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Wednesday, October 8, 2025

Lessons from 1998

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

Economic reforms and growth acceleration

Immediate impact

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

Long-Term effects

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

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

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

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

Defense and space self-reliance

Immediate impact

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

Long-term effects

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

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

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

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

Energy security and infrastructure

Immediate Impact

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

Long-term effects

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

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

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

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

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

Geopolitical repositioning

Immediate impact

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

Long-term effects

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

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

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

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

Social and political impacts

Immediate impact

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

Long-term effects

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

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

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

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

Broader implications and lessons

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

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

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

Relevance to 2025 Context

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

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

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

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

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

…to continue tomorrow 2025: Roadmap for policy imperatives

Tuesday, October 7, 2025

Do not squander the opportunity

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

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

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

The Trump shock: what changed

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

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

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

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

Lessons from 1998: Turning sanctions into strength

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

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

(More on lessons from 1998 tomrrow)

Why this is an opportunity, not just a setback

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

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

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

· Build resilience

· Accelerate reforms

· Position itself as an important global manufacturing and innovation hub

…to continue tomorrow Lessons from 1998

Wednesday, October 1, 2025

1HFY26 – India shackled

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

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

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

India performance – 1HFY26

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, September 30, 2025

State of India’s unorganized (unincorporated) Sector

The unincorporated sector, popularly referred to as the unorganized or informal sector, – comprising millions of small manufacturers, traders, and service providers – is indubitably the backbone of India’s economy. While informal in structure, it is deeply formal in impact: generating livelihoods, fostering entrepreneurship, and contributing significantly to the country’s GDP.

Recently, the National Statistics Office (NSO) has begun releasing quarterly data on this sector through QBUSE, marking a big step toward more frequent and reliable tracking.

The following is a summary of the data for the first two quarters of the year 2025. The data survey highlights that despite the challenges of formalization, productivity, and sustainability, the sector is expanding. Informal enterprises are growing with rising employment, steady digital adoption, and a strong rural push, and are continuing to be a silent driver of growth.

Key points

· The unincorporated sector is now creating more than 13 crore jobs – a vital cushion in India’s labour market.

· Rural rise signals that livelihood opportunities are expanding beyond agriculture.

· The digitization push, though slow, is steady.

Scale and spread

Enterprises: The number of establishments rose to 7.94 crore in Apr–Jun 2025 from 7.34 crore units in FY24, a steady increase of ~8%.

Employment: The sector employment number crossed the 130 million mark, for the first time ever in 4QFY25. Though the number may have slightly decreased to 129 million in 1QFY26, it is much stronger than the previous annual estimate of just above 120 million.

Who runs these enterprises?

Ownership structure: Nearly 95% of informal enterprises are proprietary or partnership firms.

Market-oriented: Almost 99.5% of informal enterprises operate as market establishments, selling goods or services at economic prices.

Employment generation

These enterprises are becoming an important source of generating employment for other workers. In 1QFY26, 13% of these enterprises employed hired workers.

· Working owners account for 58–60% of total workforce employed in the informal sector, while hired workers made 24% in Q1FY26.

· Unpaid family members and others constituted 5% of the workforce in the informal sector.

· Female participation in the informal sector is growing rapidly. Women not contribute over 28% of the total workforce in this sector.

Sectoral Trends – manufacturing, trade, services

Other Services led the way, contributing the largest share of both enterprises and workers, followed by Trade and then Manufacturing.

· Trade units had the highest share of hired-worker establishments.

· Proprietorships dominate across all three categories, though services show slightly more diversity.

· Workforce composition shows services as the most employment-intensive, with both hired and owner-driven activity rising in this sector.

Digitization and formalization

Registrations: About 35–36% of the informal enterprises are now registered under some authority.

Internet use: Rising steadily, with 36% of informal units using online methods in 1QFY26. This reflects gradual digital adoption even in the informal economy.

Rural vs Urban picture

Rural establishments rose to 4.28 crore in 1QFY26 (appx 54% of the total), highlighting material rise in non-agriculture activities in rural areas. Accordingly, the rural workforce in the informal sector also increased to 6.25 crore, reinforcing the growing role of unincorporated enterprises outside cities.

