Do it yourself

In the early hours of Wednesday, the 07^th May 2025, Indian forces, led by the Indian air force (IAF) carried out precision strikes on nine targets in the Pakistan Occupied Jammu and Kashmir and Punjab province of Pakistan.

As per the Indian authorities, the targets were terrorist camps. The strikes have been purportedly carried out in response to the killing of 25 Indian and one Nepali tourist in the Pahalgam area of Kashmir, last month. The Indian government sources confirmed that (i) the strikes were carried out from the Indian airspace and international border was not violated; and (ii) no civilian or military installations were hit during the strikes.

Preceding the yesterday’s strikes, the Indian government had taken a series of economic and diplomatic measures against Pakistan for failing to prevent terrorism activities against India from its land, and providing active support to the terrorism ecosystem thriving on its land.

Pakistan also retaliated with some economic and diplomatic measures against India. Consequently, the trade between the two countries (valued at US$1.2bn in FY24) has completely stopped and all direct diplomatic channels of discussion are officially closed. Both countries have prohibited the use of airspace and port facilities to the civil and commercial carriers of each other.

The government of India has suspended compliance of the 1960 Indus Water Treaty (IWT). IWT is a water-distribution treaty between India and Pakistan, arranged and negotiated by the World Bank, to use the water available in the Indus River and its tributaries.

The government of Pakistan announced suspension of the compliance with the 1972 Shimla Agreement. The agreement has governed the diplomatic relations and all interactions relating to the matters of mutual interest and conflicts between the two countries, in the past five decades.

There have been reports of violation of ceasefire and persistent light arm firing across the line of control in Jammu and Kashmir from both the sides in the past ten days. After yesterday's strikes, the shelling has reportedly increased and heavy artillery is being used. There are some unconfirmed reports of civilian casualties due to the shelling.

Under these circumstances, investors in India, may like to ask the following questions and find answers to these:

·         Could the present conflict escalate into a full-fledged war between the two nuclear powers?

·         If the conflict does escalate to a full-fledged war, how long this war may continue, and what would be the implications for the Indian economy, and therefore markets?

·         Could a full scale war (first after 1971) with Pakistan have any adverse international diplomatic or economic implications for India?

·         How prepared investors and markets for a full-scale war?

This morning, it is very difficult to make an assessment of the likely intensity and duration of the present conflict between two neighbors who have been at loggerheads for the past 78 years. Nonetheless, prima facie it appears that the markets are complacent and unprepared for any further escalation. I shall share my views on the above inquisition next week.

Recently the Ministry of Statistics and Program Implementation, Government of India, released the results of the Forward-Looking Survey on Private Sector CAPEX Investment Intentions, providing valuable insights into 3 year trends and future outlook private corporate sector capital expenditure plans.

The good

·        The average Gross Fixed Assets (GFA) per enterprise in the private corporate sector increased from Rs. 3,151.9 crore in 2021–22 to Rs. 4,183.3 crore in 2023–24, reflecting a healthy growth of 32.7% over the two years. This implies an average capital expenditure of Rs 366cr per corporate during FY22 to FY24. The estimated provisional capital expenditure per enterprise for purchasing new assets in the year 2024–25 is Rs. 172.2 crore.

·         Overall aggregate capital expenditure of the private corporate sector increased 66.3% over the four-year period from 2021-22 to 2024-25.

The bad

·         Out of the total capital expenditure provisionally incurred in the year 2024-25, only 53.1% were utilized for purchasing machinery & equipment.

·         The strategy of investing in distressed assets and non-performing loans was adopted by less than 0.5% of enterprises. 

·         Only about half of the capex in FY25 is for capacity addition. Over 30% capex is for maintenance, upgrade etc.

The ugly

·         Intended capex for FY26 is about 25% lower as compared to FY25.

·         Capex in the manufacturing sector is ~44% of the total capex committed in FY25. Services (telecom, IT Services, transportation, storage etc.) account for the rest 56% of the capex. Consequently, the employment intensity of the capex remains poor.

