Following the Custom: Balancing Faith and Fundamentals

Each Diwali, as lamps light up homes, optimism lights up Dalal Street too.

It’s that time of the year again. Business channels are abuzz with market commentators dressed in their festive best, sharing their annual outlooks on the economy and equities. Almost by ritual, hope dominates the narrative — and that’s not necessarily a bad thing.

This year, with investor sentiment subdued and global uncertainties still clouding the horizon, a measured dose of optimism may be just what the market needs. Continuing the custom, here’s a closer look at what could turn favorable for Indian markets over the next one year — and what investors should keep an eye on.

Domestic Drivers: The Spark Within

Consumption revival on the horizon

After three years of subdued consumption, several catalysts are now aligning. Rationalization of income tax and GST rates, material lending reforms by the RBI, a supportive rate environment, and a good monsoon could together revive private consumption demand. The upcoming pay-commission payouts may add further fuel, particularly in semi-urban and rural markets.

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Capex momentum building up

The long-awaited private investment cycle seems to be stirring beyond government-led initiatives. In the past six months, Indian corporates have announced new projects worth ₹9.35–9.95 lakh crore, marking a 30–37% year-on-year increase — the second-highest level in 15 years for the April–September period.

The new investments span data centers, defense manufacturing, semiconductors, mining, power transmission, and battery storage — sectors that could structurally strengthen the domestic supply chain.

If these plans translate into execution, they could lift capacity utilization levels, spur employment, and improve corporate earnings visibility over FY27–FY28.​

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Global Tailwinds: Winds Turning Favorable

Energy and trade outlook brightening

Global energy prices are projected to ease in 2026 as demand growth moderates and logistics costs normalize. An eventual increase in OPEC production could add downward pressure.

Simultaneously, the finalization of trade agreements with the EU, the U.S., and other major partners could stabilize India’s current account and lend support to the rupee.

Foreign flows stabilizing

After months of heavy selling, foreign investors’ outflows are slowing. Several global brokerages have highlighted that after underperforming global peers for a year, Indian equities are re-entering attractive valuation zones.

Structural Shifts: Productivity & Valuations

AI and efficiency gains

While still in early stages, AI-led productivity improvements may begin reflecting in corporate bottom lines from FY27 onward — particularly in IT services, logistics, and manufacturing automation. The initial phase could boost operating margins and asset utilization ratios.

Valuations moderating to reasonable levels

Indian equities have corrected modestly from their 2023 peaks. The Nifty 50 forward P/E now stands around 18.5×, roughly 10% below its five-year average.

With earnings expected to grow in double digits through FY27–FY28, select large-cap names look increasingly compelling from a risk-reward standpoint.​

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Cautionary Note: Risks Beneath the Diyas

Every Diwali brings hope, but this year’s optimism must be tempered with realism. A few watchpoints remain:

Fiscal balance: Pre-election spending or subsidy pressures could test the fiscal glide path.

External vulnerabilities: A sudden oil price spike or renewed global conflict could alter India’s macro assumptions.

Execution gap: Investment announcements often lag actual implementation; sustained follow-through will be critical.

AI hype vs. reality: Productivity gains may take longer than expected to reflect at scale.

Geopolitics: Even as ceasefire talks progress in the Middle East, tensions between major powers remain fluid.

A balanced investor would acknowledge these risks even while celebrating the improving trends.

Conclusion: The Glow of Disciplined Optimism

Diwali has always symbolized renewal — of faith, fortune, and perspective. This year, as India stands on the cusp of a consumption revival and a capex upcycle, optimism has reason to exist.

Yet, faith alone does not light the path forward — fundamentals do. The coming year could reward investors who practice disciplined optimism: staying invested in quality, avoiding exuberance, and letting conviction — not celebration — drive portfolio choices.

From today, I am taking my Diwali break. My next post will be on Monday, the 27th October.

Wishing all the readers a very Enlightening, Blissful and Joyous Diwali. May the Mother Supreme destroy all the darkness and sorrow from our lives and guide us to the path of enlightenment and divine bliss.

