Do it yourself

Tuesday, September 23, 2025

Dark clouds gathering on the horizon

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.

Thursday, September 18, 2025

DXY vs USDINR

Since the beginning of the year 2025, the exchange rate of India Rupee (INR) has fallen against the currencies of most of our major partners. Though, USDINR (INR vs USD) is the most keenly watched exchange rate (since a majority of our forex reserves, external debt and external trades are USD denominated), INR has depreciated most against EURO (EUR). The extent of depreciation against Japanese Yen (JPY), Chinese Yuan and British Pound (GBP) is mostly similar.

Notwithstanding the views of the finance minister that “INR is not weakening, but the other currencies are appreciating”, the INR depreciation is a matter of concern to a large majority of Indian investors. Since we are traditionally a current account negative economy, on the net basis, INR depreciation adversely affects the economic fundamentals. Besides, eroding the confidence in the economy, —

· INR depreciation makes many things expensive for the Indian households – appliances, toys, lights, clothes, footwear, medicine, communication, travel, studies abroad, gold, silver, etc.

· A sharp depreciation discourages foreign investors from investing in INR assets.

· The cost of debt servicing rises for the corporates which have taken debt in foreign currencies, impacting the profitability adversely.

On the positive side, it helps the exporters (textiles, IT services, pharmaceuticals, automobile, etc.). In fact, as per various estimates, INR depreciation has overall positive impact on the Nifty50 earnings, as several large companies derive a substantial part of their revenue from export of goods and services. On a lighter note, INR strength might help household budgets of investors, but might not be good for the health of their equity portfolios.

DXY vs USDINR

One question that I am frequently asked, why the exchange rate of INR vs USD (USDINR) is depreciating, while the USD (DXY – a trade weighted index for USD) itself is depreciating?

In my view, it is not a fair comparison. USDINR is a bilateral exchange rate between the USD and INR. Whereas, the US dollar index (DXY) represents a trade weighted exchange rate of the USD against six major currencies, viz., EUR, JPY, GBP, CHF, CAD, and SEK.

Moreover, If USD falls -5% vs EUR/JPY, but INR falls -7% vs USD, then effectively INR is even weaker than USD → hence USDINR still rises.

It may also be pertinent to note that while the trade with the US forms almost one fourth of India's total external trade, India accounts for just 3% of the Us external trade. Hence, comparing USDINR with DXY might not be a good idea.

Why INR is relatively weaker

The rupee isn’t just about the dollar’s global strength — it reflects India’s external balance, capital flows, oil dependency, and RBI policy. So even if the USD is weakening broadly, INR can still depreciate if India-specific pressures are stronger.

Oil prices & trade deficit: India imports ~85% of its crude oil. Higher oil prices mean more dollar demand → rupee pressure.

Capital outflows: If foreign investors pull money from Indian equities or bonds, they convert INR to USD. Even modest outflows can weaken the rupee.

Interest rate differentials: If the Fed is cutting slower than RBI or US yields remain higher, the USD stays attractive for investors vs INR.

Safe-haven flows: During global uncertainty, funds flow into USD and US Treasuries, even if the dollar index is down — EM currencies including INR often suffer.

RBI intervention strategy: Sometimes the RBI allows gradual depreciation to maintain export competitiveness and conserve reserves.

Wednesday, September 17, 2025

Investors’ dilemma - 2

Continuing from yesterday… (see here)

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, September 16, 2025

Investors’ dilemma

The behavior of Global markets has always been perplexing for the participants. The past 8-9 months have been no different in that sense. Stock prices, commodities, cryptos, bonds, and precious metals have all moved higher; in many cases without a fundamental case for such an upmove.

Investors who typically manage their risk through diversification, hedging and alignment of their portfolios with economic fundamentals and corporate earnings, usually underperform in this kind of market and have reasons to be disappointed. Some of them, who usually invest on borrowed conviction, surrender to the fear of missing out (FOMO) and indulge in unnecessary churning of their portfolios resulting in violation of their standard asset allocation, and accumulation of momentum assets at high prices, only to regret later.

