Do it yourself

 The events of the past two months clearly point towards deteriorating global growth prospects; rising economic uncertainties; and widening geopolitical and trade conflicts. Market participants ought to take note of these dark clouds gathering on the horizon.

Deteriorating global growth prospects

The US economy flirting with stagflation

The US Federal Reserve cut its target interest rate by 25bps to 4%-4.25% last week, after a pause of nine months. The fed officials now estimate two more cuts in the next three months. The Fed decided to continue reducing its securities holdings (Treasury, agency debt, agency mortgage-backed securities) as part of its balance sheet runoff.

·         Economic growth has moderated in the first half of the year. Consumer spending is weaker; and housing remains weak.

·         Core inflation is still above the Fed target. The Fed Chairman, Jerome Powell, described the rate cut decision as a risk management measure. He admitted that there is tension between the goals of maximum employment and stable prices; because inflation remains too high while employment risks are rising.

·         In the Fed's opinion, downside risks to employment have increased. There is more concern about labor market weakness than before. Unemployment has edged up (around 4.3% in August). Job gains have slowed significantly. Reportedly, workers out of work for 27 weeks or longer – rose to 1.9mn in August 2025, up 385,000 from a year earlier. These workers now make up 25.7% of all unemployed people, the highest share since February 2022. Persistent long-term joblessness often signals deeper cracks forming in the labor market. Initial claims for unemployment insurance jumped by 27,000 to 263,000 for the week ending Sept. 6.

Most experts believe that under the current circumstances, the Fed may not venture into aggressive easing. QE may not be a viable option given the inflation concerns and aggressive rate cuts may also not help.

Chinese economy facing slow down amidst structural challenges

China has been a major growth engine for the global economy in the past couple of decades. The engine has been showing distinct signs of fatigues in the post Covid period. The Chinese economy grew 5.3% in the first half of 2025, with 5.4% in Q1 and 5.2% in Q2. Industrial output and fixed‐asset investment are weakening. Retail sales / consumer spendings are soft. Property sector continues to drag the economy. Deflationary pressures are mounting.

Growth is widely forecasted to continue slowing, especially in H2 2025, unless strong policy stimulus revives private spending. Some forecasts expect Q3 and Q4 growth to dip below 5%, possibly closer to 4%. Inflation (especially producer and export prices) being weak is threatening to turn into a wider deflation risk. Real estate sector remains a key risk area — both for financial stability and for overall growth.

Structural challenges

·         China’s historical growth model that is heavily reliant on investment, exports, and property, is hitting diminishing returns. Slower labor force growth, aging population, and less efficiency gains also poses a serious structural challenge to the Chinese economy.

·         Tightening financial regulations on developers, falling property prices, and declining real estate investment is feeding into weaker household wealth and local government revenues.

·         After COVID-19 disruptions and regulatory uncertainty, households demand remains weak and not showing much sign of an imminent recovery.

·         Trade tensions (tariffs etc.), shifting global demand, and competition. Export growth has helped in some months, but exports to certain markets have dropped sharply.

European economy showing no signs of improvement

The economic growth in Europe continues to be weak. The European Commission’s Spring 2025 forecast projects ~1.1% growth for the EU overall, and about 0.9% growth in the euro area for 2025 — roughly flat compared to 2024. The deflationary pressures are intensifying. Inflation is expected to drop from ~2.4% to ~2.1% in the euro area in 2025, and further in 2026. Business sentiment in the European economy is weakening, especially among firms exposed to export competition, global trade tensions, and supply chain disruption.

The factors impacting European growth are both cyclical and structural. Therefore, some rebound is expected in 2026, especially if investment picks up and disinflation completes, possibly helping consumer real incomes. However, there is less visibility about improvement in structural factors, in the near term.

Cyclical factors

·         After the Russian invasion of Ukraine, energy supply disruptions (especially natural gas) plus high energy prices raised costs for both producers and consumers. Though prices have retraced somewhat, energy components of costs are still significantly higher than pre-pandemic in many places.