Art of extrapolation - 2

In recent times, one of the most extrapolated data by the market participants in India has been the household participation in the capital markets. Several research papers/reports have highlighted the relatively low deployment of the Indian household savings into the capital market, especially listed equity shares, to argue for a high growth potential in this area. In fact, capital market related stocks like brokerages, AMCs, depositories, exchanges and transfer agents & registrars, have been outperforming the broader markets for the past few years. Impressed by the trend, NSE has even launched an index (Nifty Capital Market index) to capture the performance of this sector.

Indubitably, the Indian capital markets are at the threshold of a major transition. Acceleration in institutionalization of household participation has been a major trend in the past five years. Access to banking and financial markets has improved materially with the advancement of technology and digitalization in the last one decade. The young demographic is looking to enhance their wealth through participation in the growth businesses. `The participation of small and medium sized entrepreneurs in the listed market is also increasing rapidly.

Nonetheless, extrapolating the current household participation data to the levels of the US and affording valuations based on 10-15yr forward earnings based on such lofty assumptions might not be appropriate in my view.

It may be pertinent to note the following in this context —

·         Household participation in capital markets in countries like UK, Australia, South Korea is about 7 to 8% of total household assets. China and Japan are higher at 11 to 12%. At present, Indian households’ allocation to shares, debentures and mutual funds is approximately 2.5% of their total assets.

The per capita income in these countries are much higher than India – the UK ($55000), Australia ($64,500), China ($13,700,), Japan ($34000), South Korea ($34600) as compared to India ($2880). As of this morning, there is nothing to suggest that India might reach $12000 (4x the current level) mean per capita income level in the next 10-12years, that might be needed to reach 7-8% allocation to capital markets (debt and equity).

​Indian households presently allocate about 29-30% of their assets to financial assets. Of this 30%, about 7-8% (2 to 2.5% of the total) is allocated to mutual funds, shares and debentures (public equity and debt). This allocation is almost the same as it was in the decade of 1990s. Not much has changed in the past three decades, since the first round of reforms and liberalization.

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·         The financial liabilities of the Indian households have been rising faster than the financial assets in the past couple of decades. The anecdotal evidence suggests that this trend is likely to sustain for the next decade also, as household savings continue to stay lower. This implies that the risk-taking ability of the Indian household would diminish further in the short to medium term. This does not augur well for a meaningful rise in the capital market participation.

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​·         Indian listed equities and mutual funds have consistently failed to generate meaningful alpha over physical assets like gold and real estate over a longer period. For example, over the past 15 years, Nifty 50 (+311%) has sharply underperformed even gold (464% in INR terms) returns. Over 50% fund managers have even failed to match the benchmark returns.

·         In the past three decades, the employment intensity of GDP has diminished materially. For 6.5% GDP growth, employment growth is less than 0.5% CAGR. This trend has pushed people towards self-employment. At present there are about 80 million self-owned enterprises, employing over 130 million people. The owner of these enterprises usually owns 100% of the equity. In many cases, the value of self-owned enterprises’ equity is more than the networth of the household. It could be a matter of debate whether households who fully own their enterprise do actually need to invest in listed equity. But no asset allocator would advise further equity exposure to a person who has 100% (or more in many cases) of his networth invested in the equity of his own business.

To conclude, I would say, the capital market in India is on a high growth path. The next couple of decades would see material jump in the level of activity; market capitalization; household ownership of listed equity and debt; and the people employed or engaged in the capital market activities. However, extrapolating it to matching earnings growth for all the participants might not be a great idea.

Art of extrapolation - 1

It is a normal practice of market analysts (especially buy side analysts) to extrapolate historical data for validating their pre-drawn conclusions. For example, there are numerous research reports and messages which rely on “low per capita consumption” and “moat” in India to make a strong case for buying a particular stock or sector. Based on this, many “new businesses” (and some established businesses) are given astronomical valuations. In this context, I find it pertinent to note the following:

·         In the early 1990s, the number of Indian citizens using air transport for travelling purposes was extremely low. There was only one civil airline, viz., Indian Airlines. Then the civil aviation business was opened to private competition. Within a span of 2yr several private airlines started business, e.g., Sahara, NEPC, Damania, East West, Modiluft etc. All these ended as bankrupt in less than a decade. In the second tranche, some more private airlines started business, e.g., Jet Airways, Kingfisher, Deccan Airlines etc. Soon they became very popular with Jet Airways acquiring more than 50% market share (“moat”). These also ended bankrupt, along with Indian Airlines (later Air India).