As highlighted in the latest Annual Survey of Industries, total employment in the manufacturing sector grew just at a CAGR of 3.2% during the five-year period from FY19-FY23 (see here). Lower capex and even lower manufacturing capex does not augur well for the growth of employment opportunities.

Last week, two important events took place in New Delhi. First, the union cabinet decided to include collection of caste data in the periodic general census; and second, the Supreme Court annulled the acquisition of Bhushan Steel and Power Limited by JSW Steel Limited four years ago, following the proper Insolvency and Bankruptcy Code procedures.

Notwithstanding the argument that inclusion of caste data in the census could be promote social equity, and the JSW-Bhushan annulment might reflect judicial efforts to uphold legal integrity, I find these two events significant for investors and businesses, as these further strengthen the perceptions of unpredictability and instability in the sphere of policy making and political process.

In the recent past we have seen executive actions adding considerable unpredictability in the economic process. Demonetization of high value currency notes (2016); abandoning of Amaravati capital project and cancellation of all partially executed and unexecuted orders by YSR Congress government (2019); repeal of three farm laws (2021); policy on GM seeds; taxation of foreign investors; Several flip flops in telecom policy, railway procurement (e.g., 2017 GE locomotive deal), solar power, pension rules, etc. are only a few examples. Arguably, political parties lack strong commitment to any socio-economic ideology and are often susceptible to compromise on their electoral promise, making the task of business decision making based on election manifestos redundant.

The decision to include caste related data in the decennial national census, is just another case of issues strongly opposed (or supported) by the government and later reversed primarily due to political expediency. This decision adds material uncertainty to the state and corporate (fear of reservation in private jobs) recruitment policies and admission process of the institutes of higher learning.

Despite several promises, the government remains the biggest litigant in the country. As per various estimates, the government (Central, State, and public sector undertakings) is a party to more than 45% of pending court cases in India, and responsible for more than 70% of cases admitted by the Supreme Court.

It is commonly observed that bureaucrats and regulators indulgently pursue litigation, allegedly to avoid accountability, and sometimes even due to personal egoistic urge, using taxpayer money without scrutiny. Various estimates suggest that the government’s success rate in cases/appeals filed by it, is abysmally low. The Income Tax Department reportedly loses 65–85% of its cases in higher courts. The conviction rate in cases filed by the enforcement agencies and regulators like ED, CBI, SEBI, etc., is also low. For example, the Enforcement Directorate (ED) registered 5,297 money laundering cases in the past 10 years across the country, but trials have been completed in only 43 cases so far, according to a report by the central agency submitted to Parliament.

State authorities, police department and lower judiciary audaciously ignore the guidelines set by the Supreme Court in the matters of investigation, arrests, bail, punishment outside judicial process (e.g., demolishing residences of the accused), etc.; instilling a sense of fear amongst common people and making them extremely vulnerable to the exploitation by corrupt officers and judges and frustrating the due process of law.

This clearly highlights the extent of governance deficit, lack of coordination & mutual trust between various organs of the government, fault lines in the federal structure, bureaucratic inefficiencies, deep rooted corruption, widely prevalent malpractices.

It is evident from the JSW-Bhushan Steel episode that various organs of the government lack coordination and cohesiveness in policy making, even in the issues having much wider economic repercussions. Long term socio-economic interests of the country are often ignored for immediate political expediency or pecuniary gains.

A question usually asked by investors and other people is “why India has consistently failed in generating sufficient escape velocity to move to higher economic growth orbit, like some of its global peers like China, have achieved, in the past three decades?”

There are a multitude of reasons for our inadequate growth, including our inability to implement structural reforms to eliminate corruption and promote efficiency. In particular, we have failed in making our economic policies predictable & stable and sustainable – one of the prerequisites for achieving faster growth. Failure to control the tendency of the executive to overreach and overregulate, which perhaps has roots in our colonial and feudal past, may also be responsible for our slower growth and development.

If we want to move to higher growth orbit and realize our aspirational goals of a developed nation by 2047, we need to first ensure stability and predictability of policy, and make a commitment to the slogan of “less government more governess” through appropriate legislative process. Prescribing strict rules for appeals by the government against the decisions of the government authorities and lower courts, would also be a strong signal.