Do it yourself

In July 2025, India’s consumer price inflation (CPI) hit an eight year low of 1.55% (yoy). Several factors contributed to the fall in inflation, including, a favorable base effect, lower fuel inflation, and decline in beverages and food prices. Since the inflation is much below the RBI tolerance range of 4% to 6%, it has excited the market participants about another rate cut at the RBI’s October 2025 Monetary Policy Committee (MPC) meeting. The prospect of lower Goods and Services Tax (GST) rates from November 2025, which could keep inflation subdued further, has added fuel to the speculations.

However, notwithstanding what RBI does at its next meeting, we need to answer a fundamental question - Is this low inflation—or even disinflation—a desirable thing for a growing economy like India?

Positive side of low inflation

Boost to Consumer Spending: Lower prices for essentials like vegetables and pulses mean more disposable income, which could spur consumption in a country where private spending drives nearly 60% of GDP.

Room for RBI Rate Cuts: Low inflation gives the RBI wiggle room to cut rates further, potentially by 25 basis points in October, reducing borrowing costs for businesses and homebuyers. Cheaper loans could ignite investment and housing demand, key pillars of India’s growth story.

GST relief on the horizon: Hopes of lower GST rates from November 2025 could be a game-changer. A reduction in GST, especially on essentials (which make up ~46% of the CPI basket), could keep inflation in check, further boosting purchasing power. This could amplify the RBI’s efforts to stimulate growth without stoking price pressures.

For a growing economy like India, projected to grow at 6.5-7% in FY26, low inflation creates a stable environment for businesses to plan investments and for consumers to spend confidently. No wonder markets are abuzz with optimism.

Why low inflation might be a problem

Low inflation, or worse, disinflation (a slowing rate of inflation), isn’t always a sign of economic health. For a dynamic economy like India, aiming to scale manufacturing and infrastructure, persistently low inflation could spell trouble.

Dampening capex enthusiasm: Low inflation often signals weak demand or excess supply. If prices stay too low, businesses may hesitate to invest in new factories, machinery, or tech upgrades—key drivers of capacity addition (capex). Why expand when profit margins are squeezed, and demand looks shaky? India’s GDP growth is already lacking triggers for acceleration, and a prolonged low-inflation environment could further sap corporate confidence.

Savings take a hit: Low inflation often leads to lower interest rates, as seen with the RBI’s recent cuts. While this is great for borrowers, it’s a blow to savers. Fixed deposits and small savings schemes, mainstay of Indian households’ savings, yield less in a low-rate regime. With real returns (adjusted for inflation) shrinking, households might cut back on savings, which fund bank lending and, ultimately, investment. India’s gross domestic savings rate, already down to 30.2% of GDP in FY24, could face further pressure.

Deflationary risks: If inflation dips too low—say, into disinflation or outright deflation—consumers might delay purchases, expecting prices to fall further. This could trigger a demand slump, hitting sectors like consumer durables and retail hard. Japan’s “lost decades” serve as a cautionary tale of how deflation can choke growth.

RBI’s warning bell: The RBI’s latest monetary policy review projects inflation rising to 4.6% in Q1 FY26, driven by potential food price spikes and global pressures like US tariff hikes (impacting 10.3% of the CPI basket). If businesses and consumers bank on low inflation now, only to face a sudden uptick, it could disrupt planning and erode confidence.

The GST wildcard

The anticipated GST rate cut from November 2025 could tilt the scales. Lower GST on essentials could keep inflation below the RBI’s projections, supporting consumer spending and giving the RBI more room to ease rates.

For instance, a 1% reduction in GST on food items could shave 0.1-0.2% off headline inflation, based on historical studies. This would be a boon for growth, especially in rural areas where food dominates household budgets.

But there’s a catch. Lower GST could reduce government revenue, limiting fiscal space for infrastructure spending—a key driver of India’s capex cycle. Plus, if global commodity prices or US tariffs spike, imported inflation could offset GST’s deflationary impact, forcing the RBI to rethink rate cuts.

Conclusion

Low inflation could be an opportunity as well as a challenge for India. In the short-term, it’s a tailwind—cheaper goods, lower borrowing costs, and potential GST relief could juice up consumption and growth. But sustained low inflation risks stifling capex and savings, which India can’t afford. The RBI’s cautious outlook for FY26, coupled with external risks, suggests it will tread carefully, likely opting for a modest 25-basis-point cut in October rather than aggressive easing.

Investors should watch the October MPC meeting closely and track GST reform updates. Sectors like consumer goods and banking could benefit from lower rates and higher spending, but keep an eye on capex-heavy industries like infrastructure and manufacturing for signs of slowdown. For now, enjoy the calm—but don’t bet the farm on it lasting.