·         India was one of the worst countries in terms of financial inclusion in the early 1990s. Many first-generation private banks (Global Trust Bank, Time Bank, Bank of Punjab, Centurion Bank etc.)that were given license to start banking business in the 1990s, could not survive even for a decade.

·         Numerous telecom operators and ISPs that commenced operation in the 1990s and early 2000s, ended up shutting their shop in less than a decade. This all happened in spite of very low telecom density.

·         Steel and power sectors have been another anti-thesis for this “moat” and “low per capita consumption” argument. India still ranks amongst the lowest per capita consumers of steel and power. If we carefully analyze the banking sector crises during the 1990s and 2010s, these two sectors have been largely responsible for huge credit costs to the banks. There have been numerous bankruptcies and debt restructuring in these sectors in the past four decades. Even the sector leaders like SAIL and Tata Steel have been responsible for massive investors’ wealth destruction multiple times in these four decades. Several power producers like Lanco and GVK Power, ended bankrupt, while the leaders, like NTPC and Tata Power have underperformed the benchmark returns over the past two decades.

No one should be surprised if many of the businesses currently in investors’ favor, also wind up in the next one decade, despite huge scope for growth in businesses like AI, semiconductors, renewable energy, ecommerce, fintech, etc.

The point is that arguments like “per capita consumption” and “moat” may not necessarily work in a country where about 60% of the population is dependent on government support for necessities like food, cooking fuel, primary healthcare, education, and transport; and government is constitutionally mandated to keep policy framework largely socialist.

Investors accordingly need to adjust the denominator (total population) appropriately to calculate a realistic per capita number. The “moat” premium should be assigned to a business only after applying appropriate policy risk discount (Remember online gaming companies).

On the positive side, per capita income for the total addressable market will also be much higher than the official number. In particular, the investors must consider the following while evaluating a company for investment:

·         It is not sufficient to only evaluate the debt servicing capabilities of the company. The ability to pay for the cost of other factors of production (e.g., wages, rent, plant and technology upgrade etc.) must also be evaluated.

·         It is important to assess the dependence of the company on the global economy. It would be useful, for example, to incorporate the risk emerging from policy and geopolitical stressed developed economy consumers, high risk African and Latin American government owned (or regulated) businesses, highly regulated Chinese businesses, and volatile policy environment in the US, in the valuation matrix.

·         Domestic policy risk, especially related to “sin consumption”; competition risk; perils of business with the government; and probability of economic offences, etc.

·         Risk of obsolescence of products, technology and IPRs.

 

2025: Roadmap for policy imperatives

 The India specific actions of President Trump in the past six months have evoked a varied response from various stakeholders.

·         The policymakers have been quite guarded in their response. Prime Minister Modi has rhetorically emphasized on the need to be self-reliant and adopt Swadeshi (Made in India products), but so far, we have not heard any specific policy or plan to counter the US aggression. Most of the concerned ministers and bureaucrats have repeatedly expressed hope that India will manage to finalize an “honorable” trade deal before the end of 2025. The only detail they have shared is that India shall not compromise on the interests of its farmers’ and energy security concerns. Prima facie, the bureaucratic and diplomatic effort is to “restore status quo ante”, to the extent possible.

·         Industry associations also seem to be preferring a “settlement” route, whereby the US administration withdraws punitive measures (tariff and non-tariff) and Indian exporters agree to bear some of the reciprocal tariffs.

·         The IT services industry seems to be adopting a “take whatever comes on the way and move on” approach; fast reconciling to a situation where the extant H1B visa does not exist. They are apparently working on a broad mitigation strategy, including increasing their US on ground presence, near-shoring, off-shoring to India, sharing the increased cost with clients, etc.

·         A handful of entrepreneurs and professionals have suggested that we “exploit this opportunity” to unleash a new round of economic and policy reforms in the country by beginning an “innovation revolution” in the country. Though, most of their views are available in the form of media posts and interviews, and not much specifics are available in public domain.