Traders, on the other hand, ought to love this kind of markets, when most asset classes are moving in one direction, with low implied volatility. Theoretically, in the current state of markets, traders would be limited only by their upfront margin they could afford to put for taking trading positions.

However, this does not appear to be the case, at least in case of Indian investors and traders. Anecdotal evidence suggests, several investors who yielded to FOMO have taken unplanned exposure in international equities, precious metals, and small cap stocks. Traders have also either lost money or made less than par returns due to high realized volatility (though implied volatility remains close to lowest ever levels), erratic sector churning, frequent large move at the market opening (gap up or gap down), and multidimensional news flow, often cancelling each other, e.g., strong GDP number and penal tariff by the US.

Incrementally deteriorating economic conditions, worsening fiscal profiles, elevated stress on financial system, provocative geopolitical shenanigans, worsening demographics, debasement of major currencies, and rising civil unrest and violence in most part of the word, do not augur well for the risk assets (e.g., equities), commodities, and bonds (especially treasuries).

Adding to the persisting geopolitical tensions, anti-immigration protests are taking violent turn in many of the European countries, besides Australia, and the US. A Gen Z coup in Nepal has added a new dimension to the civil unrest by introducing a new template for revolution/anarchy.

Traditional and strong alliances like the US and European Union and the US and Japan, are showing distinct signs of weakening. The probability of a paradigm shift in the global balance of power is becoming even stronger, by the day.

Under the given circumstances, assets totally unrelated to economic conditions and neutral to geopolitical jurisdictions, especially gold and crypto, should ideally be the safe haven refuge. Accordingly, neutral safe havens (gold and crypto) have done exceedingly well YTD2025.

Investor’s dilemma

· Allocation to these apparently safe haven assets, like gold and bitcoin, could not be meaningfully high (say more than 10-15%), in tandem with assets like equities and bonds. At best these can be used as partial hedge, till the issues bothering the global economy and markets get settled. At the end these assets derive value purely from wide acceptance, and not from any intrinsic economic value of their own. This acceptance can diminish in due course, as the global issues driving safe haven demand get settled. It has been the case many times in the past.

· These assets are still priced in USD terms, a benchmark which is under a serious threat itself, and a primary reason for the investors to take refuge in these safe haven assets.

· The equities of countries like Germany and South Korea, which are struggling to avoid recession and facing domestic political crises, are the best performing equities YTD2025. How do investors manage their portfolios based on economic fundamentals?

· There are indications that the US equities (especially tech sector) and private credit may be flirting with the boundaries of the bubble/sub-prime realm. Under these circumstances, a prudent view would be to expect a sudden crash like 2000 or 2008. How an investor incorporates this view in his/her investment strategy is a challenge.

…to continue

Thursday, September 11, 2025

End of demographic dividend approaching fast

The latest Sample Registration System (SRS) report confirms what has been feared for the past few years – Indian population is peaking and Indians are getting older much ahead of the original estimates.

The birth rate (number of new births in a year per 1000 population) has been declining consistently for the past many years, and the trend has accelerated post Covid (2021). The death rate (number of deaths per year for every 1000 population) has slowed down. In fact, the urban death rate has climbed after Covid. The infant mortality rate (number of new born children dying within a year, per 1000 live births) has improved materially in the past one decade, but still remains much below the global standards. Sex ratio also stays adverse for all larger states/UTs.

India's total fertility rate (average number of children that are born to a woman over her lifetime), or TFR, slipped from 2.1 in 2019 to 1.9 in 2023, below the replacement level (ratio required to keep the population level stable) of 2.1. The decline is sharper in cities, where fertility has fallen to just 1.5, compared with 2.1 in villages in 2023.

Declining birth rate, stagnating death rate, high infant mortality and TFR below replacement ratio, and persistent adverse sex ratio, implies that (i) India’s population would begin to decline much before earlier estimated 2050-2055; (ii) the average population age would begin to rise in the next one decade; and consequently (iii) the much talked about demographic dividend might begin to wane the next few years.

