Do it yourself

Tuesday, May 27, 2025

The story so far

The script in the US is playing mostly on the expected lines (see here and here).

Department of Government Efficiency (DOGE) – crash landing

Department of Government Efficiency (DOGE) is apparently on its way to crash land, with the pilot (Elon Musk) ejecting himself out shortly after taking off.

DOGE’s actions have faced multiple lawsuits, with critics arguing that Musk and his team have violated federal laws, union agreements, and civil service protections. A federal judge halted parts of USAID’s shutdown, and courts have restricted DOGE’s access to payment systems.

Despite Musk’s goal to cut $2 trillion from the federal budget, 2025 spending is slightly up from 2024, per Brookings Institution data.

Mandatory spending (e.g., Social Security, Medicare) limits achievable cuts. Over two million federal employees were offered buyout deals, with some agencies facing mass layoffs. However, some fired staff have been rehired, indicating implementation challenges.

Though DOGE has made a significant promise, the actual delivery has been materially lower, primarily due to legal, ethical, and practical challenges; mixed public support and limited measurable impact. With Musk virtually leaving the initiative, its future appears uncertain.

Fiscal deficit – continues to rise

The U.S. fiscal deficit is on an upward trajectory, driven by increased spending, rising interest costs, and insufficient revenue growth.

For the first seven months of fiscal year 2025 (through April 2025), the cumulative deficit was $194 billion higher than the same period in the previous year. Total outlays for this period were $4.2 trillion, up $340 billion from the previous year, driven by increases in Social Security ($70 billion), net interest ($65 billion), and Medicare ($41 billion)

The Congressional Budget Office (CBO) projects the federal budget deficit to be $1.9 trillion in fiscal year 2025, equivalent to 6.2% of GDP. By 2034, the deficit is expected to grow to $2.8 trillion (6.9% of GDP) if current policies remain unchanged.

Recent legislative proposals, such as the tax and spending bill passed by the House in May 2025, could add $3.3–$3.8 trillion to the federal debt over the next few years, further exacerbating the deficit. Federal debt held by the public is projected to rise from 100% of GDP in 2025 to 118% by 2035, surpassing the historical high of 106% set in 1946.

The US sovereign credit rating has been cut by Moody’s Aa1 from AAA earlier.

Tariff Tantrums – More pain than gains

The tariff war initiated by the Trump 2.0 administration in February 2025, has mostly been counterproductive so far.

New tariffs have generated a short-term revenue ($16 billion in April alone) but at a significant cost - A 6–8% GDP reduction in the long run as per The Penn Wharton Budget Model (PWBM); 2.3% higher consumer prices; losses to the US households; global trade contraction by 5%; U.S.-China trade nearly collapsing; retaliatory tariffs and supply chain disruptions exacerbating economic strain, particularly for U.S. consumers and export-heavy sectors.

The net effect is a significant economic burden on the U.S., with global ripple effects, though temporary truces (e.g., U.S.-China) and exemptions (e.g., USMCA) mitigate some damage.

Seemingly unconventional approach of the President may be turning the US strategic allies into adversaries. Frequent and unpredictable tariff tantrums of President Trump, have widened the trust deficit between traditional trade partners of the US (e.g., the EU, Britain and Japan), making the relationships purely transactional.

USD weaker, yield higher

The tariff war has imposed significant duties (e.g., 20–145% on Chinese imports, 25% on steel, aluminum, and autos from Canada and Mexico). These tariffs raise the cost of imported goods, increasing inflationary pressures. For example, the two-year breakeven inflation rate rose from 2.54% at the end of 2024 to 3.36% by April 8, 2025, reflecting market expectations of higher short-term inflation.

Rising inflationary expectations, fiscal debt and debt sustainability concerns (rating downgrade) have prompted the bond investors to demand higher yields. As Minneapolis Fed President Neel Kashkari noted, rising yields and a falling U.S. dollar suggest investors may be viewing the U.S. as less attractive due to trade war escalation and fiscal concerns, reducing demand for Treasuries as a safe-haven asset.

The US Fed is also sounding more hawkish in its recent statements, impacting the traders’ and investors’ sentiments.

