How the paradigm of power is shifting

For much of modern history, power was mostly measured by military strength. Borders shifted through conquest, and influence was enforced through force.

In the past couple of decades, there has been a gradual shift in this paradigm. While military capability still matters, the primary instruments of power today are economic and technology.

In the contemporary world, access to capital, technology, markets, and resources often determines outcomes more effectively than armies. Trade rules can shape behavior. Financial sanctions can immobilize economies. Control over technology standards can define the future of entire industries.

Unlike traditional warfare, economic power operates quietly. There are no declarations, no battlefields, and no formal endings. Yet its effects can be just as lasting. The latest events in Venezuela also need to be looked at from this Lense.

Export controls, tariffs, financial restrictions, and regulatory barriers are now routine tools of statecraft. They are justified as measures of national security or economic protection, but they also create dependencies and asymmetries. Countries that control key nodes—finance, energy, technology, or logistics—gain leverage over others.

This does not resemble old-style colonialism. There is no direct rule or occupation. Instead, influence is exercised through terms of access.

Who can trade? Who can borrow? Who can build?

From an economic perspective, intent matters less than outcomes. When countries or firms are forced to align behavior to retain access, power has been exercised—whether or not it is acknowledged as such.

The replacement of military power with economic power has not made the world more peaceful. It has made conflict less visible, more persistent, and harder to resolve.

Understanding this reality is essential for anyone trying to assess long-term risks in a changing global system.

For markets, this shift has important implications. Economic decisions are no longer evaluated purely on cost and efficiency. Political alignment, regulatory risk, and strategic sensitivity increasingly shape investment outcomes.

The conventional principles of economics that advocate efficient use of factors of production to maximize economic output are being overlooked for strategic reasons. The developed countries like the US, which outsourced manufacturing function to the more populous countries (lower wage cost) and resource rich countries (lower logistic cost) are aiming for relocating their industrial ecosystem onshore.

In view of this shift, India has two choices to make. One, to focus on fiscal discipline and compromise on capex or increase capex and let the deficit stay high. Two, carve out a space of its own in the emerging multipolar global order, or chose to become a vassal state of one of the major powers. These choices will define the investment opportunities available for the Indian investors.

The world is not resetting — It is reorganizing

The idea of a “global reset” has gained popularity in recent years. It reflects a widespread sense that the extant world order is no longer working and a fundamentally new thing needs to emerge to replace it. Total collapse of global growth in the past couple of decades, unsustainable trade balances, and excessive socialism (social security in developed countries) have raised the specter of a total collapse in the global order, just like it happened in the early part of the twentieth century.

While this feeling is understandable, the term itself might be misleading, in my view. What we are witnessing may not be a reset, but a reorganization of global institutions and systems.

Global systems rarely collapse overnight. Instead, they evolve unevenly, often while appearing stable on the surface. Trade continues, markets function, currencies circulate, and institutions remain intact. Yet beneath this continuity, the logic guiding decisions is changing.

For much of the post–Cold War era, economic integration was the dominant force. Countries pursued efficiency, specialization, and scale. Global supply chains expanded, capital flowed freely, and geopolitical considerations took a back seat to economic growth.

That framework is now under strain.

In recent years, governments have begun to prioritize resilience over efficiency, security over openness, and control over integration. Supply chains are being restructured, trade rules rewritten, and capital flows increasingly scrutinized. These shifts began immediately after the global financial crisis (2009) and have become more visible and consequential in 2025.

Importantly, this does not mean globalization is ending. Instead, it is becoming selective. Nations still trade, invest, and cooperate, but increasingly on conditional terms. Strategic sectors—technology, energy, finance, and critical resources—are no longer treated as neutral economic domains.

For example, the "US-India strategic relationship" experiment started by Bush Jr and MMS has ended. We have gone back to the pre-2009 transactional relationship. People in their 20s may find it hard to assimilate this reversal, but older people find it normal to accept.

This reorganization is messy by nature. Old assumptions coexist with new priorities. Policies are often reactive rather than coherent. Markets oscillate between optimism and caution as they try to interpret incomplete signals.

The danger lies in misdiagnosing the moment. Believing that a clean reset is underway encourages extreme positioning and binary thinking. In reality, the world is navigating a long transition, with overlapping systems and partial adjustments.

For investors, policymakers, and businesses, the challenge is not to predict a final outcome, but to operate effectively during the transition itself. Adaptability matters more than certainty. Flexibility matters more than conviction.

The world is not being rebuilt from scratch. It is being rearranged—slowly, unevenly, and with friction. Understanding this distinction is the first step toward navigating what comes next.

Investors’ dilemma - 2

Continuing from yesterday… (see here)

Investors world over are currently faced by a common challenge, viz., divergence of asset prices from the underlying fundamentals. This is particularly true for the investors in equities, precious metals, and treasuries. Nonetheless, they are staying invested, or even increasing their exposure and/or leverage driven by greed or lack of alternatives.

