Do it yourself

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.

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.

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.

Continuing from yesterday…(see here)

As I mentioned that the old narratives of the Smoot-Hawley Tariff Act (Tariff protection for domestic businesses), New Deal (Fiscal profligacy to stimulate economy) and Plaza Accord (fiscal and monetary manipulation by government/central banks to balance trade) do not fit the current circumstances, given the vastly different context. The efforts to fit the current U.S. President’s economic actions (and promises) related to trade, tariffs, and fiscal policy into historical molds, don’t align with today’s reality, and may be an exercise in futility.

For example, consider the following:

·         In 1930, global trade was 5% of U.S. GDP, and the world economy was already in freefall post-1929 crash. In 2025, trade is a larger share of GDP (e.g., ~25% for the U.S.), but global supply chains are far more integrated, making outright trade wars costlier and less likely. Modern trade agreements (e.g., USMCA, WTO) and digital economies add complexities that were not present in 1930.

Smoot-Hawley’s tariffs were sweeping and indiscriminate (40–60% increase across the board). Current U.S. tariff proposals (e.g., 10–30% on imports, higher on China) are targeted; negotiable; and used more as leverage rather than permanent barriers. Retaliation risks exist (e.g., EU or China tariffs), but multilateral frameworks mitigate escalation.

The 1930s lacked modern central bank tools like QE or quicker rate adjustments. In 2025, central banks globally can counteract trade shocks swiftly; unlike the gold-standard-constrained 1930s.

Critics overstate Smoot-Hawley’s relevance, projecting a worst-case scenario without acknowledging 2025’s resilience (e.g., diversified U.S. economy and tech dominance). The analogy ignores that tariffs today are often diplomatic tools, not ideological commitments, unlike Smoot-Hawley’s protectionist zeal.

·         The New Deal addressed 25% unemployment and a collapsed banking system. In 2025, U.S. unemployment is low (4–5%), and banks are stable, though inflation and debt ($36T) pose challenges. The urgency for New Deal-scale intervention is absent.

The New Deal was a comprehensive overhaul of the extant system. Adherence to Keynesian theory was at core of the New Deal. Trump’s infrastructure spending may echo WPA projects, but without the New Deal’s social safety net expansion or unified vision. Besides, current policies are often stalled by partisan gridlock or judicial review, unlike Roosevelt’s legislative dominance.

The New Deal’s trade liberalization (1934 Act) countered Smoot-Hawley’s damage. In 2025, trade policy is biased towards protectionism, not liberalization; and global allies are skeptical of the US leadership, unlike the 1930s’ pre-WWII alignment.

·         In 1985, the G5 shared aligned interests (Cold War unity, Japan’s deference). In 2025, the Sino-US rivalry, EU autonomy, and BRICS expansion (e.g., India’s growing role) complicate cooperation. A coordinated currency intervention (like in Plaza Accord) is unlikely given China’s managed yuan and the US political volatility.

The Plaza Accord used currency markets, not tariffs or fiscal policy. Current US actions emphasize more on tariffs and sanctions, not multilateral agreements, reflecting unilateralism over 1985’s teamwork.

The Accord strengthened the US’s exports but sparked Japan’s asset bubble and a lost decade. In 2025, similar interventions risk unintended consequences (e.g., inflation from a weaker dollar), but global economic fragmentation reduces the Accord’s replicability.

G-5 has now been replaced with G-20, which is not necessarily aligned with the US on trade or geopolitical issues.

·         Unlike 1930 or 1985, today digital economies (e.g., AI, e-commerce) and global supply chains dominate trade. A 1930 like trade war would disrupt tech flows (e.g., semiconductors), not just goods, with broader fallout. Similarly, a New Deal’s public works may be much less transformative today when remote work and AI are reshaping labor markets.

·         Current US political polarization and debt levels materially constrain a New Deal-scale ambition, while cultural shifts (e.g., distrust in institutions) differ from 1930s’ unity or 1985’s optimism.

In my view, rather than forcing old frameworks in the current crisis, it would be more useful if the US policymakers craft a “new solution” suitable to 2025 conditions. The new solution may, for example, include:

·         Fair taxes on trade: Tax goods from some countries but let allies like India sell clothes or spices without extra costs. This keeps prices low for Indian shops and helps American workers.

