will do it that way.” This advice was later restated by Arthur Bloch in his book Murphy's Law, and Other Reasons Why Things Go WRONG as “Anything that can go wrong, will go wrong.”

In 1997 Sebastian Junger wrote a creative account of the 1991 ill-fated fishing expedition of the boat Andrea Gail from Massachusetts. The boat was caught in a severe sea storm and all the six crew members were reported dead. The book, titled “The Perfect Storm”, was later adapted into a movie with the same title. ‘The Perfect Storm’ is one of the perfect examples of Murphy's law applying in real life situations.

As of this morning, the Indian equity markets appear heading into a perfect storm. Anything that can go wrong appears to be going wrong. Let’s pray Murphy fails this time.

Economy stuck in slow lane

The broader economic growth momentum has stalled, completely negating the impact of the massive Covid stimulus. After a couple of years of denial, most agencies are gradually acknowledging that the real GDP growth might be settling in the 6%-6.5% band. As the latest Union Budget depicts, the fiscal leverage to stimulate growth has now mostly dissipated.

It is worth noting that FY26BE fiscal deficit of 4.4% may appear encouraging in recent context, but is far higher than pre Covid FRBMA mid-term target. Besides, as per FY26BE interest payments are projected to be 37.2% of total revenue receipts (vs ~23% in FY18RE). Obviously, the present debt and deficit levels are not sustainable.

For record, FY19BE projected fiscal deficit at 3.3%; to be cut to 3% of GDP by FY21. If the government aims to achieve this target by FY29, there would be hardly any fiscal leverage available to the government for increasing expenditure.

The central government capex, as percentage of GDP, may have already peaked around 3% of GDP. Even taking into account the state level capex, the total public capex is now stuck at 4%-4.5% of GDP, with significant risk of slippages due to resource constraints and execution failure.

The scope for increasing government consumption (revenue expenditure) is limited and would depend entirely on the tax buoyancy. The finance minister has assumed an income tax buoyancy of 1.4 in her estimates for FY26BE. This implies the government expects 1.4% rise in personal income tax revenue for every 1% rise in GDP. Even the STT collections, which are entirely a function of stock market trading volumes & MF flows, are assumed to be growing 41.8% in FY26.

Even with these aggressive tax revenue assumptions, government revenue expenditure (ex-interest) is expected to settle around 5% of GDP, much lower than ~7.5% seen during pre-Covid years.

Aggressive tax buoyancy assumptions, despite exempting personal income upto Rs12 lacs from income tax, indicate continued pressure on the upper middle-class segment consumption. This is the segment which has provided material boost to consumption growth, especially in the premium segments like SUVs, premium liquor, travel & tourism, clothing etc.

Despite all the efforts and incentives, private capex for new capacity addition has not picked up. Most private capex in the past five year has been in technology (improving productivity), real estate accumulation, brown field expansions, and consolidation through merger and acquisitions. There have been only a handful of greenfield manufacturing projects. Consequently, the share of manufacturing in GDP has not improved (in fact declined marginally). With sub-optimal consumption demand, positive real rates, and global headwinds on exports, the visibility of any material pick-up in the private capex remains low.

Thus, all the macro drivers of growth (consumption, investments, exports) are facing headwinds. At this point in time, it appears unlikely that in the next 4-5 quarters we shall witness any substantial improvements in most of the growth drivers. However, if the Mother Nature gets angry (a hotter winter, just like the warmer winter this time); or the ongoing global trade war triggered by President Trump gets uglier, the things could worsen further and we may witness growth trajectory collapsing further to pre Covid trajectory of 5-5.5%.

Corporate earnings fatigued

After compounding at a rate of ~18% over five years (FY20-FY24), the corporate earnings appear fatigued. Nifty50 FY25E earnings are expected to grow at a meager 2%-3%. As per the current consensus estimates, FY26E Nifty 50 EPS may grow ~12-13% yoy. However, given the macro headwinds, INR weakness, tariff headwinds for exports, persisting slowness in consumption demand, indicate some downside risk to the current consensus estimates.

The earnings growth in the recent past particularly led by banking, commodities (metal & energy) and capital goods & construction sectors.

Recent performance of the banks indicates that the growth drivers are now tired. Asset quality has peaked for most banks. Any further slowdown in the economy may actually trigger a reversal. Some segments like microfinance, unsecured personal loans and gold loans etc. are reportedly already showing considerable deterioration. Beginning of rate cut cycle with emphasis on immediate transmission, indicates that net interest margins may also be closer to peak and might begin to stagnate or moderate from current levels. Rising stress on household balance sheets, slowing demand for automobile and other consumer discretionary items, and slower private capex growth may keep the credit growth under check. Any substantial improvement in earnings growth for the financial sector in the near term is unlikely.

The demand growth for building material, steel, and other metals has moderated in FY25. The management commentary indicates only moderate improvement in FY26 with continuing margin pressures, given low-capacity utilization and lack of pricing power. Durable tariff by the US, might result in EU and Chinese dumping in countries like India, further pressurizing the domestic prices.