Overall, my impression is that a large majority of the stakeholders would be delighted if the pre–Liberation Day (02 April 2025) situation is restored by the Trump administration. They would be much relieved, even if reciprocal tariffs are retained and punitive measures like 25% penal tariffs, 100% tariff on branded & patented drugs, and US$1,00,000 fee on H1B applications are revoked. Regardless of all the rhetorics and social media proclamations, the enthusiasm for ushering Reforms 3.0 (after 1991-92 and 1998-99) is much less.

In my view, we should take this opportunity to reinforce the foundation of our economy, add new engines of growth, and make our economy more sustainable. This would require coordinated efforts by the government, entrepreneurs, innovators, local governments, civil society, academia, and industry.

I suggest two level effort to achieve these objectives – (1) Business level efforts and (2) Structural changes

Business level efforts

Trade & Manufacturing

Diversify markets: Reduce reliance on the US by deepening ties with ASEAN, EU, Africa, Latin America.

FTAs & supply-chain corridors: Accelerate trade agreements with EU and UK; expand India-Japan supply chain partnerships.

Technology & Capital

Domestic R&D: Incentivize AI, semiconductor, and biotech innovation through tax breaks and PPP models.

Ease of capital flows: Simplify compliance for foreign investors; fast-track dispute resolution.

Upskilling at scale: Invest in digital skills, advanced manufacturing training, and vocational education.

Geopolitics & Defense

Strategic diversification: Strengthen ties with EU, Japan, and ASEAN to counterbalance US unpredictability.

Defense indigenization: Fast-track Make-in-India defense projects, reducing dependency on US hardware.

Structural changes

While business level efforts improve resilience of the India economy, it may not enhance sustainability of the growth or catapult our growth to a much higher trajectory, that is much needed to attain the goal of “Viksit Bharat (Developed India)” in the next couple of decades. For this we need to implement some structural reforms through transformation of our growth paradigm. In particular, we need to-

·         Completely shed the colonial mindset and make our development plans aggressive, forward looking and large;

·         Bridge a variety of deficits prevalent in our country – especially growth capital deficit; skill deficit; trust deficit; and compliance deficit;

·         Develop a scientific temper as a society, eliminating superstitions, ostentatiousness, intolerance, and ignorance, from our daily life.

·         Transform governance structure to minimize corruption.

The following three examples of development initiatives emphasize my points.

·         Develop 6 new green field global cities of the size of one Singapore each. Locate these cities in each region (North, West, South, East, central and North East) of the country. Invite top global businesses, infra builders and universities to build these world class fully integrated sustainable and self-sufficient cities in the next 10-15 yrs. These cities should have the best infrastructure; dedicated campuses for top global businesses, especially technology, and research; campuses of top global universities where Indian and foreign students could study. These cities should become global hubs of trade, finance, innovation and model living.

These cities may be managed by a board elected by the representatives of investors, institutions and residents. The board may be fully empowered to formulate rules and regulations regarding labor, property, indirect taxes, and other matters of governance and maintenance of these cities. Once successfully established, states may be encouraged to model their metropolises on these cities.

·         Develop 6 new green field global standard recreation and tourism centers, similar to Las Vegas, Macau, Phuket etc. on build operate (BO) basis. These centers must have best in class hospitality, retail and mobility infrastructure. Apply exceptional rules for these centers with regard to alcohol consumption, gambling, hotel management, prostitution etc. The objective should be to divert outbound tourism from India to these centers and encourage inbound international tourist flow. A special armed force may be raised for maintaining law & order in these centers.

Simultaneously, the existing places of tourist interest in the country may be developed in terms of cleanliness, hospitality, accessibility, law & order, etc. The tourists arriving in the special centers may be encouraged to visit these places of historical and cultural importance.

·         Religion has always been at the core Indian ethos. Traditionally, it has been the influence of religion that brought the concepts of scientific inquisition, righteousness, moral rectitude, social responsibility, environmental sustainability, debt management, HR management, and just & fair taxation, etc. in the society.