·         Green projects: Build solar panels, electric car batteries and chargers, like new roads in the 1930s, to create jobs and fight climate change.

·         Global teamwork: Create a new group with India, China, and others to agree on development of a neutral digital currency for international trade settlements; framework for global digital payments, like a global UPI, as an alternative to SWIFT, so no one country controls everything. These ideas can help the US to grow together with its trade partners, without repeating past mistakes.

These are just a few of the suggestions. A pragmatic approach, rather than adopting whimsical and jingoistic measures to achieve MAGA goals, will lead all down, including the US.

Also read

Straitjacketing a crisis-1

Do you recall Jack Braganza from the popular Hindi movie Bobby (1973)? The affable patriarch wore his marriage suit while visiting the house of Raj, his daughter Bobby’s lover, to discuss their marriage proposal. The suit would not fit him after so many years, but that was perhaps all he had in the name of formal attire.

In the movie, this scene created a comic sense. However, in real life it is not uncommon in millions of lower middle-class Indian families. The men use their wedding attire for decades, before they get a new one made, usually for their children’s marriages.

The narratives that are being built around, arguably, a blunderous act of the incumbent president of the United States (POTUS), reminded me of this movie scene. Experts are trying to use an old jacket to fit the current scenario, based on their personal perceptions and linkages. Some people, harshly critical of the POTUS, have tried to fit the 1930 trade war triggered by the Smoot-Hawley Tariff Act in 1930 – that would plunge the world into a crisis. Some POTUS followers are comparing it with the 1933 & 1938 New Deal – that would help rebuilding America. Yet some others are terming this as a fresh version of the Plaza Accord (1985) – that will usher a new era of global cooperation, progress and American dominance.

In my view, 2025 is an extremely different world from 1930, 1938 or 1985. None of these old jackets may fit the current situation. History is definitely not repeating itself. It may be rhyming to the limited extent

1929-30 – Trade war, Smoot-Hawley Tariff Act in 1930

The US government chose to protect the domestic economy from the adverse impacts of economic crisis building in Europe by undertaking protectionist measures. The Smoot-Hawley Tariff Act, was passed in 1930, to raise import duties by ~20% on over 20000 items. The motive was to protect American farmers and businesses from the global competition and boost domestic manufacturing employment.

The Smoot-Hawley Act led to a significant decline in international trade as 25 countries retaliated with higher tariffs. For example, Canada imposed tariffs on 16 U.S. products, covering 30% of U.S. exports to Canada. U.S. imports fell 66% ($4.4B in 1929 to $1.5B in 1933), exports dropped 61% ($5.4B to $2.1B), and global trade declined 66% (1929–1934). U.S. GDP fell from $103.1B (1929) to $55.6B (1933); unemployment rose from 8% (1930) to 25% (1933).

The Smoot-Hawley Act was widely regarded as a policy blunder, which along with the monetary policy blunder of raising rates during a visible slow down, exacerbated deflationary pressures, leading the world into one of the worst economic depressions ever witnessed.

Another fallout of this tariff was that Senator Smoot and Congressman Hawley (authors of the Act) lost their respective seats in 1932; Republicans faced a historic Senate swing. The Reciprocal Trade Agreements Act (1934) shifted tariff authority to the president, reducing protectionism. Incidentally the incumbent POTUS has used the same authority to start the latest tariff war.

1933-1939 - New Deal, Keynesian government

After a resounding victory in 1932 elections, President Franklin D. Roosevelt offered a deal that would provide immediate relief to the people, especially unemployed and poor and stimulate economic growth through public spending and industrial/agricultural reforms. The deal comprised the five main elements-

1.    Civilian Conservation Corps (CCC) and Federal Emergency Relief Administration (FERA) provided jobs and direct aid.

2.    National Industrial Recovery Act (NIRA) and Agricultural Adjustment Act (AAA) regulated production and prices to stabilize industries and farms.

3.    Glass-Steagall Act (banking regulation), Securities Act (stock market oversight), and Social Security Act (pensions/unemployment insurance) to reform financial and capital markets.

4.    Public Works Administration (PWA) and Works Progress Administration (WPA) funded roads, dams, and schools, employing millions.