Several mega infrastructure projects like expressway, airports, freight corridors etc. are nearing completion. The pipeline of large infrastructure projects is diminishing in size; and the focus is on completion of the stuck projects. The visibility of large contracts for construction companies, except in the power sector, is poor in FY26 at least.

It is important to note that a large part of stock price rise in the past four years has occurred due to PER re-rating in anticipation of strong earnings momentum. Lack of sustained earnings momentum might result in some PE derating also; while there is no case for a further PER rerating.

Overall, any material upgrade in earnings estimates and PER rerating looks unlikely. However, there is a decent probability of earnings slowdown and PER derating persisting through FY26.

Technical indicators pointing to further downside

With a material erosion in stock prices over the course of the past six months, the investors’ buoyancy has eroded to a large extent. The broader markets with over 20% correction from recent highs are already showing a bearish trend. Benchmark indices are down ~13% from their recent highs and are showing distinct technical weakness – trading below all key moving averages. The technical studies indicate 4-5% further downside from the current levels.

However, if the earnings deteriorate and global noise rises, the immediate technical support may break and markets may head for much lower.

The perfect storm

Deteriorating macro, global headwinds, stagnating earnings growth and PER derating, and weak technical positioning could forma perfect storm for the Indian equities. Murphy’s law says it is more likely to happen. Let’s pray Murphy fails this time.

In the past two weeks, three key economic events took place in India. These events aim to provide material fiscal and monetary stimulus to the economy.

In the sixteen century the Catholic Church in Rome established an office of the advocatus diaboli (Devil's advocate). The job of the Davil’s advocate was to argue against the canonization of a candidate proposed by the Church. The officer would use all his might to find faults in the canonization process and evidence of miracles attributed to the candidate. It was not necessary that the officer did actually believe in his arguments against the proposed canonization. The idea, apparently, was to avoid inadvertent mistakes and make sure that no underserving candidate gets canonized. Unfortunately, in the late 20^th century, the office of advocatus diaboli has been diluted materially.

“There are events in the womb of time, which shall be delivered in time”. (Othello, William Shakespeare)

Beginning of the current year, I commented that “the trend seen in the past few months is indicating that the conditions might change materially in the next 12-24 months. The macro trends may become ambivalent and unpredictable. Investors may need to make choices; and the return they would earn on their investment portfolios would largely depend on the choices they would make. Making right choices, in my view, would be the central investment challenge for the year 2025.”

Barely one month into the year and it appears that earth already witnessed many seasons. The conditions are becoming more uncertain with each passing day. The 47^th President of the United States (P47), appears in a tremendous hurry to deliver on his promise to Make America Great Again (MAGA). He is using all his negotiating skills to secure good deals for his country. How much success will he achieve with his aggressive approach, we would only know with passage of time. Nonetheless, with his initial actions he has created a fair degree of uncertainty in the minds of his political opponents, trade partners, strategic partners, competitors and markets.

While I continue to maintain that investors would be better off avoiding a macro trade and focusing on individual business stories in the next 12-24 months, the three macro trends worth including in the matrix for identifying and evaluating individual business stories are Deleveraging, Demographics and Deflation.

Deleveraging: The US Fed has contracted its balance sheet by US$2.1trn since the beginning of its monetary tightening (QT) program in April 2022. The total assets held by the US Fed are now lowest since May 2020. It would need to unwind another US$2.7trn to completely undo the Covid related monetary expansion. Besides the US Fed, most other central bankers have shown a tendency to tighten the money supply by reducing their asset holdings. The Bank of England balance sheet is following the same trajectory as the US Fed. BoJ has not expanded its balance sheet in the past couple of years and cut the size of its asset holdings in recent months. Even RBI’s balance sheet has contracted in the past few months.

If we take the plan of P47 at par value, we are staring at one of the biggest fiscal corrections in modern history. Most other major developed and developing countries are also progressing on the path of sustainable fiscal corrections.

This macro deleveraging at the global level might reflect in the corporate and household balance sheets sooner than later. But for a major natural or manmade disaster, we should be factoring in sustainable governments, lower rates and adequate household savings in our investment strategies.

Demographics: One of the most critical trends in a large part of the developed world is deteriorating demographics. Most European and LatAm countries, the US, Canada, Japan, China, South Korea, Thailand, etc. have their total fertility rates fallen below the replacement ratio (implying their population is now on a declining path). The proportion of the working age population in these countries is decreasing fast. The population in China has already peaked and the population in India is expected to peak much ahead of the previous estimates of 2050.

This demographic trend appears structural and irreversible. With deeper and wider integration of technological advancement in social and personal life, the need & space for human interaction is on the decline. Financial and professional constraints are adversely impacting the capability and willingness to commit to personal relationships. Stressed and hectic lifestyles are adversely impacting the fertility of humans. There is nothing to suggest that these trends could change in the foreseeable future.

Obviously, the demographic trends will reflect on the aggregate demand as well as the demand mix.