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After several years of corporate & bank balance sheet repair and fiscal correction, the contours of India's next economic growth cycle are beginning to emerge. With the Reserve Bank of India (RBI) maintaining a growth-supportive stance; union government showing strong commitment to fiscal consolidation, easing financing pressures for the private sector; and global markets showing signs of stabilization as geopolitical confrontations ease and trade disputes settled; the stage is set for a potential economic upswing.

The spotlight is now on three competing themes — corporate consolidation, private capex, and household consumption — each pulling investor attention in different directions.

Corporate begin to re-leverage

After many years of deleveraging, corporate debt in India appears to have bottomed out and is now beginning to rise. This shift in trajectory marks a significant departure from the post-2016 era, where Indian companies focused on strengthening balance sheets following a wave of over-leveraged investments. According to recent analyses, corporate borrowing is rising as businesses seek to capitalize on emerging opportunities.

This shift is supported by a monetary environment that remains broadly pro-growth. The Reserve Bank of India (RBI) has maintained a balancing act between containing inflation and supporting economic momentum. Rates have been cut aggressively and RBI is pushing for a quick transmission.

Fiscal consolidation by the union government is also helping to ease crowding-out pressures in the credit markets. With the Centre projecting a glide path toward more sustainable fiscal deficits, room is being created for the private sector to tap into financial resources more freely.

RBI’s Growth-Supportive Stance and Fiscal Consolidation

The Reserve Bank of India has definitely turned growth supportive in the past one year, after maintaining a delicate balance between inflation growth. The rates have been cut aggressively and liquidity conditions have been made favorable. Targeted interventions to support small and medium enterprises (SMEs) and infrastructure projects, have bolstered private sector confidence.

Simultaneously, the Indian government’s commitment to fiscal consolidation has eased pressure on private financing. By reducing the fiscal deficit—projected to decline to 4.4% of GDP in FY26 from 5.6% in FY24—the government is crowding in private investment. Lower government borrowing means more capital is available for private enterprises, reducing competition for funds and potentially lowering borrowing costs. This synergy between monetary and fiscal policy is creating a fertile ground for private capex to flourish.

Global context changing quickly

Globally, financial markets have been navigating turbulent waters for the past some time. Monetary policies remained tight in major economies like the United States and the European Union. Geopolitical concerns were elevated as multiple war fronts were opened. The political regime changes in the US early this year, also triggered an intense trade war.

However, recent developments suggest a quick shift. There are conspicuous signs of geopolitical stability, particularly with noteworthy steps toward peace in conflict zones. The US administration is showing significant flexibility in negotiating trade deals, raising hopes for an early and durable end to tariff related conflicts. Inflationary pressures are also easing, especially with stable energy prices. These all factors combined raise hopes for a global monetary easing cycle. The US Federal Reserve and the European Central Bank have hinted at potential rate cuts in 2025, which could lower global borrowing costs and improve capital flows to emerging markets like India.

For India, this presents an opportunity to attract foreign portfolio investments (FPIs) to boost market sentiments, as well as foreign direct investment (FDI) for long-term projects, especially in manufacturing and green energy. The government’s Production-Linked Incentive (PLI) schemes and “Make in India” initiatives are well-positioned to capitalize on this opportunity, but execution will be key.

Investors’ dilemma

Amidst corporate optimism, supportive policy environment, positively turning global context, investors and traders are facing a dilemma – whether to stay bullish on the capex theme or turn focus towards the consumption theme that has been lagging behind for the past couple of years.

In my view, investors need to examine two things—

1.    What is driving this resurgence in corporate debt?” Is it being used to fund acquisitions of operating or stressed assets, or is it fueling fresh capacity creation?”

2.    Whether easing inflation, lower interest rates, good monsoon, and improved employment prospects due to capex translating to on-ground activity, will accelerate private consumption growth, or households will focus on repairing their balance sheets and increase savings?

What is driving this resurgence in corporate debt – Consolidation or capacity addition?

The distinction is crucial. While the former drives job creation, productivity, and long-term growth, the latter may only temporarily improve capital utilization rates and return metrics. Acquiring distressed assets or merging with competitors may lead to short-term efficiency gains but could delay the broader economic benefits of new capacity creation. Whereas, investments in fresh capacities could signal a long-term commitment to growth, aligning with India’s aspirations to become a global manufacturing hub.

While mergers and acquisitions (M&A) activity has been robust in the past few years, particularly in sectors like infrastructure and manufacturing, greenfield investments have seen limited areas like renewable energy (driven mostly by government incentives) and steel.