If you take a note of the macroeconomic fundamentals of the top 10 global economies, you would notice that the growth trajectory of most economies is still lower than 2019 (pre-Covid) levels. Though, the growth rate of some emerging markets, like India and Brazil has recovered to the pre-Covid level, on several other parameters like unemployment, fiscal balance etc. these economies are also still struggling to regain even the pre-Covid momentum.

GDP Growth: Most of the top 10 global economies have recovered from the 2020 contraction, but rates remain below 2019 levels in advanced economies due to higher interest rates and geopolitical tensions. Emerging markets like India and Brazil show stronger rebounds.

Inflation: Global inflation has cooled from post-pandemic peaks but remains above 2019 lows in most cases, influenced by energy prices and supply chain issues.

Unemployment: Rates are generally higher than 2019 peaks in many countries, despite labor market resilience. Unemployment issue is becoming structural in several developed European economies, leading to widespread civil unrest.

Fiscal Deficit: Deficits widened dramatically post-2019 due to pandemic related stimulus spending. The current levels are only slightly improved but remain elevated in all economies except China.

Public Debt-to-GDP: Ratios surged across the board due to stimulus; while some stabilization is underway, levels are 20-50% higher than 2019 in most cases, raising sustainability concerns.

If you compare the macro fundamentals to pre-Covid (2019) levels, you would notice that-

·         GDP growth rate in Japan, India, Italy, and Brazil exceeds 2019, driven by post-pandemic recovery and some structural reforms. Unemployment has fallen in France, Italy, and Brazil but still remains elevated. Fiscal positions in China show modest improvement from consolidation efforts.

·         Advanced economies (e.g., US, Germany, UK) face slower growth and higher inflation than 2019, amid tighter monetary policy. Deficits have widened across nearly all (average +2.5% of GDP), fueled by pandemic legacies and energy shocks. Debt ratios have risen sharply (average +16%), with China and Canada seeing the largest jumps, raising risks of higher interest costs and reduced fiscal space.

·         The world economy has grown cumulatively ~25% since 2019, but unevenly—emerging markets like India lead recovery, while advanced ones grapple with aging populations and high debt. Projections suggest stabilization by 2026 if inflation eases further, but geopolitical risks (e.g., trade tensions) could exacerbate deficits.

 

The challenge for investors’, therefore, is whether and how to align their portfolios and asset allocation with the underlying fundamentals, in order to (i) hedge against a sudden convergence of asset prices and macroeconomic & corporate fundamentals (crash); (ii) preserve their wealth and (iii) manage to earn a positive rate of return.

Given the euphoric market conditions and FOMO pandemic, it is not an easy challenge to meet. Nonetheless, I am working on my strategy to meet this challenge. Would be happy to receive suggestions from my readers.

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Strategy review in light of the US tariffs

The US administration has announced imposition of 50% additional tariffs (25% reciprocal and 25% penal), over and above the regular/MFN tariffs that were already in place, on merchandise imports from India. Certain items, like pharmaceuticals, that are part of separate trade negotiations, and services are presently not part of the new tariff rates and continue to be charged at the extant rates.

This level of tariff is indubitably concerning, as it makes numerous Indian MSME businesses, especially those exporting textile, leather goods, small components, jewelry, carpets etc., incompetitive; and in many cases poses an existential threat to the exporting entities. For several MSME the US market contributes a substantial part of their revenue; and these entities were enjoying some advantage over competitors due to lower MFN tariffs. They not only lose this advantage, but become materially incompetitive due to these tariffs.

These reciprocal and penal tariffs, in my view, tantamount to covert economic sanctions on India by the US. The reason cited for the penal tariffs is continued import of crude oil by Indian oil companies from Russia. The Indian government has clearly communicated to the US administration that this reason is not valid, as several other countries, including the EU, which also import crude from Russia are not subject to penal tariffs.

The situation is still evolving as the trade negotiations with the US are still under way, and these high tariffs are not permanent as of now. Nonetheless, the probability of these tariffs staying for a longer term is not zero. It is therefore important for everyone, including businesses, policymakers, and investors, to script a worse-case scenario for themselves and test their preparedness for such a scenario.

Notably, the present tariff action of the US administration is neither a surprise nor an isolated act of aggression against India. In the past 7-8 years there has been a pattern in the evolution of Indo-US relationships. Particularly since 2018, the US administration has been actively looking to base the mutual relationship on equality. President Trump seeking to rebase the relationship seeking full reciprocity from India on key economic, trade and technology issues is just a continuation of the evolving pattern. (Read more on this New chapter in Indo-US relations).

It is also pertinent to note that since 2018, the US has withdrawn the benefits under Generalized System of Preferences (GSP); materially tightened scrutiny on Indian IT and pharma compliance; persistently stalled progress on a bilateral trade deal; virtually downgraded the diplomatic status through exceptional delay in appointing an Ambassador to India (Indian mission of the US headed by an interim Chargé d'affaires during January 2021-March 2023 and January 2025 till present day; see details) and causing inordinate delays in grant of VISA appointments to Indians; disgracefully deported illegal Indian immigrants. These are some of the pointers towards the evolving pattern of Indo-US relations since 2018. The tariff spike is simply an extension of this pattern.