Key highlights of the report are as follows:

· The Birth Rate (BR) at the National level during 2023 was 18.4, a decline of 1.6 points over 2018. The BR in urban areas declined by 1.8 points while in rural areas decline was less at 1.3 points. Among the bigger States/UTs, the maximum BR has been reported in Bihar (25.8) and the minimum in Tamil Nadu (12.0).

· The Death Rate (DR) for the Country was 6.4 in 2023. Among the bigger States/UTs, the maximum DR has been reported for Chhattisgarh (8.3) and the minimum for Delhi (4.5).

· The Infant Mortality Rate (IMR) for India was 25 in 2023, down from 32 in 2018. The corresponding decline in rural IMR has been to the tune of 8 points (36 in 2018 to 28 in 2023) against a decline of 5 points in urban IMR (23 in 2018 to 18 in 2023). This implies that one in every 36 infants in rural areas and one in every 56 infants in urban areas still die within one year of the birth.

Among the bigger States/UTs, the maximum IMR was observed in Chhattisgarh, Madhya Pradesh and Uttar Pradesh (37) and the minimum in Kerala (5). For comparison, China has an IMR of 5, Germany 3, Bangladesh 24, Cambodia 20, Congo 28, Iraq 21, and Pakistan 50. The global average for IMR is 27.

· Sex ratio (Female per 1000 male) in the country stood at 917 in 2023. Amongst the larger states, Chhattisgarh and Kerala have reported the highest Sex Ratio at Birth at 974 and 971 respectively, while Uttarakhand has the lowest (868). Sex Ratio at Birth for Rural and Urban areas was 914 and 925 respectively.

· The life expectancy at birth for India has been estimated at 70.3 years for the period 2019-23, an increase of 0.4 years from 2018-22. The life expectancy at birth varies from 64.6 in Chhattisgarh to 75.1 in Kerala. The life expectancy at birth is 69.1 years in rural areas and 73.1 years in urban areas for 2019-23. The life expectancy has increased by 0.5 years for rural and by 0.2 years in urban areas as compared to 2018-22

· The Total Fertility Rate (TFR) for the Country stood at 1.9 in 2023. Bihar reported the highest TFR at 2.8, while Delhi recorded the lowest at 1.2. States like Tamil Nadu (1.3), West Bengal (1.3), Kerala (1.5), Punjab (1.5), Himachal Pradesh (1.6), Maharashtra (1.4), Andhra Pradesh (1.5), Jammu & Kashmir (1.5), Karnataka (1.5), Telangana (1.5), Odisha (1.7), Uttarakhand (1.7), Gujarat (1.8), Haryana (1.9), Assam (2.0) recorded TFR below replacement rate of 2.1.

At present, a rural woman (having a TFR of 2.1) at the National level would have about one child more than an urban woman (having a TFR of 1.5), on average.

Wednesday, September 10, 2025

…and the big one

Continuing from yesterday (Two short stories, and a big one)

As a common Indian household, I face three key issues in my daily life. From my discussions with several other common people, and observations during my travels across the country, I understand that I may not be alone in facing these issues. In fact, a large number of common households may be facing similar issues. These issues are –

1. A conspicuous lack of the “service orientation” in our public servants. A large proportion of public servants usually act like entitled feudal lords and treat the common people as their underprivileged subjects. Even where a public servant is not extracting a fee (bribe) for his/her services, he/she ensures that the recipient of service feels deeply obliged to get, which was his/her right in the first place. The elected representatives put on hoarding (many times at public expense) to thank themselves for basic services done by civic authorities (like cleaning a choked drain, repairing potholes etc.), as if they have done some task extraordinaire. There is inexplicable contempt for accountability, transparency, and empathy – traditionally considered quintessential for any public service institution.

2. Constant struggle in daily life, notwithstanding the convenience of 10-minute delivery and cashless payments (UPI). Poor roads; encroached pavements; garbage littered around; traffic jams; parking challenges; road rage by aggressive but untrained drivers; poor civic service standards; inadequate public health and education infrastructure; total disregard for public safety, especially women and children; stray animals; lack of empathy in the fellow citizens; overburdened and complex justice delivery system – virtually much of the things that affect the daily life of a common household are either wrong or inadequate.