The U.S. dollar (USD) has also been weakening in 2025, with the Dollar Index (DXY) dropping from 108.2 in late December 2024 to around 100, a decline of approximately 7%. This weakening of the USD is driven by multiple interconnected factors, e.g., the rising U.S. fiscal deficit, the tariff war, rising U.S. Treasury bond yields, and failure of the Department of Government Efficiency (DOGE) to implement material spending cuts.

I still believe that the conventional wisdom will prevail, tempers will cool down and President Trump will eventually return to the path of reconciliation and cooperation. Nonetheless, it is still uncertain how much damage would have already been caused by then.

Thursday, May 22, 2025

Need for reforms in IMF’s Debt Sustainability Framework

The International Monetary Fund (IMF) and the World Bank designed the Debt Sustainability Framework (DSF), to assess and manage the debt sustainability of low-income countries (LICs). DSF is a key tool in the overall global financial architecture. It analyzes a country's indebtedness and its vulnerability to shocks through regular analysis of a country's present and projected (over the next 10 years) debt burden. The analysis involves conventional solvency analysis (Debt to GDP, Debt to Export, Debt service ratio, fiscal balance, etc.) and stress testing for potential crisis situations. The idea is to detect potential debt crises early and implement appropriate preventive actions.

DSF, inter alia, guides—

(i) borrowing decisions of LICs by assessing their financing needs and repaying abilities;

(ii) LICs how to maintain a balance between their development goals and financial stability;

(iii) the process of identifying countries under stress and designing a sustainable relief package; and

(iv) lending decision of creditors ensuring that resources are provided in a way that both development goals and long-term debt sustainability of the borrowing country are aligned well;

(v) the process of early detection and prevention of potential debt crisis

DSF, in vogue since 2005, has been criticized by several development economists for prioritizing creditors’ interests and failing to account for developmental and climate-related financing needs of LICs, especially in the aftermath of the global financial crisis (2008-2009).

In a recent paper, Kevin P. Gallagher, José Antonio Ocampo, and Kunal Sen, have highlighted that the existing debt sustainability framework, primarily driven by institutions like the IMF and World Bank, focuses on ensuring debt repayment to creditors rather than enabling LICs to meet developmental goals. This approach limits fiscal space for investments in critical areas like infrastructure, education, and healthcare. This is critical as LICs face disproportionate climate impacts despite contributing less to global emissions.

Besides, he framework’s reliance on narrow metrics (e.g., debt-to-GDP ratios) that fail to consider growth potential or external shocks. This can lead to misclassifying countries as debt-distressed, triggering austerity measures that stifle growth. The current framework influences credit ratings, which affect borrowing costs. A flawed framework may lead to downgrades for LICs, even when their economic fundamentals are strong.

The authors therefore advocate reforming the global financial architecture to prioritize developmental and climate needs, including more flexible debt sustainability assessments and increased multilateral lending. It is critical that the framework is suitable revised (i) to integrate developmental and climate financing needs; (ii) to make assessment metrics more flexible to incorporate growth potential and external vulnerabilities; (iii) to make sustainability goals more equitable and just, by increasing multilateral lending and debt-for-climate swaps to support LICs.

Applicability of DSF to India

It is important to note that India’s position with regard to the DSF for LICs is little complex.

The IMF distinguishes between Market Access Countries (MACs) and Low Income Countries (LICs) for debt sustainability analysis. MACs are economies that typically have significant access to international capital markets and rely less on concessional financing (e.g., grants or low-interest loans). India fits this description due to its ability to borrow from international markets, issue sovereign bonds, and attract foreign investment.

IMF assesses MACs using the MAC Debt Sustainability Analysis (MAC DSA), which focuses on market-based indicators like bond spreads, external financing needs, and debt rollover risks, rather than the DSF used for LICs reliant on concessional financing.

However, The World Bank classifies countries based on Gross National Income (GNI) per capita. For the 2025 fiscal year, India is classified as a lower-middle-income country (LMIC) with a GNI per capita of approximately $2,390 (2023 data), falling within the World Bank’s LMIC range ($1,146–$4,515).

Therefore, despite being an MCA country, the DSF is used to assess India’s debt sustainability, particularly for external debt, as part of IMF surveillance (e.g., Article IV consultations) and World Bank lending programs. India is typically classified as having a low to moderate risk of debt distress due to its robust growth (6–7% annually), large foreign exchange reserves (over $600 billion), and diversified economy.