Some entrepreneurs, politicians, investors and thought leaders have called for a 1991 (balance of payment crisis) and 1998 like (economic sanctions post nuclear test) response to the situation. They have suggested that the government should use this opportunity to initiate some major reforms, like 1991 and 1998, to further strengthen the resilience of the Indian economy. Many of them see the current situation equivalent to economic sanction (through trade route) and suggest an appropriate response accordingly.

In my view, the Indian economy urgently needs several major reforms, regardless of the outcome of the present trade conflict with the US. The current situation does provide a catalyst and a valid excuse to implement these reforms that may cause some short-term pain to various stakeholders.

In the next few posts, I shall discuss my thoughts on the areas that need urgent reforms and changes, if any, required in the investment strategy in light of the latest US tariffs. Before that it is important to take note of the 1998 crisis, and how the situation in 2025 may be different.

Operation Shakti triggered global sanctions on India

India had maintained a policy of nuclear ambiguity since its first nuclear test in 1974 (Smiling Buddha). Over the years, global non-proliferation efforts intensified, particularly after the Cold War. On May 11 and 13, 1998, India conducted five underground nuclear tests in Pokhran, Rajasthan, codenamed Operation Shakti.

Operation Shakti, triggered a wave of economic sanctions from the US, Japan, Canada, the EU, and international financial institutions like World Bank, IMF and ADB. Notably, Russia, France, and Israel did not participate in sanctions. China issued strong condemnation but refrained from economic penalties.

Under the sanction, most of the non-humanitarian financial aid was suspended. Export of military and dual use technology to India was banned. All defense cooperation and technology transfer treaties were suspended. A freeze was put on loan guarantees and financial assistance. Lending to India by the World Bank, IMF, and ADB temporarily halted/slowed.

The extant government decided to take the global pressure head-on. It steadfastly refused to sign the Comprehensive Test Ban Treaty (CTBT) under pressure. The government also launched an aggressive diplomatic campaign to explain its position, emphasizing strategic necessity and national security concerns. Most importantly, the government unleashed several structural reforms to strengthen the domestic economy. Notably, the government divested its monopoly over core sectors like coal, power, telecom, oil & gas, civil aviation, etc. An ambitious national highway development plan (NHDP) was launched. Several fiscal incentives were provided to promote exports. A special economic zone (SEZ) policy was implemented. Several tax and other concessions were offered to the ITeS sector.

Consequently, the impact of the sanction remained contained. Reforms attracted material private capital flows from global investors. Turbulence in the market was short lived, and within a year the market scaled new highs. Sensex rose from ~3,300 in Jan 1999 to ~5,100 by March 2000, a jump of 50% in 15months.

Overall, the impact of sanctions was marginal.

The sanctions were lifted within two years as India materially helped the world in managing the Y2K crisis; unilaterally announced a “no first use” nuclear doctrine.

Situation in 2025 is different from 1998

The present situation is however materially different from the 1998 situation. First, the present trade action is limited to the US, unlike 1998 when a number of trade partners had imposed restrictions. Second, the Indian economy is now much stronger and materially more integrated into the global economy as compared to 1998. The impact of trade restrictions on the local economy, therefore, could be materially higher. Third, the political situation in India is much more stable now as compared to 1998, when the coalition was more fragile. Fourth, India has strengthened its global strategic position significantly in the past 27years. With several multilateral alliances (G-20, BRICS, QUAD etc.) and bilateral treaties, India has much stronger support from its global partners as compared to 1998.

 

Also read

New chapter in Indo-US relations

Speculating Trump’s second term

Ambivalent

…to continue tomorrow

 Where did we lose our way?

My engagement with Indian financial markets began in the late 1980s, at a time when the winds of reform had just started sweeping through the economy. What followed in the 1990s was a structural reset — the kind that lays the foundation for decades of growth, even if its full implications aren’t immediately visible.

The decade of 1990s witnessed –

(i)    An overhaul of the financial sector with abolition of capital controls, opening of doors for the foreign portfolio investors, entry of private banks in the markets, material liberalization of the rules for non-bank lenders (NBFCs); laying foundation for pension and insurance sector reforms;

(ii)   Significant liberalization of the industrial licensing system; material dilution of the Monopolies and Restrictive Trade Practices Act and Foreign Exchange Regulation Act, de-reservation of several articles from Small Scale Industries, introduction of Liberalized Exchange Rate Management System (LERMS), etc.;

(iii)  India becoming a signatory of the World Trade Organization. (Of course, India was a signatory to the GATT since 1948);

(iv)  Simplification of excise classifications, introduction of VAT and MODVAT, material reduction in maximum marginal rates of IT Act and simplification of rules;

(v)   Beginning of disinvestment and divestment process in public sector enterprises (PSEs). The government initiated disinvestment of its stake in many non-strategic PSEs. More importantly, the government divested government monopolies in core sectors like Oil& gas, Power, Coal, Roads, Ports, Civil Aviation, Communication, etc.