Post Independence the State has been over focusing on micromanaging businesses and ignoring key social issues. This has weakened the core fabric of Indian society. Consequently, places of worship have degenerated from being centers of learning & spiritual evolution to shelters for hatemongers, fearmongers, power seekers, and wealth hoarders. Many of these promote superstitions and block scientific inquiry to the detriment of society at large.

In my view, if we want to make this century belong to India, then Indian State—

o    should leave business completely to private enterprise;

o    play a much larger role in social awakening and create an enabling environment of mutual trust, self-motivation, empathy and compassion;

o    make the Temple (of course including Mosques, Churches, Monasteries, Gurudwaras, Mutts, Agiyaris, Derasars and others) play a larger evolutionary role in progress of the society, rather than continuing to de-generate further and stay a stumbling block in the path to socio-economic progress.

The State must realize and accept that politicians and bureaucrats are mostly handicapped insofar as their capability to run businesses is concerned. They should therefore focus on securing borders, developing social & physical infrastructure, maintaining law & order and promoting social harmony.

 

Lessons from 1998

The 1998 US sanctions on India, imposed after the Pokhran-II nuclear tests in May 1998, were a pivotal moment that reshaped India's economic, strategic, and technological trajectory. Triggered by India’s nuclear tests under the Vajpayee government, these sanctions aimed to penalize India for violating non-proliferation norms. Sanctions included restrictions on technology transfers, suspension of US aid (except humanitarian), bans on defense sales, and multilateral lending curbs by institutions like the World Bank. While the immediate impact was disruptive, the long-term effects catalyzed India's self-reliance, economic reforms, and global repositioning.

Economic reforms and growth acceleration

Immediate impact

The sanctions caused short-term economic turbulence. Foreign capital inflows dropped, with FIIs pulling out $1.2 billion in 1998, and India’s GDP growth slowed to 4.8% in FY99 from 6.5% in FY98. The rupee depreciated by ~12% against the dollar, and export growth stalled due to restricted access to US markets and technology.

Long-Term effects

Catalyst for liberalization: The sanctions forced India to accelerate economic reforms to counter external dependence. The government introduced Special Economic Zones (SEZs) in 2000, simplifying tax, land, and labor laws to attract FDI. By 2005, SEZs hosted $5 billion in investments, creating 1 million jobs by 2010.

Privatization push: Key sectors like telecom, aviation, insurance, coal, ports, roads, and energy, etc. were opened to private players. The 1999 New Telecom Policy allowed 74% FDI, leading to a mobile subscriber boom (2 million in 1998 to 90 million by 2005). Disinvestment in PSUs raised $2 billion by 2003, reducing fiscal strain.

Growth momentum: These reforms fueled India’s high-growth phase in the 2000s, with GDP growth averaging 8-9% from 2003-08. The sanctions indirectly strengthened India’s domestic market, reducing reliance on volatile US aid ($150 million annually pre-1998).

While the sanctions spurred reforms, they also exposed structural weaknesses, like India’s dependence on foreign capital and technology. The growth spurt was uneven, with rural areas lagging, and SEZs faced criticism for land acquisition issues, displacing 1.4 million farmers by 2010.

Defense and space self-reliance

Immediate impact

The US banned defense exports and terminated joint military exercises, while multilateral sanctions blocked technology transfers for India’s space and missile programs. This hit projects like the Light Combat Aircraft (LCA) Tejas, reliant on US engines, and delayed ISRO’s satellite launches.

Long-term effects

Indigenous defense programs: India doubled down on domestic R&D. The DRDO’s Integrated Guided Missile Development Program advanced, leading to the successful Agni-II test in 1999 and Prithvi-III by 2006. By 2010, India’s defense R&D budget rose to $2 billion, reducing import dependence from 70% in 1998 to 50% by 2015. Ambitious Brahmos missile program was launched in 2001.

Space advancements: ISRO developed indigenous cryogenic engines after US pressure blocked Russian transfers. The GSLV program, stalled in 1998, saw success with GSLV Mk-I in 2001. By 2020, India’s space budget reached $1.8 billion, with 50+ satellites launched independently.