Equity markets are evidently betting on a capital investment Supercycle. Stocks of capital goods makers, construction contractors, and building material firms have seen sharp re-rating over the past year. Order books are swelling, and forward guidance from several listed players suggests growing optimism.

Consumption paradox

While the equity markets are bullish on capex-driven sectors, investor enthusiasm for household consumption remains subdued. This is puzzling, given the macroeconomic tailwinds that should theoretically support private consumption. Easing inflation, which dropped to 4.7% in mid-2025, coupled with the prospect of lower interest rates and improving employment prospects due to rising capex, should create a virtuous cycle of demand. Yet, private consumption, which accounts for nearly 60% of India’s GDP, has been lackluster over the past two years.

Several factors may explain this paradox. First, uneven income distribution means that the benefits of economic growth are not reaching all segments of the population equally. Rural consumption, in particular, has been hampered by volatile agricultural incomes and inadequate infrastructure. Second, high inflation in essential goods like food and fuel, despite overall moderation, continues to erode purchasing power for lower- and middle-income households. Third, policy support in the form of subsidies and cash transfers is being gradually unwound as fiscal discipline returns. Finally, the stress in the household balance sheet, especially in the wake of the Covid-19 pandemic may have also hampered consumption growth.

The equity market’s lack of enthusiasm for consumption-driven sectors like FMCG (fast-moving consumer goods) and retail reflects these concerns. Investors appear to be betting on a capex-led recovery rather than a consumption-driven one, prioritizing sectors poised to benefit from infrastructure spending and industrial growth. However, sustained economic growth will require a revival in household consumption, as capex alone cannot drive inclusive prosperity.

What to do?

The question is what investors should do under the present circumstances? Should they continue to back the obvious beneficiaries of capex — engineering firms, infra developers, lenders to industry? Or should they begin building positions in consumption plays, in anticipation of a cyclical rebound?

In my view, both themes may ultimately play out — but on different timelines. Capex is here and now, led by policy push and balance sheet strength. Consumption is the laggard, but if the macro indicators hold, its turn could come with a lag of a few quarters.

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.

India’s real GDP grew by 5.4% yoy during 2QFY25 (July-Sep); the slowest growth rate recorded since 3QFY23. The Reserve Bank of India had forecasted a growth of 7%, just a month ago, while the market consensus was less sanguine at ~6.5%.

For the argument’s sake, some of the slowdown in 2QFY25 could be attributed to a high base (2QFY24 GDP grew at 8.1%). However, it is tough to deny that the Indian economy has been growing below potential in most of the post global financial crisis (GFC-2009) period. In fact, it will not be totally perverse to argue that in the past one decade or so, the potential growth curve itself has moved lower.

For record, the Indian economy has grown at an average rate of 5.8% during the past decade (FY15-FY24). Even normalizing for the Covid-19 lockdown impact, the Indian economy has grown at an average rate of 6.0%, much below the estimated potential growth rate of over 8%. The real GDP had grown at an average rate of 7.8% during the preceding decade (FY05-FY14).

The slowdown in 2QFY25 has been led by the industrial sector, especially, manufacturing and core sector (e.g., mining and electricity) – a sector that has been the highest priority area for the incumbent government in the past decade. Agriculture (3.5% growth) sector did well on the back of a bountiful monsoon; and services also grew at a decent 7.1% led by public administration. On demand side, investments contracted for the fourth consecutive quarter, belying the promise of a massive jump in allocation for capex in the union budgets for FY24 and FY25. Private consumption grew 6% yoy on a low base of 2.6%, but declined qoq, despite the higher DBT.

The fiscal data for April-October 2024 period shows that contrary to its commitment in the union budget, the government has sacrificed capital expenditure in favor of direct cash transfer (DBT) to households. Ahead of key state elections, the government transferred an advance installment of tax devolution to states to meet revenue expense obligations. The central government capex (including on defense) was much lower than the budget targets. The disbursement of the promised capex loans to the states was also lower. Revenue expenditure on education, drinking water and sanitation were restrained to increase DBT allocation.

The popular narrative after the announcement of 2QFY25 GDP data appears to be that high effective rate of taxes and higher interest rates are hurting the growth and fiscal and monetary stimulus may lead to a course correction. I sincerely beg to differ from this hypothesis.

I have often highlighted that the obstacles to the acceleration in India’s growth rate are structural and not cyclical. Inability to adequately exploit our most valuable resources – the human capital and the largest pool of arable land in the world – is the principal reason for below potential growth. Consistent misallocation of capital, adhocism in policy making, lack of a conceptual growth framework, a distorted federal political structure, blatant pursuit of crony socialism, and lack of a long-term socio-economic growth plan.