3. Constant or diminishing living standards. Real wages for a large majority of common households are either stagnant or diminishing. Notwithstanding the low CPI inflation numbers flashed on media screens frequently, the lifestyle inflation for common households is much higher. The average real wage growth in India during the past decade has been almost zero or negative. Consequently, the living standards of these households are either stagnant or gradually diminishing. Their houses are getting smaller and weaker. Education and skill quality of their children is deteriorating, making wealth and income disparity more permanent. Average health of a common household is deteriorating, even though the average life expectancy is rising, causing a significant rise in healthcare expenses over lifetime. They are being driven to fraudulent people masquerading as saints or religious preachers, in search of solutions to their routine problems, only to be fleeced. This is damaging the scientific temperament of the society, promoting superstitions and quackery and materially straining household finances as more money is being spent on fake rituals and unnecessary journeys.

Unfortunately, the governments are functioning more like shopkeepers in a flea market. They do not mind fleecing unsuspecting citizens in the name of service charge, toll tax, and other taxes; disregarding whether service standards are congruent with the charges/taxes. Even elections have become like a trade, buying votes for free ration etc.

In my view, this strategy to make the relationship between the government and citizens purely transactional, rather than based on mutual trust and accountability is the biggest problem our country is facing presently. “Unless this trust-contract is rebuilt, India risks remaining a nation where citizens endure services rather than receive them.”

Tuesday, September 9, 2025

Two short stories, and a big one

Fruit salad and helmets

It was summer of 1992. The weathermen had announced the arrival of monsoon, a few days ago; though it had not rained even once. Weather was hot and humid – just the way mosquitoes, houseflies, fungi, and a variety of bacteria & viruses love it. People, especially children, were suffering from infections. The city administration was daily issuing half/full page newspaper advertisements cautioning people against disease outbreak, and guiding them to maintain personal hygiene, stay hydrated and avoid consuming street food, especially cut fruits. Several billboards and posters were also put up across the city.

My office was located on Indraprastha Marg, one of the busiest streets in the city, just opposite an imposing building housing the Delhi Police headquarter (DPHQ).

Around 100 meters away from DPHQ, there was a major bus stop (ITO). Several fruit chat vendors would sell cut fruits & vegetables like watermelon, pineapple, cucumber, coconut, etc. There were also few vendors who would sell helmets for 2-wheeler riders. These helmets were mostly made from cardboard and thermocol, and were completely unfit for their purpose.

I did not witness any police action against these vendors. In fact, often some policemen were also seen buying fruit salad and helmets from these vendors. On being confronted, these policemen would simply escape, saying, “if you have a problem, file a complaint at the police station, and an action will be taken”.

Sometimes municipal raiding parties would come and scare these vendors away. But this was for unauthorized use of pavements; and not for selling bacteria infested fruits or non-standard helmets.

Thirty-three years and thousands of CCTV installations later, I do not think that things in the capital city have changed in any significant manner.

A train journey, not to remember

Last month, it was a rainy morning. I was waiting at Bareilly Junction, for my train to Delhi. The train (Rajdhani Express) was running over half an hour late. For the past 40 minutes, the female announcer at the station was announcing that the train no. xxxxx is arriving at Platform No 2. The live train location tracking apps were showing that the train had stopped just 2km before the railway station, and waiting there for some other train to pass.

While waiting at the platform, wet from a leaking roof, I saw a disheveled man quarreling with a group of passengers. The man appeared hassled and angry. The passengers were apparently poor laborers travelling to their hometown. Since I had nothing to do, and there was no place to sit at the platform where I could read something, I decided to intervene in the quarrel in a typical UP style.

I discovered that the hassled man was a railway contractor. He had recently won a contract to keep the Bareilly Junction railway station clean. He explained in detail how difficult (and expensive) it is to get a railway contract.