Unlike smaller LMICs, India’s large economy (world’s fifth-largest, ~$3.4 trillion nominal GDP in 2024) and strong repayment capacity mean it is less dependent on the DSF’s outcomes for concessional financing. Besides, India’s borrowing from the IMF has been limited in recent decades, with no active IMF program since the 1991 balance-of-payments crisis. However, the DSF still applies during IMF assessments to ensure external debt sustainability.

Implications for India

Constraints on Development Financing: India requires substantial investments to sustain its growth trajectory, reduce poverty, and achieve Sustainable Development Goals (SDGs). The current framework may discourage India from borrowing for long-term development projects due to stringent debt sustainability metrics, potentially slowing progress in key sectors. For instance, India’s ambitious infrastructure push (e.g., National Infrastructure Pipeline) and social welfare programs could face funding constraints if external borrowing is deemed unsustainable under rigid criteria.

Climate Financing Challenges: India is highly vulnerable to climate risks (e.g., floods, heatwaves, and droughts) and has committed to net-zero emissions by 2070. The paper suggests that the current framework may undervalue the need for climate-related investments, limiting India’s access to concessional finance for renewable energy, disaster resilience, or green infrastructure. This could force India to rely on costlier domestic or private financing, increasing fiscal pressure.

Risk of Debt Distress Misclassification: India’s public debt-to-GDP ratio was around 89% in 2023-24 (per IMF data), higher than many LMICs, but its economy has shown resilience with 6-7% annual GDP growth. An overly conservative debt assessment could mislabel India as high-risk, leading to restrictive lending terms or pressure for fiscal consolidation. This could limit India’s ability to borrow for productive investments, despite its strong repayment capacity driven by domestic revenue and foreign exchange reserves (over $600 billion in 2024).

Impact on Sovereign Credit Ratings: India’s sovereign credit rating (e.g., BBB- by S&P) is already constrained by concerns over high public debt and fiscal deficits. If the framework continues to prioritize creditor-focused metrics, India may face higher borrowing costs in international markets, making external debt less affordable. This could push India toward domestic borrowing, which may crowd out private investment and increase interest rates.

Wednesday, May 21, 2025

“Trade” over “War”

After the recent geopolitical escalation between India and Pakistan, the president of the United States (POTUS), Donald J. Trump, has become one of the most hated personalities amongst Indian households. His babbling about facilitating a truce between two neighbors, offering trade deals as incentive, may not have gone well with most Indians; even though the Indian government has officially denied any role of the POTUS and his administration in negotiation with Pakistan. This is perhaps one of the reasons the market discourse has mostly ignored “the strategic economic partnership” signed between U.S. President Donald Trump and Saudi Arabia’s Crown Prince Mohammed bin Salman, last week.

In my view, this renewed strength in the Arab-US relations is very significant, not only for the US economy, but also for a much wider global economic context. Although, it might be speculative on my part, nonetheless I believe that this “strategic economic partnership” deal could potentially result in—

(a) a material reduction in global geopolitical conflicts and yielding some peace dividend to the global economy;

(b) strengthening of the USD, reinforcing its position as the primary global reserve currency;

(d) sustainable reduction in energy inflation, affording good reasons to the US Fed for embarking on a sustained easing path;

(e) normalization of global trade, especially aiding the growth in export-oriented economies like China;

The US-Arab strategic economic partnership

Last week, the U.S. and Saudi Arabia signed a strategic economic partnership that includes a range of deals. The agreement aims at boosting bilateral economic ties. The white house claimed that the deal entails a total investment commitment of $600 billion by Saudi Arabia into the US, encompassing investments in defense, energy, technology, arts, and zoology. Notably, some sources have claimed that the actual new commitments may be closer to $283 billion, since the US$600bn number includes some projects predating the latest agreement.

The deal reflects Saudi Arabia’s interest in diversifying its economy and the U.S. goal of securing foreign investment. A significant part of the agreement is a $142 billion arms deal, including sales of military equipment to Saudi Arabia, strengthening its defense capabilities and U.S.-Saudi security ties.