·         To fight inflation, central banks have raised rates. That increases borrowing costs, weighs on investment (especially in manufacturing, construction), and slows demand.

·         Tariffs and trade policy uncertainty (both with the U.S. and more broadly) are hurting export demand.

·         Consumer confidence remains fragile: households are still dealing with high inflation (food, energy), rising living costs, and economic uncertainty. That reduces spending.

·         Investment cycle is not picking up due to higher cost of capital, uncertain regulatory / policy environments, and energy & supply risks.

Structural factors

·         Competition from Asia and China (especially low-cost manufacturers) is squeezing European exporters.

·         Shifts in supply chains and demand patterns post-COVID are disrupting traditional trade flows.

·         Productivity growth has been sluggish in many European countries, as demographics are worsening and investment in tech innovation has been lagging.

·         Regulatory burdens, fragmented capital markets, and slower innovation are holding back private investment and scaling up.

·         High energy costs and environmental transition costs also pose competitive disadvantages relative to regions with cheaper energy or more efficient infrastructures.

·         Civil unrest in many major European economies is becoming more deep rooted with rising resentment against immigration policies and rising youth employment.

Japanese economy also facing specter of stagflation

Japan’s economy recently contracted (-0.2% in a recent quarter), largely driven by falling exports. Demand from major trade partners is weakening. U.S. tariffs on Japanese goods (especially autos and parts) are hurting its export-heavy industries. Inflation has remained above the Bank of Japan’s target (2%) for some time. Food, energy, and import costs (exacerbated by a weak yen) are contributing to higher consumer prices. Moreover, while inflation is persistent, wage growth has been slower, so real income gains are modest.

Growth is expected to remain modest. Most forecasts point to ~1.0-1.2% real GDP growth in FY2025, assuming global demand holds and domestic consumption strengthens. Fiscal pressures continue to mount as interest costs are rising; resulting in less fiscal space for stimulus or cushioning shocks. External risks (trade, global slowdown, currency fluctuations) also remain elevated. For example, stronger yen is hurting exports; and U.S./China trade policies are adversely impacting demand for Japanese goods.

Two major constraints for the Japanese economy are:

Demographics & labor constraints: Japan’s population has been aging fast, and the working-age population is shrinking. This means fewer workers, more spending on healthcare/pensions, and fewer taxpayers. Labor shortages in certain sectors are putting upward pressure on wages, but this comes with trade-offs (cost pressures for businesses, especially smaller firms).

Monetary Normalization: The Bank of Japan has begun to shift away from ultra-loose monetary policy (e.g. raising short-term rates to ~0.5%, reducing purchases of government bonds / ETFs). This helps combat inflation, but carries risks: higher borrowing costs for companies and government, and stress for debtors.

These two are mostly structural and may keep the growth rate of the Japanese economy under check.

…to continue tomorrow.

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.

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.

​ 

 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.​

​

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.

The Reserve Bank of India (RBI) recently released the results of its latest forward-looking surveys (November 2024 Round). Based on the feedback received from the respondents the survey results provide important insights with respect to consumer confidence, inflationary expectations and economic growth expectations.

Consumer confidence – Present tense, hopes high for future

The survey collects current perceptions (vis-à-vis a year ago) and one year ahead expectations of households on general economic situation, employment scenario, overall price situation, own income and spending across 19 major cities.

As per the survey results, Consumer confidence for the current period declined marginally owing to weaker sentiments across the survey parameters except household spending. The current situation index (CSI) moderated to 94 in November 2024 from 94.7 two months ago. (A value below 100 indicates a state of pessimism)

However, for the year ahead, consumer confidence remained elevated, improving 50bps from the previous round of Surveys. Households displayed somewhat higher optimism on one year ahead outlook for major economic parameters, except prices. The future expectations index (FEI) stood at 121.9 in November 2024 (121.4 in the previous survey round).

The respondents’ sentiments towards current earning moderated marginally, they displayed high optimism on future income which was consistent with their surmise on employment conditions. Households anticipated higher spending over one year horizon on the back of higher essential as well as non-essential spending.