The reason for his anguish this morning was that two of the passengers had relieved themselves on the foot-over bridge, instead of the Sulabh Shauchalaya (private toilet) on the station premises. The contractor was fighting with these poor laborers for adding to his work and making him liable for fine, if the inspecting officer finds the excreta on the FoB. I somehow managed to pacify him and offered him a cup of tea and a samosa. What I discovered from my discussion was disturbing, though not unsurprising.

The privately managed toilet at the station was charging Rs20 per person for latrine, much higher than the specified rate. Poor people who travel on train floors, even for long distance journeys (taking 36-60hrs), and have little cash on them, can hardly afford to pay Rs20 for use of the toilet. They (including women) invariably relieve themselves in the open. The contractor says it is impossible to keep the station clean at all times, as per the terms of the contract.

By the time his story was over, my train came, I boarded on it. I had booked my lunch online to be delivered at the next station (Moradabad Jn). The train halts for less than 5 minutes at Moradabad.

As soon as the train entered the station, the delivery boys started jumping at the train, even before it came to a complete halt. Jostling with the passengers who had to get down at Moradabad, the delivery reached me and handed over my lunch box. However, before I could properly hold my food, the boy insisted that I acknowledge the receipt of food at IRCTC website and also give a 5/5 rating for the quality of food. We had just 2 minute to complete the task. IRCTC website would not open. I had no clue about what food has been delivered to me in the box. Nonetheless, I tried my best, but unsuccessfully. The train started moving and the boy had to jump off. Barely 5 minutes had passed, and I got a call from his boss. He insisted “please give me 5/5 rating”, otherwise IRCTC will not release my payment (Rs374). After struggling for 15 minutes, I somehow managed to complete the task. I acknowledged the receipt of food on time, and gave the food 5/5 rating, even though it was not even 2/5.

Since I have been giving 10/10 rating to the authorized service stations where I get my cars services; to the guy who comes for regular RO and AC servicing at my house; and all my bank relationship managers, regardless of their service standards, I did not even think once before giving this caterer 5/5.

Tackling potholes and meet scary musclemen

Last weekend, I traveled to Mohali (Punjab) from Gurgaon, to meet my daughter at her college. All colleges in Punjab were closed for a week due to floods and heavy rain alerts. We took the newly built UER-2 (link road between NH48 and NH44), to reach NH44. Drove on NH44 till Shambhu Border near Ambala, and then took NH 205A to Mohali. On our way to Mohali, we covered a distance of 270 kms and crossed 5 toll gates, paying a total toll tax appx Rs500.

At each toll plaza wait time exceeded one minute. Each toll plaza has deployed ominous looking bouncers; in case you think of complaining about wait time or seek toll waiver as per the NHAI rules.

The worst part however is that most of the expressway was in bad shape. There were potholes at many places. There were diversions to the poorly maintained service lane (apparently for many weeks) as the main carriageway is under repair. There were tractors overloaded with chaff, ominously covering almost two highway lanes. There were e-rickshaw; three wheeled tempos; overloaded motorbikes with riders not wearing helmets; large goods carriers and trailers consistently driving in fast lane and overtaking lanes, blocking cars; and roadways buses driving crazily. On the entire stretch we did not see even one policeman. Driving through NH44 was definitely a forgettable experience. Moreover, there is no chance that things will improve anytime soon.

“As I dodged potholes on NH44, I was reminded of a recent groundbreaking judgment of the Kerala High Court (Re. Shaji J. Kodankadath v. Union of India), establishing a crucial precedent in public infrastructure law. The court ruled that the National Highways Authority of India (NHAI) cannot collect toll fees from road users when highways fail to meet prescribed maintenance standards. This landmark decision suspended toll collection at the Paliyekkara Toll Plaza on NH-544 for four weeks, citing severe traffic congestion, poor road conditions, and NHAI's failure to provide adequate infrastructure services. The judgement has been subsequently confirmed by the Supreme Court of India also.

The judgment ought to represent a paradigm shift in the relationship between infrastructure development authorities and public rights. It must establish beyond any doubt that toll collection must be contingent upon service delivery standards.