(vi)  India gained recognition as a major center of information technology (IT) and pharmaceutical research and development center in the world. For the first time, thousands of Indian professionals (Software Engineers & developers, Bankers, doctors and Managers) started working and travelling across the globe, unlike decades when Indian worker mostly got low paid blue-collar jobs.

(vii) Strategically, India was recognized as a country having a nuclear deterrent. Significant advances were made in development of missile and space research technologies.

All these developments gain higher importance when we consider that this was the era of significant political instability (minority governments 1989-1995, and then three general elections during 1995-1998) and financial constraints (Balance of Payment crisis in early 1990s, economic sanctions post nuclear tests in 1998, massive stock market scams, financial sector crisis and bankruptcy of multiple development financial institutions like UTI, IDBI, ICICI, IFCI).

More notably, till 1990 Indian and Chinese economies were mostly at par. We could even say that India had a marginal edge over China as it had wider global acceptance due to its democratic traditions. China also started its economic transformation around the same time. In 35 years, the Chinese economy has sprinted miles ahead of the Indian economy. No one, not even Indian politicians, is claiming that we are even in the race to bridge this gap in the foreseeable future.​

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This morning, I am writing this after reading about 20 equity research reports. All these reports, without even a single exception, have expressed worries about inflation and CAD due to the spike in crude oil prices in the global markets. It felt like déjà vu.

Back in 1990-91, as the Gulf War broke out, crude prices spiked and sparked the same anxiety. Three decades on, monsoon dependency and crude oil shocks remain headline risks for the Indian economy. Three decades later, nothing seems to have really changed - we’re still haunted by monsoon uncertainties and oil shocks.

Despite a decade of brave reforms and a globalized capital base, India’s macro vulnerabilities remain eerily similar. Our reforms deepened markets and broadened participation, but left key structural risks unaddressed.

So, the question we need to ask is “where did we lose our way in the past couple of decades?”

To me, India’s growth story remains compelling, but ignoring its macro vulnerabilities is difficult. The past teaches us resilience but the future demands vigilance.

Israel-Iran Conflict: Implications for India’s Economy and Markets

The Middle East is once again a tinderbox, with the escalating Israel-Iran conflict threatening to spiral into a broader global crisis. Unlike the recent Indo-Pak hostilities, which remained contained, this clash carries the potential to draw in multiple nations, disrupting global trade and energy markets. For India, which is heavily reliant on energy imports, the stakes are high. While India has reiterated its neutral stance, the ripple effects of a prolonged conflict could significantly impact its energy security, inflation, current account balance, INR exchange rate, fiscal stability, and overall economic growth prospects.

This global flashpoint could have local consequences

The Israel-Iran conflict differs starkly from localized India and Pakistan military engagements. With China and Pakistan openly backing Iran, and Russia potentially supplying critical defense equipment should the U.S. directly support Israel, the geopolitical fault lines are deepening.

For India, this presents both risks and opportunities. The alignment of China, Pakistan, and potentially Russia with Iran could provide India an opening to mend recent strains in its ties with the U.S. and Europe. Strengthened diplomatic and economic alignment with the West could bolster India’s strategic position, particularly in securing foreign direct investment (FDI) and defense collaborations.

However, the immediate concern for India lies in its energy security. The Middle East accounts for a significant portion of India’s oil and gas imports. A protracted conflict could disrupt supply chains, spike global oil prices, and inflate India’s oil import bill. This would exert upward pressure on inflation, widen the current account deficit, and weaken the INR, potentially forcing the government to stretch its fiscal resources to stabilize the economy. While India is unlikely to be directly or indirectly involved in the conflict, the economic fallout could still be substantial if the situation escalates.

Uncertainty prevails

Despite these risks, there’s reason to believe the conflict may not spiral out of control. Cooler heads may prevail, leading to a ceasefire to avert a wider war. If this scenario unfolds, the impact on India’s economy and markets is likely to remain limited. Indian enterprises with economic interests in both Iran and Israel—spanning sectors like technology, agriculture, and energy—may face temporary disruptions, but the broader market impact could be contained.

However, should the conflict intensify and Western forces enter the fray, the consequences could be far-reaching. Disruptions in global trade routes, particularly through the Strait of Hormuz, could choke energy supplies, sending shockwaves through India’s economy. Such a scenario would test India’s policy framework, with missteps potentially jeopardizing long-term energy security, FDI inflows, and employment opportunities in the Middle East, where millions of Indian expatriate work.

What Investors should do?

For Indian investors and traders, the heightened volatility in global markets presents both temptation and peril. Navigating such uncertainty requires specialized skills that most retail investors lack. Attempting to capitalize on market swings driven by geopolitical developments is a high-risk game best left to professionals. The prudent course is to stay on the sidelines, closely monitor developments, and avoid impulsive decisions.