Household inflationary expectations rise

Households’ perception of current inflation rose by 30bps to 8.4%t, as compared to the previous survey round. Inflation expectation for three months horizon moderated marginally by 10 bps to 9.1 per cent, whereas it inched up by 10 bps to 10.1 per cent for one year ahead period.

Compared to the September 2024 round of the survey, a somewhat larger share of respondents expects the year ahead price and inflation to increase, mainly due to higher pressures from food items and housing related expenses. One year ahead, the price expectation of households is closely aligned with food prices and housing related expenses.

Male respondents expected relatively higher inflation in one to three months, as well as one year ahead, as compared to the female respondents.

GDP: Real gross domestic product (GDP) is expected to grow by 6.8% in 2024-25 and 6.6% in 2025-26. Forecasters have assigned the highest probability to real GDP growth in the range 6.5-6.9% for both the years 2024-25 and 2025-26.

Annual growth in real private final consumption expenditure (PFCE) and real gross fixed capital formation (GFCF) for 2024-25 are expected at 6.2% and 7.9% (revised down), respectively. Real gross value added (GVA) growth projection has been revised down marginally to 6.7% for 2024-25 and kept unchanged at 6.4 per cent for 2025-26.

 Inflation: Annual headline inflation, based on consumer price index (CPI), is expected to be higher at 4.8% for FY25 and 4.3% for FY26.

External sector: Merchandise exports and imports are projected to grow at a slower rate of 2.4% and 4.6% respectively in FY25 and recover to 5.5% and 6% respectively in FY26, in US dollar terms. Current account deficit (CAD) is expected at 1.0% (of nominal GDP) during both FY25 and FY26.

The Reserve Bank of India (RBI) has issued its latest assessment of the state of the economy. The paper notes the marked slowdown in the global economy; it exudes confidence in the sustainability of 6.7%-7% GDP growth in India. In particular, the assessment sounds buoyant on manufacturing, and household consumption, while taking cognizance of resilience in the services sector. The inflation is forecasted to stay close to the lower bound of the RBI tolerance limit (4-6%).

Ending the weeks of intense speculation, anticipation and debate last night, the Federal Open Market Committee (FOMC) of the US Federal Reserve started the latest monetary easing cycle with a 50bps fund rate cut. The Fed fund rate range now stands at 4.75-5.00% This is the first Fed rate cut since March 2020 and has come after a fourteen months policy pause.

No panic in the boardroom

Unlike the previous two rate cycles that started with a rather aggressive 50bps rate cut – first October 2008 post the Lehman collapse and second March 2020 post Covid-19 break out – this cut is apparently not a panic cut.

The Fed chairman sounded confident about growth and employment level. He emphasized that the central bank is not in a hurry to ease policy, as he sees no likelihood of an elevated downturn in the economy. He mentioned, “There’s nothing in the SEP (Summary of Economic Projections) that suggests the committee is in a rush to get this done.”

The Chairman categorically advised the markets to not take this 50bps cut as “new pace”. He said, “we’re going to go carefully meeting by meeting, and make our decisions as we go”.

The decision to cut was however not unanimous. In a rare dissent, one member (Michelle Bowman) voted for a 25bps. This could be seen as yet another sign of “no panic” in the Fed board room.

Committed to price stability without pain in labor market

Announcing a victory over inflation, Mr. Powell announced, “The U.S. economy is in good shape. It is growing at a solid pace. Inflation is coming down.”

As per the latest economic data release, the US GDP expanded at 3% annual rate in 2Q2024 with 4.2% unemployment rate (considered near full employment), and inflation at 2.2% in August 2024.

Outlining the latest policy objectives, he commented, “We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation”. Guiding the markets, he emphasized that investors should take the Fed’s 50bps rate cut as a sign of its “strong commitment” toward achieving that goal.

Neutral rate seen close to 3%

The FOMC members see cuts of 25bps each in November and December FOMC meetings; 100bps cut in 2025 and 25bps cut in 2026 – implying that the latest easing cycle may end with the Fed rate range of 2.75-3.00%.