5.    Dilution of Smoot-Hawley tariffs, to empower the president to negotiate bilateral trade deals, boosting exports.

The reforms initiated under the New Deal reduced unemployment from 25% (1933) to 14% (1937), though full recovery awaited World War II. GDP grew steadily (e.g., 10.8% in 1934). Public works created lasting infrastructure (e.g., Hoover Dam). However, the increased reliance on deficit spending and regulation sparked intense debates about government overreach. Besides, some programs (e.g., NIRA) were struck down as unconstitutional, and recovery was uneven. Some critics argued that the New Deal prolonged the Depression by distorting markets.

1985 – Plaza Accord, trade corrections, sanctifying active market management

On 22nd September of 1985, the representatives from the now defunct G-5 met at Plaza Hotel, New York to discuss one of the most remarkable currency manipulation plans. On that afternoon, the US, France, Germany, UK, and Japan signed the Plaza Accord to weaken the US dollar to help the US reduce its burgeoning trade deficit.

As part of the accord, the US agreed to cut its fiscal deficit materially; while Germany and Japan consented to boost their domestic demand by cutting taxes. All parties agreed to actively “manage” their currency markets to “correct” their current account imbalances.

In backdrop to the Plaza Accord, the US Dollar had appreciated about 48% during 1980-1985, primarily induced by the sharp hikes in the policy rates by the US Federal Reserve, led by the Paul Volcker; pressurizing the US manufacturing by making (i) imports from Japan and Germany more competitive and (ii) exports to other countries less competitive. This was the time when US manufacturing giants like IBM and Caterpillar were facing severe stress and lobbying the US Congress for relief.

The US Dollar (USD) depreciated 40-50% against Japanese Yen (JPY) and German Mark (DEM) in the two years following the Plaza Accord. The plan worked with limited success but not without material collateral damage. The US-Japan trade sustained as Japanese automobile and electronic products continued to overwhelm the US consumers. US-Germany trade imbalance corrected materially. A stronger JPY, in addition to the monetary policy blunders of the Bank of Japan (BoJ), however resulted in severe deflationary conditions in the Japanese economy, resulting in the famous “lost decade”.

The Black Monday (19th October 1987) crash of the stock markets over exposed several faults lines in the Plaza Accord.

Conclusion:

Smoot-Hawley was protectionist, prioritizing domestic interests at global expense, and failed miserably pushing the global economy into a deep abyss. The New Deal blended interventionism with trade liberalization. It had limited economic success but introduced several structural anomalies, like wider and deeper regulatory overreach. The Plaza Accord sanctified active market intervention by the government and monetary authorities. It had some short-term success, but long-term impacts have been mostly negative, especially on the German and Japanese economies.

In my view, the current global landscape is fundamentally different from the 1930, 1938 and 1985. Comparing the latest tariff war to push the Make America Great Again (MAGA) campaign to any of the historical precedents would be a futile oversimplification.

…to continue tomorrow 

Not long ago, history used to be mostly an academic subject. The educated elite wrote, studied, analyzed, discussed, debated, formed, and altered history as per the available scientific evidence, their perceptions and affiliations. Their perceptions were perhaps deeply influenced by the political narrative and economic concerns of the times.

The first three weeks of the FY26 have been rather dramatic for the stock markets. By the end of FY25, the benchmark Nifty 50 was down ~10% from its previous high level recorded in September 2024. Foreign investors were selling persistently. News flow from any quarter was not particularly encouraging. Investors’ sentiment was sagging. Market volumes had plunged over 30% from their 2024 highs. The rate of SIP discontinuation had increased materially, with March 2025 recording net negative addition to operative SIPs. Social media timelines of active market participants were filled with despondency.

FY26 started with the declaration of trade war by the US. Markets that were already reeling under pressure plunged further, with the benchmark Nifty 50 falling another 9% in the first five trading sessions of FY26. Anecdotal evidence suggests that many traders and small investors capitulated and liquidated their positions. Several others churned their portfolios to move to defensive sectors like FMCG, Pharma etc.

In a dramatic turnaround, Nifty 50 has gained over 9% from the lows of 7^th April 2025, erasing all the losses YTD2025. This is perhaps the most hated market rally since 2009. The participation has been poor. In fact, several investors/traders have used the rally to raise more cash.

In my view, the market continues to be in the process of forming a strong bottom and beginning a strong rally. It is early to conclude that a firm bottom is in place and a sustainable market rally is imminent. Nonetheless, the recent market behavior provides significant evidence to conclude that (i) fall from September 2024 was beginning of a bear market cycle (see here); (ii) bottoming process has accelerated with the April first week sharp correction; and (iii) contours of the new bull market have already started to take shape.