Strategic autonomy: The sanctions reinforced India’s non-aligned stance, deepening ties with Russia (e.g., $1.5 billion Su-30 MKI deal in 2000) and France (Mirage 2000 upgrades). This diversified defense partnerships, mitigating US leverage.

While self-reliance grew, delays in projects like LCA (fully operational only by 2015) and high R&D costs strained budgets. The sanctions also isolated India in global non-proliferation regimes like the NSG until the 2008 US-India nuclear deal, limiting technology access for a decade.

Energy security and infrastructure

Immediate Impact

Sanctions restricted US energy technology exports and World Bank loans for power projects, threatening India’s 6,000 MW generation shortfall in 1998. Oil and gas exploration faced delays due to limited foreign investment.

Long-term effects

Nuclear and alternative energy: India launched the Three-Stage Nuclear Power Program, commissioning 10 reactors by 2010, adding 4,800 MW. The 2008 nuclear deal, partly a sanction reversal, unlocked $10 billion in US reactor investments. Renewable energy got a boost, with wind capacity rising from 1,000 MW in 1998 to 7,000 MW by 2008.

Ultra Mega Power Projects (UMPP): Launched in 2005, UMPPs aimed for large 4,000 MW plants, with Mundra (Tata Power) adding 4,800 MW by 2012. Total power capacity grew from 90,000 MW in 1998 to 150,000 MW by 2010.

Oil and gas privatization: The New Exploration Licensing Policy (NELP) in 1999 attracted $15 billion in private investment by 2008, with Reliance’s KG-D6 gas field boosting domestic output by 30% by 2010.

Logistics infrastructure: The National Highway Development Program (NHDP), launched in 1998, funded with a fuel cess, built 24,000 km of highways by 2008, cutting logistics costs by 2% of GDP.

Energy reforms reduced import dependence (oil imports fell from 70% to 65% of consumption by 2010), but UMPPs faced delays due to land and environmental clearances. Coal reliance persisted, with 55% of power from coal in 2010, hindering sustainability goals.

Geopolitical repositioning

Immediate impact

The sanctions strained Indo-US ties, with Clinton’s administration labeling India a “rogue state.” Multilateral pressure from G-7 nations and Japan isolated India diplomatically, delaying World Bank loans worth $2 billion.

Long-term effects

Global realignment: India deepened ties with Russia, China, and ASEAN. The 2000 Indo-Russia strategic partnership secured $10 billion in defense and energy deals by 2005. India’s “Look East” policy gained traction, with trade with ASEAN rising from $7 billion in 1998 to $40 billion by 2010.

Nuclear deal breakthrough: The sanctions paved the way for the 2005 Indo-US nuclear framework, culminating in the 2008 deal. This granted India NSG waivers, access to global nuclear markets, and de facto recognition as a nuclear power, boosting its global stature.

Soft power gains: Sanctions spurred India’s IT and diaspora-led soft power. The 2000s saw Indian IT firms expand globally, with IT exports rising from $4 billion in 1998 to $50 billion by 2008. The Indian diaspora in the US grew to 2 million by 2010, remitting $12 billion annually.

While the nuclear deal marked a diplomatic win, India’s initial isolation delayed integration into global regimes like the WTO. Over-reliance on IT exports to the US (60% of total by 2008) created new vulnerabilities, as seen in later H-1B visa disputes.

Social and political impacts

Immediate impact

The sanctions bolstered nationalistic sentiment, with Vajpayee’s “India Shining” narrative rallying domestic support. However, urban-rural divides widened due to export and investment slowdowns, with rural unemployment rising to 7% in 1999.

Long-term effects

Policy continuity: The sanctions fostered a bipartisan push for self-reliance, sustained by the UPA government (2004-14). Programs like Bharat Nirman (2005) invested $40 billion in rural infrastructure, narrowing urban-rural gaps by 2010.

Innovation ecosystem: Sanctions spurred STEM education and R&D. IIT/IIM expansions in the 2000s produced 1 million engineers annually by 2010, fueling India’s IT and startup boom (e.g., Flipkart founded in 2007).

Public resilience: The 1998 crisis built a policy template for handling external shocks, reused during the 2008 financial crisis and 2020 pandemic. Public-private partnerships grew, with 1,200 PPP projects worth $100 billion by 2015.