In this context, it might be pertinent to note the OECD has projected a gradual deceleration in the potential growth rate of the Indian economy in the next four decades, as the marginal productivity of capital declines and contribution from technological progresses diminishes. (Table 1). The potential rate declines, even if in a blue-sky scenario, where India is able to take fuller advantage of its demography and is able to achieve a much higher rate of capital accumulation and employment (Table 2). (see full report here)

 For me, Diwali this year was certainly not as it ought to be. Untimely demise of many close friends and relatives in the past few months; incessant horrific news flow from the active war zones; conspicuous signs of extreme socio-economic stress in a majority of the population; and apathy of the administration towards common man’s plight and worsening law & order situation dampened my spirit of festival.

I spent the week wandering the streets, slums and villages of Delhi NCR region and adjoining districts. What I witnessed and experienced, makes me believe that blaming selling by the foreign investors for the extant pain in the stock markets is like treating “the effect” as “the cause” – which is not only inappropriate but borders foolishness.

Household inflation, unemployment (including underemployment, disguised unemployment and most importantly unemployability), lack of basic civic infrastructure (drinking water, sanitation, primary health, decent primary education, etc.), are serious challenges for even the citizens living in the national capital or in its vicinity.

It is clearly evident that household savings and consumption may continue to face strong headwinds in the short term (4-6 quarters) at least. It shall reflect on the asset quality of the lenders, fiscal balance (rising reliance on the fiscal support for food, healthcare, education, and constricted ability for revenue mobilization) and eventually slow down the capex growth. 2QFY25 results declared so far are indicative of some of these trends.

I also find the stress in household finance management manifesting in the elevated anger and anxiety in the personal behavior of citizens. A sharp rise in the instances of domestic violence; social aggression; racial & religious intolerance; addiction to drugs, alcohol, & pornography; and insolent disregard for compliance, are some of the conspicuous effects, especially in the lower strata of the population. Rise in corruption and ostentatious consumption (as an act of denial of the actual state or to deceive others) are only a couple of economic consequences.

I also gathered some pearls of wisdom during the Diwali week, which I would like to share with the readers.

End of home cooking approaching?

A reputable entrepreneur shared his thoughts on the likely future trend in the food industry. In a tweet on Diwali day, he wrote, “In my view in 2040: For every 1L population at least one “Food Factory” will operate. From it, for 5 KM radius food will be delivered at home in 10 mins by a drone or a driverless EV. 50% of the population will not use the kitchen even once a week. 80% of hotels will not exist.” Many comments to this tweet mentioned that 16 years is too long a period. This trend may emerge in the next 5-7 years. The necessity of two incomes to run a kitchen may be one of the major factors in forcing the ‘homemaker’ out of home for work.

It is pertinent to note that as per the latest Annual Survey of Industries (ASI) Factories producing food products, 16% of the total number of factories, are now the largest category of industrial units in the country. These factories employ 21,16,000 or 11.4% of the total industrial workers, more than any other industry. The traditional largest employer, textile industry, comes a distant second employing 17,23,000 workers. (see here)

It would be interesting to see what changes the kitchen appliances industry would face due to this emerging trend.

Gulab Jamun is real villain not Soan Papdi

In the past decade or so, the Soan Papdi memes have become an essential part of the Diwali festivities. Once a cherished delicacy, a traditional sweet Soan Papdi has become a joke for everyone, as the modern health-conscious find this particularly sweet very unhealthy and prefer to pass it to others instead of consuming it themselves.

A sweet-maker (Halwai) in Hathras town in Uttar Pradesh educated me on this. As per him, if properly made, Soan Papdi is actually not unhealthy. It is made of besan (gram flour) which is protein rich and not deep fried. On the other hand, the worst sweet is Gulab Jamun – Maida (refined flour), deep fried (mostly in extremely unhealthy reused palm oil), and soaked in sugar syrup for days. It has no nutritional value and tons of ill effects. So, the next time you gulp a savory Gulab Jamun, please be mindful.

Kiwis whitewash the men in blue

The Indian men’s cricket team lost their first test series in India after 2012, after 18 consecutive series victories. The New Zealand team defeated India 3-0 in a three-test series. The worst part is that all three tests were lost very badly. For example, on the third day of the third test, India needed just 146 runs to win the test. On home ground, for a team that bats right till number nine, it should not have been very hard. If only the coach had told all the eight batsmen that “they need to score 19 runs each, and they have 25 overs each to achieve this task. There is no rush and no need to hit boundaries.”