India’s policymakers, too, must tread carefully. A balanced approach that safeguards energy security, preserves economic ties with both Iran and Israel, and capitalizes on potential geopolitical alignments will be critical. Any miscalculation could undermine India’s long-term economic interests, particularly in a region as vital as the Middle East.

The road ahead

As the Israel-Iran conflict unfolds, India finds itself in a delicate position. While direct involvement is unlikely, the economic and geopolitical ramifications demand close watch. For now, the hope is that diplomacy prevails and a broader conflict is averted, minimizing disruptions. However, investors and policymakers alike must remain cautious, prioritizing stability over speculative risk-taking. In these uncertain times, watching from the fringes may be the wisest strategy.

Speculating Trump’s second term

President elect of the US, Donald Trump has already designated key members of his team. Based on his election agenda, speeches and rhetoric and personal views of his designated team members, market participants are speculating about the likely policy framework of Trump 2.0 administration, and its implications for the global trade and markets.

My personal view is that the actual agenda of governance might have some shades of the election rhetoric but its actual path may not materially deviate from the trend seen in the post GFC (2009) period. At this point in time, I do not expect to sight any black swan in global economics and/or markets. With this caveat, let me summarize the current market speculations and its likely impact on India.

Trade tariffs

Trump has been speaking about imposing high tariffs on the US merchandise imports to promote local manufacturing, cut US trade deficit and strengthen USD. He has been suggesting 20% universal tariff on all imports, 60% tariff on imports from China and restrictions on the trade partners that he believes have artificially undervalued their currencies to gain trade surplus with the US. India is seen as one of these currency manipulating countries.

The administration will have to assess the impact of higher tariffs on businesses that are heavily reliant on imported inputs. Besides, the present US infrastructure and worker pool may not be adequate to onshore much of manufacturing activities. The impact of higher tariffs on the monetary policy objectives will also need to be calibrated.

Trump 1.0 started a manufacturing renaissance of sorts in the US, through tax incentives, tariffs and favorable skilled worker immigration policies. The Biden administration has carried forward the Trump 1.0 agenda and provided added further impetus though It would be reasonable to assume that trend will continue. There may be some random measures taken to address the political constituency, but a universal restrictive tariff policy (if at all implemented) will take much longer, maybe a couple of years, to evolve. A trade taken on the likely contours of the tariff policy may be frustrating.

In this context, it would be pertinent to note the comments of Michael Feroli, chief US economist at JPMorgan. Feroli said, “One path sees tax cuts and deregulation unleashing animal spirits, thereby boosting productivity growth and GDP outcomes while keeping inflation well-contained. The other path foresees policy uncertainty hindering growth, while trade and immigration restrictions impart a stagflationary bias.”

Collateral

Presuming Trump carries out his threat of a 60% tariff on Chinese imports – it may have consequences for most of the trade partners of the US and China. Some of the tariff hikes may be absorbed through CNY devaluation like China did in 2018; but some of it will have to be shared by the US consumers and producers. This essentially means higher US inflation and lower corporate profitability. China may dump the surplus production on Non-US importers, impacting local producers in those markets – thus exporting deflation throughout the world.

The Indian chemical sector, for example, which has already been suffering from Chinese price cuts may suffer further damage. Considering the massive capacity addition in the past 5-6 years and leveraged balance sheets, some of these companies might not be able to survive.

Energy policy

Trump has designated Chris Wright to head the energy department. Wright has been a known supporter of fossil fuels, disregarding the threat of climate change. He believes that the oil and gas industry has brought security and power and development to the United States, and global emissions aren't going down with greater focus on clean energy. He famously rejected carbon dioxide as a pollutant, claiming “carbon is essential for life”.

In the words of Wright, “Climate change is a real and global challenge that we should and can address. However, representing it as the most urgent threat to humanity today displaces concerns about more pressing threats of malnutrition, access to clean water, air pollution, endemic diseases, and human rights, among others.” He therefore advocates a need to bring down the price of energy and secure energy independence for the US.

Anticipating higher US oil production and return of thermal power in favor, the traders are placing a trade on fossil fuel – buying coal miners, fracking companies and drilling equipment manufacturers.

If Trump-Wright energy doctrine is actually implemented it would mean – collapse of United Nations Climate Change Conference (COP), sharp rise in the US oil production and exports resulting in lower global crude prices, decline in clean energy subsidies resulting in poor demand growth for solar energy and EVs.

In the past one-decade massive investment has been made in the production and adoption of clean energy solutions for electricity and mobility needs. The viability of these investments, especially in emerging economies where viability gap is already funded through fiscal support, would need to be reassessed.

Collateral

A 20% duty hike on the Indian exports may hurt some of the Indian exporters, as they may not be able to pass on the whole of the duty hike to the importers.

Cheaper oil may hurt the economies of OPEC countries, which are major trade partners, investors and employment providers for India.

Cheaper oil may help current account, inflation and INR.