Nationalist rhetoric sometimes overshadowed inclusive growth, with 30% of rural India below the poverty line in 2005. The focus on high-tech sectors left low-skill workers vulnerable, a gap unaddressed until later schemes like MGNREGA (2005).

Broader implications and lessons

The 1998 sanctions, though initially painful, acted as a forcing function for India’s structural transformation. They reduced reliance on US aid and technology, diversified global partnerships, and embedded a reform-oriented mindset.

By 2010, India’s economy was 2.5 times larger than in 1998 ($1.7 trillion vs. $0.7 trillion), with FDI inflows rising from $3 billion to $40 billion annually. The sanctions also entrenched “strategic autonomy” as a foreign policy pillar, evident in India’s balancing act during the 2025 US tariff crisis.

However, the long-term effects reveal trade-offs. Rapid privatization led to cronyism allegations, and infrastructure gains were uneven, with only 60% of NHDP targets met by 2010. The sanctions also delayed India’s integration into global tech supply chains, a gap still felt in 2025 amid US export controls on AI chips.

Relevance to 2025 Context

Comparing 1998 to the 2025 US-India trade tensions (50% tariffs, H-1B fee hikes), the earlier sanctions offer lessons:

Reform over appeasement: India’s 1998 success came from inward focus (SEZs, NHDP) rather than US concessions.

Diversification: Post-1998 ties with Russia/ASEAN cushioned US pressure.

Risk management: 1998’s rural neglect warns against urban-centric policies.

In conclusion, the 1998 sanctions transformed adversity into a springboard for India’s 2000s boom, but uneven outcomes underscore the need for inclusive, agile policies. Applying these lessons could help India navigate 2025’s challenges, turning US protectionism into a driver for self-reliance and global competitiveness.

…to continue tomorrow 2025: Roadmap for policy imperatives

Do not squander the opportunity

The Indo-US relations have never been linear and secular like Indo-Russia (Indo-Soviet) relations. Moreover, the Indo-US relations have mostly been transactional and opportunistic; with very little connect on cultural and social level.

Both countries have based their strategies on their respective abilities to exploit the available opportunities. In the past three decades, India has significantly gained from the shortages of highly skilled human resources in the US. We have also shared the gains (with other emerging economies) from the US strategy of relocating their manufacturing processes. The US has benefitted from selling technology, energy and defense equipment to India. Besides, India has been an attractive high growth potential opportunity for US capital.

Evidently, the US administration now seeks to redefine this transactional relationship. The present strife in the Indo-US relations may therefore sustain much longer than what most of us would have expected a couple of months ago.

The Trump shock: what changed

In recent months, India’s relationship with the United States has entered a turbulent phase. President Donald Trump’s administration has imposed penal tariffs targeting India’s labor-intensive exports, rolled back strategic assurances, and reignited ties with Pakistan in ways that ignore India’s security concerns. The tightening of H-1B visa rules and deportations of overstaying Indian citizens have also strained people-to-people ties.

This shift has disrupted Indian business models that relied heavily on US consumers, technology, capital, and immigration pathways. The transactional nature of Indo-US relations has always meant that strategic alignments could shift rapidly. The Trump administration’s America-first strategy has redefined the terms of engagement.

Under the circumstances, it would be a normal strategy for the US businesses and policymakers to work on an India+1 strategy for their merchandise, human resource and strategic support requirements. The policymakers would want Indian businesses to invest in the US to “Make in America” and “Hire Americans”.

It is therefore important that the Indian businesses and policymakers have a long-term strategy to mitigate the impact of the change in American strategy and ensure a sustainable growth for the Indian economy.

Lessons from 1998: Turning sanctions into strength

This is not the first time India has faced strategic setbacks from the US. In 1998, following nuclear tests, India faced severe sanctions. Rather than bowing to pressure, India leveraged the situation to accelerate reforms and investments. These reforms laid the groundwork for India’s high growth phase in the 2000s.

The subsequent governments continued to focus on increasing “self-reliance” and “energy security”. However, momentum slowed down considerably as India grew comfortable with much improved relations with the US, Japan and the EU, in the past two decades.