I think all the young investors, who have started their investment journey in the past four years, could draw an important lesson from this. They need not chase the stocks that hit daily limits frequently. They just need to find 10 companies that are most likely to grow their earnings @15% CAGR for the next five years. Investing in these companies may double their capital in the next five years. It is as simple as that.

Internecine celebrations

The residents of the national capital blew up billions in burning firecrackers on Diwali night, despite the dangerous level of air quality, sick children and old parents in their homes, a government order prohibiting non-green crackers, and stretched finances. They offered the most ridiculous of the arguments to justify this act of assured mutual destruction.

In all their sincerity, they believed that by doing so they are (a) protecting their religion; (b) telling other religious communities their true place in the society, and (c) rebelling against the government’s minority appeasement policies.

Little did they realize that (i) they have burned their hard-earned money; (ii) added more poison to the already poisonous air; (iii) poisonous air does not discriminate between Hindu and Muslim lungs & brains, and it would kill both equally; and (iv) the people who claim to be more fierce religious warriors come mostly from lower middle and poor classes, spend most money on firecrackers are the worst affected by the poor air quality. Their children and old parents will suffer the most and they would spend the most on their healthcare.

The administration and law enforcement agencies bother little about their welfare. Like the colonial British government, they are happy seeing the society divided and killing each other. The educated and rich are getting disenchanted from festival celebrations, slowly dissipating the Indian culture and traditions. This is what the colonial rulers always strived for – destroy their culture and traditions, and the people will love to be slaves.

One thing that the prime minister Narendra Modi is well known for is his business friendliness. At the core of the famous Gujarat Model, that shot Mr. Modi to the national and international scene, was his claim of making Gujarat the most business-friendly state in India. He is also often accused by the opposition parties for unduly favoring the large corporate at the expense of micro and small enterprises and middle-class households.

ले दे के अपने पास फ़क़त इक नज़र तो है, क्यूँ देखें ज़िंदगी को किसी की नज़र से हम —साहिर लुधियानवी

Last Thursday, the finance minister presented an interim budget for the fiscal year 2024-25. The budget presentation had two part – (i) rhetorical and (ii) substantive.

The first part included a speech about the performance of the governments led by Prime Minister Narendra Modi for the past 10 years and promises for the next 23 years. The finance minister spoke about how in 2014 their government inherited an economy that was in shambles; and how they have pulled it out from a total mess and put it on the fast track to achieve the status of a developed nation by the year 2047; when we would celebrate 100 years of our independence from the colonial British rule. The finance minister also promised to implement a slew of development schemes over the next five years. She however refrained from listing any specifics or financial details.

The second part included (i) the accounts of the government for FY24; (ii) fiscal proposals for FY25, and (iii) a vote on account to meet the government’s expenses till a new government is formed and a full budget is approved by the parliament. This is the part that needs to be discussed and analyzed.

Fiscal prudence – achievement vs desirability

The finance minister presented that the fiscal deficit target for FY24 has been revised downward to 5.8% (Budget estimates (BE) 5.9%) and budgeted a fiscal deficit for FY25BE at 5.1% of GDP. She emphasized that the government is well on course to achieve the FRBMA target of a 4.5% fiscal deficit by FY26. The sharp improvement in the fiscal deficit has been received well by most. A tight balance is particularly commendable given the impending general elections. In my view, we need to ponder deeply over the following five points:

1.    At this stage of economic development, whether this degree of fiscal tightening is desirable? FY24RE shows that to meet the fiscal targets, the government has cut capex spending also. Is it appropriate to save on capital expenditure to meet fiscal targets? FY25BE growth in capex spend on key sectors is very moderate.

2.    FY25BE further confirms the trend of the past three years that the government is systematically cutting its consumption expenditure, subsidies, and social sector spending while allocating more for manufacturing and export incentives. Should investors assume that our economy is taking a left turn toward the Chinese model of growth (primarily manufacturing and infrastructure capacity building) from a largely consumption and social sector capacity building led growth?

3.    The budget does not explain why Rs one trillion, 50-year interest-free loan to states shall not be considered part of the fiscal deficit. For all practical purposes, it’s a drain on the center’s finances that will likely never be returned.

4.    Interest expense now constitutes 25% of the total government spending. There is no indication that this proportion will come down any time soon. On the contrary, with fiscal deficit staying at 4% of GDP or above for at least three more years, and greater reliance on high-cost small savings funding of deficit, it is likely that the proportion of interest in total expenditure may rise further. Under these circumstances, the sovereign rating of India may not see any upgrade anytime soon.

5.   With the current valuations of PSEs, disinvestment looks increasingly improbable. The government has not presented an alternative plan for fundraising so far.

 

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