The stated part of the deal is significant. However, various sources are alluding to the unstated part, which could be transformative. For example,

(i) The BoFA Securities strategist believes that this deal implies that the US is abandoning the original plan to boost its oil production to 3mbpd (from the current 1.7mbpd), as it is influencing OPEC+ “to boost oil output in return for lifting Russia sanctions, military support for OPEC nations (Iran deal a further catalyst)”.

(ii) As per Reuters, Trump has relaxed requirements for Saudi Arabia to normalize relations with Israel as a condition for U.S. support in developing a peaceful nuclear program, signaling a shift in U.S. foreign policy priorities. This could pressurize Israel to stop hostilities against Palestine, ending one of the most brutal conflicts in recent years and paving the way for reconstruction of Gaza and other Palestinian territories.

(iii) Lifting economic and other sanctions on Syria simultaneously with signing this deal, corroborates this shift. Given Trump’s focus on n U.S. economic and strategic interests, it could be reasonably speculated that lifting of Russian sanctions is on the table, as it aligns with these goals, especially securing energy supply chains for the European Union, and preventing the UE, Russia and Arabs from becoming too close to China. Resumption of US-Russia trade could also open new possibilities of a durable ceasefire between Russia and Ukraine.

(iv) Saudi Arabia agreeing to retail petrodollar (pricing its crude in USD terms) implies a consistent demand for the USD, and flows into the US treasuries. This could halt the process of de-dollarization, if not completely reverse it.

To sum up, the latest US-Arab deal removes much uncertainty and adds some hope of a peace dividend accruing to the global economy in the next couple of years. Trump promoting “Trade” over “War” is definitely a good sign for the financial markets in particular.

India is reportedly at an advanced stage of trade negotiation with the Trump administration. Hopefully, this deal would be a balanced one and shall remove the uncertainty hanging over the markets for a couple of months.

Tuesday, May 20, 2025

South Block’s Doctrine, North Block’s Dilemma

South Block’s Doctrine, North Block’s Dilemma

Past four weeks have marked a watershed in the geopolitics of South Asia. A terrorist attack in Pahalgam (J&K, India) on 22^nd April 2025, resulted in the brutal killing of 26 tourists (25 Indian and 1 Nepalese). The terrorists were believed to be from groups actively supported by the Government/Army establishment of Pakistan; and operating from the Pakistan Occupied Jammu & Kashmir (PoJK) and Pakistan.

The Government of India responded to the attack by (i) taking several diplomatic and economic measures against Pakistan over the next couple of weeks, and (ii) targeting terror infrastructure in PoJK and Pakistan, on 7^th may 2025, reportedly killing 70-100 terrorists and their allies. A number of terrorist training camps and hideouts were also destroyed in the targeted precision airstrikes by the Indian Airforce (IAF). The operation was code named “Operation Sindoor”.

Pakistan escalated the conflict by launching artillery and air attacks on civilian areas in the states of J&K and Punjab, killing several civilians. Indian forces retaliated by targeting critical Army and Airforce establishments across Pakistan.

On 10^th May afternoon, the Director Generals of Military Operations (DGMOs) of both sides agreed for a temporary cessation of hostilities. The temporary ceasefire has since been extended thrice on 12^th, 14^th and 18^th May, respectively.

There have been claims and counterclaims of the damage inflicted to each country during this operation. The President of the United States (POTUS) has claimed that he facilitated the “immediate and complete” ceasefire. There are claims of Chinese and Turkish defense experts and equipment actively participating in the conflict from the side of Pakistan. During the conflict, the International Monetary Fund (IMF) approved a US$1.3bn loan to Pakistan, with all members, except India, voting in favor; and India abstaining. This explicit support for Pakistan from several countries is being widely seen as a diplomatic setback for India.

Notwithstanding, subsequent to the ceasefire, Prime Minister Modi has enunciated a “new doctrine” for engagement with Pakistan in future. He categorically stated that any act of Pakistan supported terrorism in India will be treated as an Act of War and accordingly responded by Indian forces; ending the extant policy of retrain.

The situation as of this morning is filled with an uneasy calm. Tension is palpable on both sides of the border and Line of Actual Control in J&K (LoC). This heightened tension raises some critical questions for investors in India, especially related to India’s security, fiscal policy, and economic strategy. Some of the key questions, from an investor’s viewpoint could be listed as below:

Does the latest conflict, and subsequent response from both sides, increase the geopolitical uncertainty in the region materially, requiring India to be in a state of high continuously, notwithstanding the ceasefire declaration?