In particular, I would like to highlight the following trends to in support of my conclusion:

·         A clear leadership appears emerging, with private banks (+13% vs Nifty 50 +3% YTD2025) clearly leading the up move.

·         The up move is led by large cap stocks. Small cap (-9% YTD2025) and Midcap (-5% YTD2025) lagging behind in a typical early cycle trend.

·         Besides size wise category, sector wise - IT Services (21% YTD2025), Realty (-17% YTD2025), Pharma (-9% YTD2025), Auto (-4% YTD2025) – laggards are also prominent; usually a sign of market cycle transition.

·         A sizable number of market participants are still not confident about the sustainability of market rally; implying fear still dominates greed.

·         Implied volatility has remained low to moderate, except for a brief surge earlier this month.

·         Stock prices of capital market related businesses have recovered fast, indicating that the market participants are confident about the prospects of market activity levels picking up in the short to medium term.

I would also like to take this opportunity to mention the following ancient Hindu tradition, which I find most relevant to the investment strategy of household investors.

Hindu religious traditions mandate that a grand feast must be organized by all Hindus within 3 weeks of the death of their parents, spouse or children. In this grand feast Priests, Dogs, Crows and the poor are served with delicious food. Priests and the poor are also given clothes, gold, cash and other gifts.

Also, as per the ancient Hindu traditions, all Hindus are obligated to serve priests and feed crows during waning moon fortnight (Krishna Paksha) of lunar month of Bhadrapada. It is widely believed that serving priests and feeding crows in this fortnight pleases souls of the ancestors, and redeems the person performing this ritual from the debt of ancestors. I am not competent enough to comment about the traditions of other religions and cultures, but I am sure similar traditions are practiced by the followers of other religions also.

The lesson for investors in this tradition is that "the feast" (gains from investment) will occur regardless of you. In case you want to enjoy the feast (gains), you need to survive (stay invested) till the market cycle turns; otherwise, the priests (savvy investors and traders) will savor the feast at your expense.

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Bull fatigue or bear charge

Swings may get incrementally shorter

Prepare for the spring

The rate of Consumer Price Inflation (CPI) in India dropped to 3.34% in the month of March; below the lower bound (4%) of the regulator’s (RBI) target band of 4% to 6%. It is definitely a significant development insofar as the monetary policy consideration, macroeconomic stability, and consumer confidence are concerned.

If this trend sustains, it would pave the path for further easing in the monetary policy; improve the fiscal outlook; improve the outlook for debt and currency markets; aid corporate profitability and encourage fresh investment flows. In this sense, it is certainly good news for the investors in Indian financial markets in the near-term.

However, in my view, a low inflation rate does not help a large section of the Indian population much. A low inflation rate only implies a slower rise in the price level as compared to the prices in the base period. It offers no relief to the people who are already finding the existing prices of the essential goods and services unaffordable. A slower rise, not matched by a similar rise in wage level, just makes the living conditions even more challenging.

Apples at Rs300/kg and Mangoes @Rs180/kg are unaffordable for many middle-class households, even though their annual inflation rate may be close to zero.

Over the past two decades, nominal wage growth has often lagged or barely matched CPI inflation, especially for informal and unskilled workers. This has led to stagnant or declining real wages, exacerbating affordability challenges.

This trend, juxtaposed with poor new job creation, implies a further squeeze on the struggling middle class of India. The growth rate of private consumption, which constitutes approximately 60% of India’s GDP, will decelerate. Household savings which have cushioned the fiscal balance since independence, will erode even faster. A significant section of middle-class households may slither into a debt trap. Investment rate will deteriorate. The economy will get stuck in a vicious cycle of poor savings rate-low investment rate-lower economic growth-lower household income growth-poor savings rate.

Wage dynamics in India

As per the latest Annual Report (2023-24) of the periodic Labour Force Survey (PLFS):

·         Labour Force Participation Rate (Ratio of workers employed and willing to work to the total population) in India is ~46%. The worker population ratio (WPR) is slightly lower at ~43%.

·         Of the total Worker population (WP), 58% workers are self-employed (39% work on their own account and 19% family members helping these own account workers). Only 22% of WP is employed in a regular salaried job. ~20% of WP is casual workers.