NHAI has, however, not taken any action in pursuance of this judgement. No instruction, advice, order, and/or request has been apparently issued to the toll collector to suspend toll collection where the road conditions do not conform to the prescribed standards.

If the government agencies treat the Supreme Court instructions with such contempt, what should be expected of scrupulous elements of the society.

These are just three short stories. But collectively they make for a big picture which depicts the biggest malice in our system.

….to continue tomorrow

Thursday, September 4, 2025

Policy Uncertainty – India’s Biggest Business Risk

One of the biggest hurdles to doing business in India today is not infrastructure, taxation, or talent—it is policy unpredictability.

The Economic Survey 2019 reminded us that India’s own thinkers since ancient times tied prosperity to rule of law (Dandaniti) and protection against arbitrary rule (Matsyanyaya). In modern terms, this means clear rules, consistent enforcement, and contract sanctity. Investors, entrepreneurs, and global partners all look for this.

Yet, over the past decade, India has repeatedly seen sudden policy shocks. These not only create losses for businesses and investors but also erode long-term trust between government and enterprise.

Case Studies of Policy Uncertainty

Maggi Ban (2015)

FSSAI imposed a sudden nationwide ban on Nestlé’s Maggi noodles citing excessive lead/MSG. Months later, the Bombay High Court lifted the ban after independent tests cleared the product.

· Nestlé lost sales and investor confidence.

· The episode became a global case study on India’s regulatory unpredictability.

Demonetization (2016)

The government invalidated 86% of currency in circulation overnight, citing black money, corruption, counterfeit notes, and digitization.

· Micro and small enterprises faced an existential crisis.

· Consumers struggled for months.

· No credible outcome report has been released, and the ruling party no longer highlights this “reform”.

Amaravati Project Rollback (2019)

The new Andhra Pradesh government cancelled ongoing projects, reopened power purchase agreements worth 5.2GW, and lost World Bank/AIIB funding for Amaravati.

· Contractors, lenders, and investors faced huge losses.

· Political risk perception shot up.

· Trust deficit between private capital and state deepened.

Online Gaming Ban (2025)

The government abruptly banned all real-money online gaming under the guise of protecting users from addiction.

· Stakeholders were given no consultation or transition.

· Just a year earlier, the government had legitimized the sector with a 28% GST.

· The move exposed inconsistencies in governance priorities.

Frequent Tax Changes

Ad-hoc changes in taxation of capital gains, buybacks, and dividends have repeatedly disrupted long-term investment planning. Investors call this “taxation by surprise”.

Why This Matters

The Economic Survey 2019 itself warned:

· Policy uncertainty raises systematic risk and cost of capital.

· Higher uncertainty discourages investment due to irreversibility of capital decisions.

· Predictable and consistent policy attracts investors.

Despite this, India continues to score high on unpredictability.

The Bottom Line

India has the scale, demographics, and entrepreneurial energy to attract global capital. But without policy stability and regulatory predictability, much of these potential risks being wasted.

A government that consults, provides forward guidance, and avoids sudden reversals can unlock enormous investor confidence.

Unfortunately, recent history shows that India is still far from that goal.

Wednesday, September 3, 2025

US Tariffs - Imagining the worst case

The US administration has imposed a 25% penal tariff on the goods imported from India, with few exceptions. The reason cited for this penal action is continued import of crude oil from Russia by the Indian refiners, despite the US administration insistence that sales proceeds from such oil sales are being used to finance the Russian war on Ukraine. These tariffs are over and above the MFN tariffs prevalent prior to 7th August 2025, and 25% reciprocal imposed with effect from 07th August.

Considering the exemption for several items that are critical for the US supply chains, e.g., mobile phones, certain metal items, pharma, semiconductors, energy etc., the effective tariff rates on Indian exports to the US are estimated to be ~33%.

India has termed this penal action “unfair, unjustified, unreasonable”. The public stance of the Indian government is that buying Russian oil is critical for our energy security, and it is our prerogative to decide from where to buy.