(More on lessons from 1998 tomrrow)

Why this is an opportunity, not just a setback

Just as in 1998, India can turn adversity into opportunity. Trump’s policies are part of a broader global trend: protectionism, supply-chain re-shoring, and weaponization of trade.

History shows that India thrives when external shocks force inward reform. The Trump administration’s adversarial stance should not be viewed as an existential threat but as a catalyst for bold domestic policy shifts.

Taking a myopic approach—by rushing to invest in the US to appease Trump—would dissipate this opportunity. Instead, India should use this moment to:

·         Build resilience

·         Accelerate reforms

·         Position itself as an important global manufacturing and innovation hub

 

…to continue tomorrow Lessons from 1998

 

1HFY26 – India shackled

The first half of the financial year FY26 has been good for financial and commodity markets in general. Despite elevated geopolitical concerns, renewed trade war, slowing growth in major economies and emerging deflationary pressures, stock market, crypto assets, and precious metals, and industrial metals performed rather well. Energy and soft commodity prices were lower, indicating good price control. The global central bankers accordingly remained on the easing path.

India however was an outlier in the global context. Indian equities, currency and bond markets were one of the worst performers globally. South Koren equities were the best performing equities in 1HFY26. Chinese and German equities were other notable outperformers. Equity indices of the US, Japan, and the UK also recorded strong gains.

The most notable feature of global markets was the sharp rally in precious metal. The central bankers across emerging markets accelerated their gold accumulation, in view of the geopolitical developments and trade tensions. Silver also joined the rally in the past few months.

India performance – 1HFY26

Indian markets were one of the worst performers globally; sharply underperforming the peers. A short war with Pakistan, several punitive actions (tantamounting to virtual economic sanctions) by the US, slowing earnings growth amidst lagging consumer and investment demand, and persistent selling by the foreign investors weighed heavily on Indian equities and INR. The bond market was also sluggish, with the yield curve steepening. The efforts to stimulate demand by allowing income-tax and GST concessions have so far not yielded the desired results. Regulatory measures to curb excessive speculation in the market impacted overall volumes and level of activity.

The key highlights of the India market performance could be listed as follows:

·         The benchmark Nifty50 gained 4.6% during 1HFY26; while the Midcap (+9.4%) and Small Cap (+9.1%) did much better. Consequently, overall market breadth was positive.

·         Most of the market gains came in 1QFY26, prior to US penal tariffs coming into effect from July 2025. However, four out of six months yielded positive results.

·         The total market capitalization of the NSE is higher by ~9.2%; much more than gains in the benchmark indices – implying that stronger gains have occurred in the broader market.

·         PSU Banks, Metals and Consumer discretionary, were the top outperforming sector. Media, IT Services, pharma, Realty, FMCG, and private banks were notable underperformers.

·         Institutional flows to the secondary equity markets were positive for all six months. 1HFY26 witnessed a total flow of ~INR3154bn, despite net FPI outflow of ~Rs684bn. The correlation of institutional flows with Nifty returns was average (~56%).

·         The bond and currency markets were particularly weak in the 1HFY26. INR lost materially against most major currencies, e.g., GBPINR (-10%), EURINR (-14.6%), JPYINR (-9%) and USDINR (-3.6%). Benchmark yields are higher by 1.5%, despite 75bps cut by RBI and strict control over fiscal deficit. Lending and deposit rates were lower by ~50bps. Call rates are lower by 50-75bps.

·         The overall Indian yield curve shifted higher and steepened. Sharply.

·         The economic growth for FY26 is expected to remain flat at 6.5% (same as FY25). Fiscal balance is expected to be better with FY26BE fiscal deficit projected at 4.4% (vs FY25RE at 4.8%).

·         CPI inflation has eased significantly, averaging below 2% in the 2QFY26, much below the RBI tolerance band. Though RBI expects the inflation to pick up in 4QFY26, professional forecasters are predicting it to stay lower than 4%.

·         Corporate performance in 1QFY26 has been slightly better than the modest estimates, but signs of long-term earning trajectory slowing down are conspicuous.