In my view, post the 22^nd April 2025, the region has regressed into much greater geopolitical uncertainty. India will likely need to maintain heightened vigilance despite the ceasefire. The underlying issues, particularly Pakistan’s alleged support for terrorism, remain unresolved. India’s new anti-terror doctrine suggests an aggressive and alert stance. Continued cross-border violations and Pakistan’s advanced foreign-origin missile and drone capabilities further underscore the need for constant readiness. The Indian government has explicitly stated it remains “fully prepared” and “ever-vigilant,” indicating that the ceasefire does not equate to a relaxation of security measures.

Frequent escalations, aggressive posturing, and targeted invasions may be the new normal at the Indo-Pak border and LoC.

Does the new normal mean material rise in security and defense spending for India?

Yes, increased spending on internal security and defense capabilities is highly likely. India’s response to the Pahalgam attack, including Operation Sindoor, and the need to counter Pakistan’s evolving military capabilities (e.g., Chinese-supplied drones and missiles) suggest a necessity for enhanced defense infrastructure and equipment. India already ranks fifth globally in military spending, with $86.1 billion in 2024, compared to Pakistan’s $10.2 billion. The recent crisis, coupled with ongoing tensions with China, may necessitate aggressive investments in advanced weaponry, border infrastructure, and cybersecurity, especially given the likely multidomain nature of the future conflict (airstrikes, drones, cyber operations). The Indian Air Force’s (IAF) planned mega military exercise post-ceasefire further indicates sustained or increased defense expenditure.

Could additional defense spending materially impact the fiscal balance of India?

Additional defense spending would definitely have an adverse impact on India’s fiscal balance. The fiscal deficit target, currently set at 4.4% of GDP for FY26BE, might witness some upward revision.

It would be challenging for the government to balance increased defense spending with austerity measures in social sector spending and general government spending (salaries are set to rise materially after the pay commission report next year). Also, the trade deals with the UK and the US may also impact revenue adversely in the short term.

In my view, the capex on non-defense infra could be hit negatively, further impacting the growth potential. The interest coverage ratio of the government of India (FY25AE ~2.65x) is already moderate. A further rise in borrowing may make it unsustainable, possibly impacting the sovereign rating.

What measures could be taken to maintain fiscal balance?

In my view, managing a potential increased fiscal deficit will likely involve a mix of additional revenue generation, expenditure rationalization, and borrowing; though the government will aim to avoid excessive borrowing to maintain investor confidence and avoid credit rating downgrades.

The government may consider higher dividends from cash rich Public Sector Undertakings (PSUs). The Finance Ministry has a history of pressing PSUs for surplus capital to meet fiscal targets; though it may constrict their growth capex and hence affect future growth outlook.

Temporary rise in the incidence of tax on higher income taxpayers and luxury consumption through additional war/infra cess may be implemented. Past budgets have used targeted levies, such as a 1-4% infrastructure cess on cars, increased excise duties on aviation fuel (from 8% to 14%), or higher taxes on tobacco products, to raise revenue without broad tax hikes.

A compliance window (Amnesty Scheme) for undeclared income or a new dispute resolution scheme, as proposed in 2016, could also be used to generate additional funds.

Selling stakes in state-run enterprises could provide funds for additional defense funding. However, it may not be easy considering the past experience. Administrative austerity measures (travel restrictions, equipment purchases, etc.) and capex reallocation by prioritizing defense infra over other infra, and seeking external emergency support could be some of the measures the government may consider.

The government may avoid measures that directly burden rural or middle-class voters, focusing instead on high-income groups, luxury goods, or corporate tax tweaks (e.g., rationalizing corporate tax for new manufacturing firms).

Obviously, fiscal balancing would be a tightrope walk for the finance minister, especially with global economic uncertainties like U.S. tariffs looming.

Could defense production companies be asked to cut margins in “national interest”?