Considering the current seemingly inflexible stance of both the parties on this issue, it would not be unreasonable to assume that these penal tariffs may stay, at least for a few more months, till a breakthrough in trade talks is achieved. Reportedly, the Indo-US bilateral trade talks are continuing and the negotiators are hopeful that a bilateral trade agreement (BTA) may be achieved in the next few months.

However, assuming the worst case (penal tariffs stay for a longer term than presently estimated), the repercussions could be serious for the Indian economy, in general, and exporters in particular. Some of the consequences of sustained penal tariffs could be listed as follows. Please note that these are based on worst case assumptions and not a base case.

Capital and jobs drain: If the penal tariffs sustain, a large number of SMEs, catering mostly to the US demand, especially in sectors like textile, jewelry, carpet, could think of relocating their manufacturing base (fully or partially) to a more tariff friendly jurisdiction like UAE, Oman, Egypt etc. This would result in material capital outflow and loss of jobs for local workers.

Job losses and labor migration: The loss of business due to lower exports to the US is likely to affect the labor-intensive SME sector the most. Various estimates are suggesting a loss of over one million manufacturing jobs directly. There could be material secondary job losses also as exporters scale down their businesses and workers migrate to their native places. This could adversely impact the already struggling private consumption growth and household savings.

Capital controls: India has traditionally run a trade surplus with the US. Loss of exports to the US market, may erode this surplus, adversely impacting the overall trade balance of India. To manage this widening of trade deficit, the government might consider, like it did in the 2013 BoP crisis, imposing some capital controls like reducing limits under LRS remittance, capital investments (outbound FDI) through automatic route, etc. It may also consider liberalizing rules for FDI in sectors like retail trade, increasing competition for the local businesses.

Uncertainty over pharma and services: As of now, pharmaceuticals and services are not covered by the reciprocal and penal tariffs. These two together form ~45% of total Indian exports to the US. If the two sides are unable to find a solution to the current impasse, the US may consider imposing some tariff or non-tariff barriers on pharma and services also. Though not on the board this morning, in the back of minds it must be bothering many entrepreneurs and investors. Even the global corporations making large investments in setting up GCCs in India, would be mindful of this risk and slowdown their future investment plans.

India+1: Presently, it may not be viable for a lot of American importers to immediately replace Indian imports with other countries. However, to mitigate a long-term risk, American importers might explore developing vendors in other countries, even if it costs a fraction higher. This clouds the long-term prospects of export growth for the Indian vendors, even if the present tariff impasse gets resolved in the next few months.

Wider sanctions: To increase pressure on India, the US administration may enhance the scope of penal tariffs to non-tariff restrictions (effectively sanctions like 1998) to include sale of critical defense components, and technology transfer agreements etc. This may adversely impact, for example, the plans to develop local fighter jets and develop a local semiconductor ecosystem.

Remittances: Sanctions and/or fear of sanctions can materially affect remittances from the US to India. On the positive side, many NRIs can accelerate their remittances to preempt remittance tax, restrictions on remittances to India or freezing of assets on some convoluted pretext (This has already happened with Russians and Iranians). On the negative side, VISA restrictions, cancellation of Green cards and H1Bs etc., may impact remittances adversely to some extent.

Uncertainty for tech workers and students: For the past many years, India has sent the largest number of tech workers and students to the US. Escalation in trade conflict could impact this trend adversely. Moreover, dark clouds of uncertainty may engulf the workers and students already present in the US or planning to travel to the US in near term. There are already reports of several Indian students (present and prospective) suffering from extreme stress and depression.

Rise in Chinese threat: To mitigate the impact of the US tariffs and potential sanctions, the Indian government has already enhanced its engagement with the Chinese government and businesses. Reportedly, India has shown inclination to relax several restrictions on the Chinese businesses, capital and products. This is in spite of the past history of mistrust and deceit, and recent Chinese participation (against India) in Operation Sindoor. A liberal access to the Chinese capital and technology might seriously compromise the security of the country; and potentially create a gulf between the government and defense establishment.

I am definitely not suggesting that the government of India should accede to the unfair and unjust US demands and sign an unfavorable trade agreement. I have just listed some pointers for adjusting investment strategy, should things take a turn for the worst.