·         Regular wage workers (22% of WP) earn on average Rs700/day wage. Self employed workers earn on an average Rs463/day wage. Casual workers earn on an average Rs433/day wage.

·         About 90% of WP is employed in the informal sector, with mostly undefined social security and poor job guarantee.

·         Job creation has been a persistent challenge. The PLFS data shows unemployment rates hovering around 6–8% from 2017–2023, with youth unemployment (15–29 years) exceeding 15%. Formal job growth has been sluggish, with only ~10% of the workforce in organized sectors. The IT and services sectors, traditional middle-class job engines, face slowdowns due to automation and global competition.

·         In the past decade or so, wages of the regular salaried employees have risen at 3.7% CAGR; while casual and self-employed have experienced 2-3% CAGR in their earnings. CPI index in the 2013-2025 period has risen at 5.5% CAGR. The affordability quotient of middle classes has obviously diminished.

It is pertinent to note that “Nominal wages grew faster (6–10%) in the 2000s due to MGNREGA and economic growth but slowed to 2–4% post-2015, lagging inflation.

Implications of diminishing affordability quotient

The combination of stagnant real wages and poor job creation has put a squeeze on middle-class disposable income, reducing their ability to consume and save. This is particularly acute for the lower middle class, who lack the financial cushion of wealthier households.

·         Private Final Consumption Expenditure (PFCE) accounts for ~60% of India’s GDP. PFCE registered a growth rate of 6–7% in the 2000s and early 2010s. In the past five years PFCE growth rate has slowed to 4–5% due to economic shocks like demonetization, GST implementation, and the COVID-19 pandemic. Recent trends are indicating a recovery in consumption, with PFCE growth projected at 5–6% for FY25, driven by rural demand and government transfers. However, urban middle-class consumption continues to remain subdued.

Stagnant real incomes and high absolute prices (e.g., food, fuel, education) have adversely affected the discretionary consumption (e.g., durable goods, travel) of households. For example, automobile sales, a proxy for middle-class spending, grew only 2–3% annually post-COVID, reflecting affordability challenges.

·         Household savings have been quintessential to India’s fiscal stability, financing investment, fiscal deficit and cushioning the current account deficit. Gross household savings averaged 20–25% of GDP in the 2000s but have since declined to 17–19%. Financial savings (e.g., bank deposits, mutual funds) have fallen from 10–12% of GDP in the early 2010s to ~7% in 2022–2023.

A sustained decline in household savings reduces the pool of domestic capital available for investment, increasing reliance on foreign inflows or government borrowing. This is straining India’s fiscal balance and public investment. Erosion of savings is also making middle-class households vulnerable to economic shocks.

·         Household debt in India has risen steadily, from ~10% of GDP in the early 2000s to 40% by 2023. Retail loans (e.g., housing, personal, credit card debt) grew at 15–20% annually post-2015, far outpacing income growth. Middle-class households are increasingly relying on debt for housing, education, and consumption (e.g., EMIs for durables).

If real incomes stagnate and job creation lags, households may struggle to service debt, especially with rising interest rates. A debt trap would further erode savings, reduce consumption, and increase financial instability, as households divert income to debt repayment. This could also strain the banking sector, reducing credit availability for investment.

·         Gross Fixed Capital Formation (GFCF), a measure of investment, averaged 30–32% of GDP in the 2000s and has fallen below 30% by 2024. In particular, corporate capex has remained slow, despite a variety of government incentives. Declining household savings has on one hand reduced the available domestic capital pool for investment; while on the other hand poor demand growth visibility is also discouraging new capacity building in many areas.

·         Declining household savings has adversely affected bank deposits, constraining credit for small and medium enterprises (SMEs), a key investment driver. RBI data shows SME credit growth slowing to 10–12% from a high of 18-20%.

Conclusion

While low CPI is welcome, it does not address affordability issues. It is critical to not lose focus on managing the price situation and improve the affordability quotient of households. The urgency of implementing structural reforms cannot be emphasized more at this point in time.

Massive efforts and pragmatism are needed in the areas of agricultural productivity enhancements, education & skilling of workers, improving women workforce participation rate, making education, housing and healthcare costs affordable for households. A strong wage indexation mechanism could also help improve the affordability quotient. 

Continuing from yesterday…Mr. Bond no longer a superstar