Immigration policy

Immigration was a core issue in the entire campaign of Trump. He promised strict action against all illegal immigrants and several restrictive actions against the legal immigrants. We have heard similar rhetoric during the election campaign of Geroge Bush jr, Hillary Clinton, and Trump 1.0 etc.

It is widely accepted that ~47 million immigrants form a critical element of the US economy. They support the US businesses by providing a highly skilled workforce; boost federal revenue by paying taxes and contribution to social security; support the economy through high rates of savings and investments; and are an important consumer group.

President-elect Trump has indicated that his administration plans to carry out mass detentions and deportations of millions of immigrants, including long-term residents, by declaring national emergency and deploying armed forces to carry out deportation exercises. This could lead to family separations and negative mental and physical health consequences. This could potentially create widespread civil unrest, affecting the mental and social health of millions and the health of several small businesses who employ these immigrants. It is also feared that there could also be higher taxes on legal foreign workers.

Collateral

Uncertainty about jobs and residential status and higher taxes could result in lower job opportunities for the Indian workers employed in the US, negatively impacting remittances. Tougher VISA norms and immigration policies may also have some negative impact on the margins of the Indian IT services companies.

Geopolitics

George Washington implemented a policy of isolationism and neutrality with regards to the internal affairs of other nations. The successive US presidents followed this policy till the president Wilson was forced to change it in the wake of threats to the American interests that emerged from the first World War. In April 1917, the US entered the war with Germany “to make the world safe for democracy”. In the past 107 years, the US has followed this doctrine in its foreign policy.

Trump has now vowed to revert to the policy of isolationism and neutrality. Many geopolitical experts fear that this will end a major deterrent to the global expansionist forces like China and Russia, and could potentially unleash some major wars.

In my view, Trump may not hurry to a policy of isolationism and neutrality. I believe the US derives most of its power from the bombs they dropped in Hiroshima and Nagasaki. This nuclear deterrent has kept most expansionist ambitions at pay in the post WWII era.

The promise of liberty, fairness and equal opportunity has tremendously enhanced the US’s power. It has enabled it to attract and retain top talent from their adversaries like Vietnam, Japan, China, Russia, East Europe, Iran, Cuba, etc. and even talent starved countries like India, Pakistan, Bangladesh etc. The US will be able to retain its supremacy only as long as these immigrants are loyal to the US and the US administration is ready to bomb any country to protect the world order.

(PS: A large number of people believe that “the save democracy” democracy doctrine of the US is a façade to camouflage its own expansionist agenda. There are strong arguments on both sides of this belief. I would not like to get into that debate here.)

Collateral

If the US does revert to the policy of isolationism and neutrality by cutting aid to the countries like Ukraine and Israel, we may witness widespread unrest globally. This will unfold the worst human tragedy since WWII.

Besides the above mentioned factors, there are speculations about the trajectory of USD, Rates, Crypto, Gold during the second term of Trump. I believe that these all are derivative factors which would depend on the macro policies of the new US administration. It may be too early to call a good trade on these.

Growing like ginger-2

Urbanization is intrinsic to development and often serves as a major driver of economic growth. As India reaches tipping point of transitioning from a mostly rural to an urban society, the focus must be on ensuring the best opportunities for economic growth for all sections of the society. — Dr. Rajiv Kumar, Former Vice Chairman, NITI Aayog

In October 2020, the NITI Aayog formed an Advisory Committee on ‘Reforms in Urban Planning Capacity in India’, to find ways to face the multiple challenges being faced in the cities and India’s commitments towards global agendas. After extensive deliberation with domain experts and think tanks, the Committee presented its report in September 2021. The highlights of the report are summarized below.

·         India is the second largest urban system in the world with almost 11% of the total global urban population living in Indian cities. In absolute numbers, the urban population in India is more than highly urbanized countries/regions across the globe. Observing India’s urbanization through Western lens has become a practice . Experience has shown that such objectivity diminishes the motivation and confidence needed to generate innovative solutions for indigenous problems. Indian cities are different from their Western counterparts in terms of culture, demography, lifestyle and so on. Adopting Western practices without tailoring them to suit Indian needs is not advisable.

·         India’s urban story may be lauded globally or suffer irreversible damages in the next 10-15 years depending upon corrective policy measures and actions taken at the beginning of this decade.

·         Over the years, cities have expanded and become burdened by the stresses and strains of unplanned urbanization, the brunt of which is faced by the poor and the marginalised, the biodiversity and the economy.

·         In urban areas, land is confronted with competing uses due to market forces, social necessities, as well as environmental concerns.

·         Issues like lack of availability of serviced land, traffic congestion, pressure on basic infrastructure, extreme air pollution, urban flooding, water scarcity and droughts are not merely a reflection of infrastructural shortcomings in the cities. These issues indicate a deep and substantial lack of adequate urban planning and governance frameworks.

·         Urban planning, which is the foundation for the integrated development of cities, citizens, and the environment, has not received adequate attention. A study conducted by TCPO and NIUA for NITI Aayog indicates that over 12,000 posts for town planners are required in the State town and country planning departments. This is in stark contrast to the present situation. There are fewer than 4000 sanctioned positions for ‘town planners’ in these departments, half of which are lying vacant.