In my view, asking defense PSUs to cut margins in the name of national interest is plausible, though complex, proposition. These companies have seen sky-high valuation multiples due to strong order books and defense modernization demands. Historically, the government has influenced PSU pricing or margins during crises, as seen in austerity measures or subsidy pressures on OMCs. A patriotic appeal could be made, especially post-Operation Sindoor, to align these firms with national security goals. However, forcing margin cuts risks eroding investor confidence, as these stocks are very popular with investors. It could also impact their ability to invest in R&D or capacity expansion, critical for long-term defense self-reliance. The government would need to balance this with incentives, like guaranteed orders or export support, to mitigate financial strain. While plausible, this move would face resistance from market participants.

Conclusion

The ceasefire, while a temporary de-escalation, does not address the structural instability of India-Pakistan relations, particularly over Kashmir. India’s assertive posture, coupled with domestic political pressures (elections, welfare commitments), suggests a delicate balancing act. Overcommitting to defense spending could strain fiscal discipline, while populist measures risk long-term economic stability. The government’s reliance on PSU dividends and targeted taxes is plausible but not sustainable without structural reforms. The role of U.S. mediation, though downplayed by India, highlights external influences on domestic policy, which could complicate nationalist narratives.

(PS: The South Block of Raisina Hills in New Delhi houses offices of the Prime Minister and Defense Minister, and External Affairs Ministers). The North Block of Raisina Hills Houses office of the Finance Minister)

Thursday, May 15, 2025

India’s MSME Challenge

Micro, small and medium size enterprises (MSME) have been widely recognized as the core of India’s development plan. MSME are not only critical from their economic importance, but are also drivers of social development. MSMEs generate large employment; help in managing regional imbalances; help in bridging income and wealth inequalities; and most importantly, enable the large enterprises to attain competitive scale and efficiency. MSMEs contribute 30.1% to India’s Gross Value Added and 45.79% to exports (₹12.39 lakh crore in 2024-25).

Unfortunately, in the past 10 years, especially in the wake of demonetization, GST implementation and Covid-19 pandemic, India’s MSME sector has faced serious challenges to growth.

The NITI Aayog in a recent report, “Enhancing Competitiveness of MSMEs in India,” prepared in collaboration with the Institute for Competitiveness, has provided a strategic roadmap to strengthen India’s MSME sector. The report identifies key challenges and proposes reforms across financing, skilling, innovation, and market access, with a focus on textiles, chemicals, automotive, and food processing sectors. The report examines the key challenges faced by the MSME sector in India and makes some good recommendations to overcome these challenges.

Among other things, the report emphasizes the importance of integrating into the global value chains (GVC) for India’s MSMEs. Pertinent to note that India is still a fringe player in GVC, representing only 1.5% of global GVC exports or $241 billion as of 2017, with the largest share, about 10%, heading to the United States.

As per the report, “Integration into GVC refers to the extent to which a nation’s exports are embedded within multi-stage international trade processes. This concept refers to the integration of domestic value added into the exports of other nations, as well as the incorporation of foreign value added into a nation’s exports. The proportion of a nation’s total exports that is comprised of GVC participation provides a quantitative assessment of the extent to which its export sector relies on GVCs. GVC metrics also play a crucial role in assessing the extent to which sectors depend on international manufacturing networks.

GVCs are crucial for engaging with the global market, by concentrating on the development of specialised products and specialising in particular segments of the production chain. Furthermore, GVCs serve as critical facilitators of the international exchange of investment, knowledge, and managerial practices that are in line with global standards, thereby significantly bolstering domestic businesses. Gaining access to these globally recognised best practices offers emerging economies unparalleled prospects for growth and the augmentation of their export capabilities.”

Key Challenges faced by India’s MSMEs:

Financing: Only 19% of MSME credit demand was met by FY21, with an ₹80 lakh crore credit gap due to limited formal loan access and high-risk perception.

Skilling: A significant portion of the workforce lacks formal vocational training, hindering productivity and scalability.

Innovation & Technology: Limited R&D investment, outdated technology, and barriers like poor internet connectivity and high costs impede digital adoption.

Market Access: Low product diversification, weak branding, and inadequate marketing facilities limit competitiveness.

Data Gaps: Inadequate data, especially via the UDYAM portal, hinders policymaking.

“Missing Middle”: A lack of medium-sized enterprises (97.92% micro, 1.89% small, 0.01% medium as of 2023) restricts sector growth.