Deflation: The mix of deleveraging, ageing demographics and superior productivity gains through technological advancements may lead to resumption of the pre-Covid deflationary trend. The supply lines disrupted due to Covid related restrictions and geopolitical developments post 2021 have mostly been restored. Save for a totally unexpected development, the current trend appears that a workable global trade balance may be achieved within the next 12-24 months.

With almost all major global market forces (the US, China, Germany, Japan, South Korea, France and the UK account for ~40% of the global trade) focused on repairing and strengthening their domestic economies, it is more likely a mutually beneficial global trade framework will emerge after the initial aggression of the P47 brings all trade partners to the negotiating table. This framework would, among other things, will certainly dampen the inflationary expectations.

The general reaction to the Union Budget for fiscal year 2025-26 is mostly positive. Most people have appreciated the commitment to fiscal discipline. Substantial increase in the allocation for rural and urban development programs has apparently come at the expense of lower or no growth in the allocation for food, fuel & fertilizer subsidies, defense and transportation (road and railways).

The most celebrated aspect of the budget is the enhancement of tax rebate under section 87A from Rs25,000 to Rs60,000; and restructuring of tax slabs from the earlier three to six in the new scheme of personal income tax. These changes would result in a potential net tax saving of 2-6% of the post-tax income.

The most debated aspect of the budget is the allocation to the capital expenditure. Analysts are calculating the total allocation for capex using different matrices and thus debating in favor or against the budget.

The budget numbers assume a nominal GDP growth of 10.1% for FY26, which will roughly translate into a 6.5% real GDP growth. The Revenue Secretary, in an interview to the Economics Times, termed this as the trend growth (see here). He emphasized that “more structural measures” are needed to push this trend growth higher to 7%.

I find this the most concerning aspect of the present governance and market narrative. We seem to be totally disregarding the fact that 6.5%-7% real growth is merely sufficient to maintain the current trends in the development of social and physical infrastructure. To achieve the ambition of developed India (Viksit Bharat) all curves affecting the quality of life need to shift much higher. As highlighted by the latest Economic Survey, we would need a sustained 8%+ growth for a couple of decades to become a middle-income country (Viksit Bharat).

This budget or any other recent policy announcement of the government does not show any glide path in that direction. To this extent, the governance and market narrative suffer from an extreme degree of adhocism, opportunism and complacency. A total absence of discussions on structural reforms needed to catapult the economy to 8-10% growth orbit in the popular discourse is a worrisome sign. Being content with a few administrative changes and procedural efficiencies (mostly due to adoption of available technology) as “reforms” might not help much.

I would like to explain this situation with the help of four short stories, which I have narrated before also.

Freedom from bondage: There was this feudal lord, who had enslaved a number of peasants on different pretexts. He would make them toil hard the whole day and give two inadequate meals to survive. Occasionally, on festivals, birthdays of his children, his marriage anniversary, and death anniversary of his parents, he would treat them with a good meal and sweets. Once in 3-4yrs, during winters, he would give them new blankets so that they do not die of cold. In return, the bonded peasants were expected to hail him as protector and great benefactor of the poor. No one ever dares ask for freedom from bondage.

Eat ladoo and hail the minister: Once the home minister of a state visited the Jail on Independence Day. After finishing his speech, he distributed some sweets (Ladoo) and asked the inmates about their problems and what he could do for them. Most complained about mosquitoes and the quality of food. Few wanted new blankets. Some daring one asked for a large screen TV in the library. No convict asked for freedom. The minister granted their wishes and won their adulation.

Save me an extra half kilometer drive: A minister on his election campaign addressed a gathering of a housing society’s members in a posh Bengaluru location. The only request these educated upper middle-class people made to this politician was to “provide a right turn in front of the society gate, as they have to go 500 mtrs ahead to take a U turn” for travelling in the right direction; disregarding the fact that providing this “right turn” would be “wrong” as it would cause huge traffic disruptions and frequent traffic snarls in front of the society gate. No one asked him to give an undertaking that he would not encourage corruption, if elected.

Art of staying relevant: In the late 1980s, I had an opportunity to attend a budget committee meeting of a large medical college cum hospital. The twelve-member committee comprised two doctors, three administrative in-charge, district magistrate (ex-office), local MLA (govt nominee), and five prominent local citizens. The total annual budget of the college was close to Rs230 crores. The committee cleared 73 expenditure proposals worth Rs180 cores in less than one hour. The 74^th item of agenda was a bicycle-shed for Class-IV employees of the college/hospital. The budget sought for this item was mere Rs3.5 lacs. This would have helped over 200 employees coming to work on bicycle, as the scorching heat often resulted in deflation of bicycle tyres. The committee discussed the matter for more than two hours and rejected the proposal. Later, the dean of the college explained that this was the only item on agenda, besides salaries, which all committee members understood fully. They used all their wisdom in discussing this item and saved Rs3.5 lacs for the college, thus justifying their relevance to the college and society!