·         A significant proportion of urbanization in the country is unacknowledged and unaddressed. Almost half of the 7933 ‘urban’ settlements are census towns, that is, they continue to be governed as ‘rural’ entities. Small and medium towns face vulnerabilities due to rapid growth and inadequate planning. 65% of the 7933 urban settlements do not have any master plan.

·         In many cities, development control regulations were formulated several decades ago and have been updated arbitrarily without sufficient empirical evidence on their impacts

·         The transfer of the urban planning function from States/UTs to elected urban local governments did not happen as was envisaged through the Constitutional (Seventy-Fourth amendment) Act 1992. Many agencies are involved in urban planning, implementation, infrastructure development at the city as well as State levels. The existing framework has become complex, which often leads to overlapping of functions, lack of accountability and coordination, time delays, resource wastage, etc.

·         Massive capacities for problem-solving, innovation, and ideation are required to address the present and future challenges in the planning and management of cities, towns, villages and their infrastructure. It may not be feasible to create such capacities in the public sector given the size and scale of urbanisation in India. However, the ecosystem of the private sector in urban planning domain has remained under-developed.

·         The country has been producing graduates with degrees such as Bachelor of Planning since more than 3 decades and Master of Planning since early 1950s. However, so far, the urban planning profession has not yet gained a strong and unique identity of its own. As a result, prospective employers, unaware of these courses and skill sets of available graduates, end up hiring professionals from other disciplines to undertake the tasks of planning, thereby creating a negative feedback loop.

The Committee suggested measures to strengthen the three pillars of cumulative urban planning capacity in the country: public sector, education/research sector, and private sector. The suggestions include programmatic intervention for planning of healthy cities, optimum utilization of urban land, ramping up human resources, re-engineering urban governance, involving citizens in urban planning, building local leadership, and enhance participation of private sector.

The committee advised that “The political leadership, decision-makers and planners need to reach a common consensus that a promise to save the environment from the strains of urbanization is a promise of economic growth in the long run. The road to reform may be long. Collaborative, concerted and cooperative efforts are required to strengthen the urban planning capacity of the country. The moment to start is now, if the country has to keep pace with the emerging demands of time.”

The finance minister took cognizance of the report and devoted six paragraphs in the budget speech of February 2022, while presenting the union budget for 2022-23. The FM proposed setting up a high-level committee of urban planners and economists to make recommendations on urban sector policies, capacity building, planning, implementation, and governance. She pledged support to the states for urban capacity building. Five existing academic institutions in different regions were designated as centers of excellence with endowment funds of INR 250 crore each, tasked to develop India-specific knowledge in urban planning and design.

I hope we shall see some results in the current tenure of the NDA government.

Also see Growing like ginger - 1

Agenda for the new government

A new central government will assume office in India, in a few days. This is a great opportunity to look at the current state of affairs with a new perspective and reorient the policy framework.

The present state of the Indian economy is characterized by the rising incidence of unemployment, disguised unemployment, and underemployment; higher than acceptable socio-economic inequality; strong and rising intellectual and skill inequality; gradually bridging but still high regional imbalances; low productivity especially in the agriculture sector; oversized government with abysmal level of decentralization; incapacitating supply constraints, especially in social and physical infrastructure terms; and trust deficit at all levels. A younger demography provides high potential in terms of growing workforce and consumption demand. However, the potential remains under-exploited due to low skill levels, lack of adequate employment opportunities, financial and social exclusion, and disillusionment of youth due to political indifference and poor governance standards.

I suggest the following 15-point program for overcoming many of these problems and exploiting the tremendous potential of the Indian economy that has been widely recognized. I shall discuss these points in some detail in the coming days.

1.      Take convincing measures to bridge the trust deficit between society and public institutions.

2.      Overhaul the education system to make it job-oriented. Inculcate enterprising skills in students from the primary level.

Emphasize developing traits like discipline, social responsibility, empathy, cleanliness, sustainability, tolerance, etc., at the primary level.

Transform RTE into the “Right to equal and uniform education”.

Skill youth in modern and evolving technologies on top priority.

3.      Promote cooperation movement in industry.

Allow employees’ cooperatives to buy a controlling stake in PSEs.

4.      Enhance agri-productivity to the highest level.

Promote collective and commercial farming.

Take factories to farms.

5.      Make at least 5 global education clusters by creating special zones.

6.      Develop at least one truly world-class tourism center in each state on the PPP model, with the local population being one of the partners.

7.      Stop river waters from flowing into the sea.

8.      Give equity in natural resources to the local population.

9.      Minimize the size of the government.

Devolve full powers to Panchayati Raj Institutions and local bodies.

Empower and encourage local communities to self-regulate and self-govern.

10.   Completely overhaul the police force and justice delivery system.

11.   Reorient public services to treat every citizen as a valuable customer.

Ensure the dignity of all citizens in birth, education, marriage, and death.