Recommendations to meet challenges

Financing: Revamp the Credit Guarantee Fund Trust, support NBFCs, and ease state-level subsidy norms.

Skilling: Expand vocational training and address the 3.9% drop in knowledge-based hiring.

Technology & Innovation: Promote AI adoption, subsidize technological upgrades, and invest in Industry 4.0 for textiles and chemicals.

Market Access: Provide export incentives, quality certifications, and digital marketing training, with a focus on northeastern and eastern India.

Policy & Data: Enhance state-level policy awareness, improve data integration (e.g., via PLFS and UDYAM), and engage stakeholders like women-owned enterprises.

The report emphasizes cluster-based development, stronger institutional collaborations, and consistent policy monitoring to integrate MSMEs into global value chains (GVC), fostering sustainable economic growth.

Wednesday, May 14, 2025

Being hopeful is a great thing, but…

A few years ago, I had to make a visit to a local garbage dump site in Delhi. My wife had lost an earring, which she thought could have been dumped there with the daily kitchen waste. The visit was a revelation for me as it introduced me to a significant phenomenon of our society.

A casual discussion with the rag pickers skimming the household garbage to pick pieces of paper, plastic and metal, etc. was quite intriguing. Out of seven people diligently scanning the nauseating dump, some were children under the age of 14, including girls, and many were youth in the age bracket of 19-27. Incidentally, there was a police PCR vehicle standing just 10mtr from the site. The police personnel on petrol duty were blissfully unaware of the laws relating to right to education, child labor, dumping of garbage in open areas etc.

On being asked why they chose to do this menial, risky (health wise) and hideous job, when they have relatively decent options driving an e-rickshaw, working at a nearby auto garage, cleaning cars in nearby housing societies etc., the youth politely answered, “We are doing this job for past 12-15yrs. How could we change it now.”

On prodding further, one of them admitted that many of their peers live on hope that “someday they will find treasure in the garbage”. “More years you put into the job, the greater the chances of you hitting on a treasure”, one girl smirked. Though, the best they could cite of a treasure find was a gold bangle found by one of their seniors several years ago.

The discussion did two things to me: (a) it prompted me to drop the search of the lost earring of my wife, with the hope that it may complete the treasure hunt of some child; and (b) raised numerous pertinent but extremely disturbing questions in my mind. For example—

· After seven decades of independence, we are still struggling to eradicate manual scavenging. Though many NGOs work in this area, so far not many policy makers have been seen speaking about eradicating the practice of manual handling of garbage; particularly, employing minor children for the job. It may take many more decades before this issue is addressed.

· The police force (including traffic police) may not be adequately trained to prevent crimes. They are more focused on detecting and prosecuting criminals rather than taking preventive actions. The system of “no complaint no action” needs to be replaced with proactively protecting peoples’ life, dignity and property.

· If we want to reap the demographic dividend, beyond selling more and more motorcycles, smart phones, and apparels, we need to overhaul our education and training system. The efforts made so far are inadequate and to a large extent misdirected.

You may ask, “why am I narrating this instance after so many years?” Well, I have three important reasons for doing so.

1. I happened to pass the same garbage dump over the last weekend. The only changes I noticed were – (i) the number of scavenging kids and youth has increased; and (ii) police patrol van is now parked about 100mtrs away, since the volume and stink of garbage has increased materially.

2. Recently I had a chance to interact with a group of investors. Their investment behavior sounded uncannily similar to the ragpickers skimming through garbage dumps in the hope of striking gold. Most of them had bought a bunch of poor-quality stocks in the hope of striking a multi-bagger. Their hopes were mostly driven by some reports, primarily circulating on social media, highlighting how some of the stocks had given astronomical returns in the past few years. None of them personally knew an investor who had managed to make 1000% return from a stock or even beaten the index return by more than 10% consistently. Notwithstanding, they keep skimping through the bottom of the stock pyramid.

3. I met a very popular social media influencer at a social event. During our discussion, I raised a question, “why so many Indian middle-class and lower-middle-class people (women, men, kids, youth, middle aged and old) are spending so much time, energy and resources on making (mostly) frivolous, and many times vulgar and obscene, social media posts (reels)?”