The Fed Chairman also mentioned in the post FOMC press meet that the neutral rate is likely significantly higher than it was on the previous occasions.

Markets ended lower

Markets – equity, bonds and commodities – ended the day with marginal cuts post the Fed announcement; while the USD was marginally stronger. This could be an outcome of either (i) sell on news; or (ii) traders’ disbelief in what Fed says about the strength of the economy.

What now

In my view, this aggressive 50bps cut is more of a correction than an aberration. Perhaps the Fed realized that they are running slightly behind the curve and hence tried to catch up. I do not see it as a panic move and would not like to indulge in “there is more to it than what meets the eye” debate.

Unlike 2008, there is no corporate balance sheet crisis, no risk of global markets freezing, and unlike 2020 there is no shutdown necessitating fiscal and monetary profligacy. It is a normal rate cycle change in response to a normalizing economic cycle. Therefore, expecting a market reaction like 2008 (sharply down) or 2020 (sharply higher) may not be appropriate.

I feel the US markets will adjust to the new policy trajectory in a couple of weeks and move accordingly. The lower rates shall help arrest the decline in the US housing markets and consumer spending. The bond yields may come down and the hedge trade in gold may begin to unwind. The corporate discretionary spend may also normalize as the cost of borrowing eases. This could be a relief for the Indian IT services companies.

For India, I am not sure if the RBI will rush to cut in October meeting, but would not rule it out completely. Financials and commodities are two sectors that need to be watched closely, in my view.

In the next couple of months, the markets in India will be driven by the 2QFY25 earnings. Any disappointment could lead to a decent correction in the markets. For now, I do not see a need to make any change in my investment strategy. (More on this next week)

The major risk to the markets comes from geopolitics now. The situation in the Middle East is worsening by the hour. NATO and CRIK (China, Russia, Iran and North Korea) alliances are hardening their positions, both on trade and war, making the situation explosive. (More on this next week)

Last weekend I visited some villages in the Bareilly, Shahjehanpur and Hathras districts of Uttar Pradesh. I had an opportunity to speak with several medium, small and marginal farmers.

The minutes of the last meeting (30 April 2024 – 1 May 2024) of the Federal Open Market Committee (FOMC) of the US were released last week. The discussion provides a decent insight into the policymakers’ thought process about the near-term economic outlook and the likely policy direction.

“Economic efficiency” is one of the fundamental principles of economics. An efficient economy exists when every resource is allocated in the best possible way while minimizing waste and inefficiencies. The objective is to optimize productivity – producing goods and providing services at the minimum possible cost. A state of full efficiency is, of course, a theoretical concept. Nonetheless, by striving for this state economies, enterprises, and households aim to minimize waste and optimize the cost of producing goods and providing services.

The principle of ‘economic efficiency’ is at the core of the globalization of trade and commerce. Countries have their strengths regarding resources (man, material, money etc.), technology, infrastructure, policy framework, etc. Affording countries to produce goods and services according to their strength means optimum utilization of the available resources for the benefit of all the trade partners. However, local political and geopolitical considerations impede the achievement of full economic efficiency.

The globalization of trade and commerce in the past five decades resulted in a shift in the production of goods and services to Asia with abundant human and mineral resources. First Asian tigers and subsequently, China, Vietnam, Taiwan, and India became major producers of goods and services and Western economies took charge of research & development, technology, financial services, and logistics, etc. Even the production of fossil fuels, to support the rising consumption of energy, was outsourced to Middle East Asia, Australia, Africa etc. The trend has arguably contributed to a structural downward shift in global inflation, despite a relatively loose monetary policy regime.

The arrangement has worked well for most of the economies that opened up to participate in the process of globalization. In particular, the past three decades have been an era of overall peace and prosperity. However, logistic challenges and geopolitical developments in the past 3 years are threatening to reverse the trend. The question to examine is whether we are going to witness geopolitics and political ambitions triumph the globalization based on the principle of economic efficiency; or it’s just a passing phase.