Transform public works departments and civic authorities. Reorient the civic work to care for public safety, convenience, sensitivities, and impact.

Make people’s lives easy.

Abolish toll on urban roads. Consider abolishing toll on all highways that are less than 6 lanes.

12.   Make public offices unremunerative by stripping most discretion.

Obliterate the feudal character of public representatives and bureaucrats and make them truly public servants.

13.   Implement electoral reforms. Consider state funding of elections. Afford equal opportunity to all citizens in public representation.

14.   Settle border disputes with neighbors and enter into a new era of cooperation and coexistence.

15.   Make winning multiple Nobel prizes in science and medicine a mission.

What if? – Part 3

Verdict 2024: Market Implications

An analysis of the past 30 years of market trends provides no evidence to suggest that elections, the form of government, or the strength of a particular party in the parliament impacts the market performance significantly. However, it is common to see higher volatility during or around elections.

Insofar as the fear of a multi-party coalition or a fractured mandate is concerned, I believe, the investors should be relieved by the prospects of a true coalition coming to power. Because, in the post-independence era, the best periods for the Indian economy have been those when a “coalition” government was in power.

It is however important to note that by “coalition” I do not mean just a multi-party government. In my view, coalition government means where people with diverging socio-economic policies jointly participate in a government. Empirical evidence suggests that such coalition governments in India have agreed on a common minimum agenda and focused on executing the same, avoiding conflicts and logjams.

The first cabinet of India post-independence had R. K. Shanmukham Shetty (Finance), Shyama Prasad Mukherjee (Industries) B. R. Ambedkar (Law) and Jagjiwan Ram (Labor). These people did not subscribe to the Nehruvian socio-economic agenda, but we got a robust socio-economic framework. The singular governments of Nehru (post BRA, RML, SPM - 1956 and 1961), Indira Gandhi (1971, 1980), Rajiv Gandhi (1984) are not known for good governance or transformative socio-economic reforms.

Morarji Desai (1977 – FERA dilution, Gandhian socialism), V. P. Singh (1989 – tax reforms, social justice), Chandershekhar (1990 – disinvestment, fiscal reforms), PV Narsingh Rao (1991 - liberalization, delicensing), Devegoda/IK Gujaral (1996 – dream budget), Vajpayee (1998, 1999 – divestment, infra development) and Manmohan Singh (2004 – RTI, RTE, UIDAI, Right to Food, Right to Healthcare, MNREGA, Civil Nuclear Deal, FDI in retail & pension etc.) were all coalition governments. These governments are all remembered for socio-economic reforms causing fundamental changes in the socio-economic milieu of the country. None of these governments is remembered for non-governance, anti-market policies or anti-business stance.

The incumbent government has taken three major initiatives in the past 10 years, that have helped Indian equity markets:

(a)   Abolition of 86% of currency notes in circulation in November 2016. This measure is popularly believed to have benefitted the large organized sector businesses (mostly listed) at the cost of smaller and marginal businesses (mostly unlisted).

(b)   Implementation of GST from July 2017. This is also popularly believed to have enhanced the competitiveness of large businesses (mostly listed) at the cost of smaller unorganized and non-compliant businesses.

(c)    Promoting local manufacturing through production-linked incentive (PLI) schemes for a variety of sectors.

However, the gains from these initiatives have not been true to the expectations due to the unpredictability that crept into the policy framework and sub-optimal execution.

Thus, in my view, the policy risks in India from the political side are low and not to be much bothered about. The key risk is execution and this risk has little to do with the form and constitution of the government of the day.

Insofar as the market performance during coalition or minority governments is concerned, there is no evidence that markets have performed poorly due to the form or constitution of government.

2024: Market after elections

Regardless of election results, the markets may remain volatile and directionless until a government is formed.

Bonds: The bond market will be guided by the full budget for FY25 that may be presented in the last week of July 2024. A significant violation of fiscal discipline, and disappointment in the inclusion of Indian bonds in global indices may lead to a sell-off. Else, we may see a stable bond market. A good monsoon, as forecasted by IMD and other agencies, may brighten the outlook on inflation, and a softer RBI monetary policy stance.

Equity: The corporate earnings for 4QFY24 have been below the consensus estimates. This has resulted in downgrades in FY25 and FY26 earnings forecasts. If the trend continues in 1QFY25, we may see further earnings downgrades and de-rating of the market in general.

A BJP victory, as widely expected, may extend the rally till mid-July. After that, the market direction would be determined by the budget proposals and earnings outlook.

In a less likely situation of an INDIA government, we may see a knee-jerk move downward that may get reversed in the next few weeks. After that, the market direction would be determined by budget proposals and earnings outlook. In this case, however, we may see a material sectoral rotation towards consumption, given the INDIA promise to afford significant cash in the hands of consumers.

In any case, the impact of election results may not last beyond July 2024. The strategy should therefore be to actively look for opportunities (to buy or sell) in case of any material rise or fall in prices on or after 4^th June.

Also read

What if? – Part 1

What if? – Part 2