Thursday, September 25, 2025

Time to take out your umbrellas

A consistent rise in global equity prices, not accompanied by a matching earnings growth, has raised concerns about the sustainability of current valuations. In particular, the tech sector valuations in US technology have raised alarms. Several reports have highlighted that the market conditions and investors’ sentiments bear a stark resemblance to the dotcom exuberance (1999-2000) period, and as such markets may have already crossed the fairness redline and moved over to the realm of bubble.

In this context, I would like to draw readers’ attention towards two particular reports that I find representative of the analysis advising caution.

“Dotcom on Steroids” by GQG Partners.

First report, titled “Dotcom on Steroids” has been published by GQG Partners, USA. This report draws parallels between the current AI-driven tech boom and the dotcom bubble of the late 1990s, warning of similar risks ahead. The report postulates-

“Today's market, particularly in the tech sector, exhibits dotcom-era overvaluation, with lofty multiples, slower earnings growth, and a weaker macroeconomic backdrop, in our view

We believe today's technology sector no longer represents forward-looking quality due to decelerating revenue growth, collapsing free cash flow, and increasing competition.”

The S&P 500 today trades at 23x TMF EPS—nearly the same as in 2000, but with slower growth (10% vs. ~18% without any stimulus then). Most tech stocks already trade at 1999-like multiples, unlike 1999’s budget surplus, the U.S. now faces fiscal deficits, weakening the backdrop.

The key points analyzed in these reports are as follows:

Rising Capital Intensity

Big Tech’s capex now consumes 50–70% of EBITDA (similar to past telecom and energy bubbles). This undermines the old thesis of tech as “hyper-scalable” with minimal investment.

· Microsoft in 1999: traded at 60x earnings with 35% revenue growth, but took 15 years to recover from the crash.

· Cisco: once the largest company during the internet bubble, driven by over-optimistic growth projections—similar to Nvidia today.

· Today’s valuations (Nvidia, Palantir, ServiceNow) resemble bubble-era extremes.

Penetration driven growth hitting peak

“Most of today's Al capital expenditures are funded by advertising revenue. Digital advertising now accounts for more than 70% of all advertising, so the penetration-driven growth story could be approaching its peak. Morgan Stanley expects the US digital ad industry to grow at a 9% compound annual growth rate (CAGR) from 2025 to 2030-less than half of its 20% CAGR between 2014 to 2019.”

· Heavy dependence on AI-related capex funded by cyclical advertisement revenues makes growth fragile.

· Analysts fear AI giants may be this generation’s “Nifty Fifty”—dominant but overpriced.

Competition landscape changing

During the 2010s, big tech was dominated by monopolies, e.g., Amazon dominated e-commerce, and Google dominated search. This not valid today. All big companies directly compete against each other in the same space. Cloud market is a good example of the deteriorating competitive landscape. This was once a stable three-player market: Microsoft, Amazon, and Alphabet. However, a disruptive fourth player (Oracle) just entered in a big way and is explicitly undercutting peers on pricing by 40%. Adding to the shakeup, CoreWeave-a financially constrained fifth player with an arguably more cutting-edge product-has announced its intention to aggressively gain market share through pricing pressure.

Big tech is now incumbent not disrupter

In the 2010s, big tech were the disruptors. Today, big tech is the incumbent, while Al is emerging as a highly disruptive force. AI winners would be known only a decade or more later, just like the internet era winner (Meta, Google) was declared several years after the bubble burst.

Conclusion: Tech is no longer uniquely superior in growth; risks of poor investment outcomes are high if bought at inflated prices.

Voltage too high, be cautious, Ambit Capital

Second report titled, “Voltage too high, be cautious”, by Ambit Capital, India, cautions that near term growth in the electrification of India theme are more than priced in, but the mid-term risks like risks (slowing demand, BESS substitution, subsidy phase-outs, rising global competition) are not yet considered. It argues that better opportunities may exist outside the tech sector with lower risk and similar returns.