The conclusion of a long, and partly heated, discussion was that a large majority of these reel-makers are also very similar to the ragpicker kids and youth in the earlier narration. They do this seemingly unlikeable job in the hope of one of their posts going viral and making them rich overnight. To gain some gold (viral post) they are not only staking their self-esteem, traditional family values, money, time, and energy; but also risking their mental and physical health. After all, they have only heard about the success stories of a few social media influencers; but they are pitifully unaware of the success rate and distressing fate of 99.99% aspirants, who could not strike the gold.

I would like conclude by quoting two dialogues from my most favorite movie – Shawshank Redemption (1994):

“Hope is a dangerous thing. It drives people insane.”

“Hope is a good thing, maybe the best of things, and no good thing ever dies”.

In my view, being hopeful is a great thing, but only after making best efforts in the right direction. Merely hoping, without putting in the required effort, and in the right direction, is a dangerous thing. It can perpetuate cycles of poverty, financial ruin, or emotional distress.

Tuesday, May 13, 2025

Strategy review

The weather has changed suddenly. What was dark and grim on Friday evening, became bright and pleasant on Monday morning.

· India and Pakistan took several steps back from their respective aggressive positions over the weekend. The entire Indian leadership greeted the world on the Birth Anniversary of Lord Buddha, showing commitment to his doctrine of non-violence, tolerance and empathy.

· The Indian Meteorological Department (IMD) assured that the south west monsoon is on track to enter Kerala coast five days before the scheduled date.

· Japanese financial giant Sumitomo Mitsui Banking Corp. announced acquisition of 20% stake in Yes Bank, marking one of the most successful revivals of a troubled entity since acquisition of the government managed deal of Satyam Computers by Tech Mahindra.

· The US and Chinese leaderships agreed on a 90 day pause to the tariff hikes; rationalize tariffs and work on a sustainable terms of trade agenda. USD rallied and a global risk rally ensued.

· The prospects of a Russia and Ukraine peace accord appear to be improving.

Indian equities rallied hard, marking one of the best trading sessions in many months. Benchmark Nifty gained ~3.82%. The IT Services sector (+6.7%) led the rally on the hope of better global demand prospects. Realty (+5.93%), metals (+5.86%), energy (+4.2%) sectors also did very well. Gold prices (-Rs200/gm) eased.

The question in the minds of several market participants this morning could be “will this risk rally continue or will we gradually retrace back to 22500-24500 range?” A contingent question may be, “should investors be deploying fresh funds or take some money off the table using the latest sharp rally in prices?”

In my view, the Monday stock market rally in India could be a function of three factors – (i) Covering of short positions created last week in anticipation of escalation of hostilities between India and Pakistan; (ii) fear of missing out (FOMO) stimulating the sentiments of investors who were sitting on fence for the past few months; and (iii) good technical and speculative positions by traders as the benchmark indices and several stocks break out of their strong resistance zones.

Notwithstanding, I do not find any reason for a change in investment strategy, at this point in time, since no new evidence has emerged about a material change in the geopolitical or macroeconomic conditions. The events that have driven the latest risk rally have been well within the realm of extant forecast, speculations and/or assessment of market participants. The escalation of Indo-Pak hostilities and a swift de-escalation, may have surprised the markets, but it hardly changes the investment thesis of Indian equities.

I continue to believe that the collective wisdom of the market in India has appeared to have assimilated all the known events and anticipated developments regarding the economy and earnings, that could have sustainable impact on the stock prices. A major surprise, like the outbreak of Indo-Pak conflict escalation last week may only cause the market to breach these extremes temporarily.

The markets may continue to cement the cyclical bottom in the 22500-24500 range, for next few months, as additional evidence of earnings recovery and improvement in the macroeconomic conditions emerges. We may also have more clarity on the global economic and geopolitical conditions in this period. A sustained and strong up move could be expected after a firm bottom is established on the basis of the visibility about the future earnings trajectory and macroeconomic growth and stability.

Thursday, May 8, 2025

Are you prepared?

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, May 7, 2025

Private sector capex – the good, the bad and the ugly

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

The good

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

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

The bad

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

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

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

The ugly

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

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

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

Tuesday, May 6, 2025

Uncertainty, instability and unpredictability

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

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

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

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

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

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

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

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

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

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

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

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