· Post-Covid electrification boom (driven by transmission & distribution demand) created supply-demand gaps and high margins for equipment makers. But these conditions are peaking. Risks are rising beyond FY28 as growth slows, competition intensifies, and margins normalize.

Demand–Supply Outlook

· HV transmission equipment is currently undersupplied, but heavy capacity expansions (transformers, switchgear) will narrow the gap in 2–3 years.

· National Electricity Plan (NEP) targets show >30% decline in installations in FY27–32 vs FY22–27.

· Battery Energy Storage Systems (BESS) will reduce the need for fresh transmission infra post-2028.

· Private capex remains muted (capacity utilisation ~75%).

· PGCIL capex plan accelerates till FY28, then flattens.

Execution Risks

· Land and regulatory delays already caused FY26 targets to be cut.

· Order growth likely to peak in FY26–27, then plateau.

Policy Risks

· Gradual removal of ISTS waivers (inter-state transmission subsidies) will raise RE project costs and reduce transmission demand.

· Shift toward intra-state RE sourcing could hit long-distance transmission growth.

Competitive Landscape

· Local subsidiaries of MNCs like ABB, Siemens, Siemens Energy gained share recently, but global majors (Schneider, WEG, Nidec, Eaton, Delta) are scaling up aggressively. Schneider, in particular, is expanding 2.5–3x capacity in India.

· Export contribution shrinking for most domestic players.

Margins & Returns

· Margins peaked in FY24; price growth moderating.

· RoCE expected to decline.

· Multiples corrected from Sept/Oct 2024 but still downside risks persist.

These two are only representative reports. I find several such cautionary reports on the rising (and unsustainable) high valuations, slowing growth, rising household (retail) exposure to these high valuation stocks and sectors, elevated macro concerns and explosive geopolitical conditions.

As has been the case on every previous occasion, most market participants appear to be believing that they still have some distance to cover before this bubble burst, and they will be able to “exit’ well in time – regardless of the fact that it has never happened in the past.

In my view, the US market bubble is within striking distance of the needle. Obviously, every market in the world will feel the tremor, whenever the US tech bubble bursts. India may be no exception. However, India is much better placed this time compared to 2000, because the Indian markets have been underperforming the global markets for the past one year, FII holdings is now at lowest level since the global financial crisis, speculative activities have reduced materially due to consistent regulatory intervention, Indian markets have insignificant exposure to high-tech sectors like AI, Cloud, semi-conductors etc., and a large part of Indian markets is still reasonably valued (though not cheap).

More on strategy for the Indian markets, next week.

Wednesday, September 24, 2025

Dark clouds gathering on the horizon – 2

Continuing from yesterday...(see here)

Rising uncertainties

In the past one year, global economic uncertainties have intensified, contributing to a marked slowdown in growth projections—from around 3.2% in 2024 to 2.3–3.0% in 2025—amid persistent disruptions that have eroded investor confidence and trade flows. This volatility stems from a confluence of interconnected factors, including policy unpredictability, deteriorating fiscal positions worldwide, and escalating geopolitical tensions, which collectively amplify risks of financial instability and reduced productivity.

Economic policy uncertainty

Economic policy uncertainty (EPU) in the US has surged to levels roughly double its long-term average since 2008, exacerbated by the 2024 presidential election and subsequent shifts toward looser regulation, tax cuts, and aggressive tariffs. These US-centric changes have spiked trade policy uncertainty to record highs in early 2025, prompting front-loaded imports and market volatility, while hindering global investment as firms adopt a "wait-and-see" stance.

Globally, this unpredictability—compounded by inflation divergence and abrupt financial tightening—has led to capital outflows from emerging markets and a broader erosion of business confidence.

Worsening fiscal imbalances globally

Fiscal strains have deepened across both advanced and developing economies, driven by post-pandemic debt accumulation, demographic pressures from aging populations, and reduced fiscal buffers amid tepid growth.

In the US, expected fiscal expansion alongside tariffs has fueled concerns over sustainability, while in emerging markets, declining export revenues and aid flows heighten debt distress risks. Least developed countries face particular vulnerability, with growth slowing to 4.1% in 2025 and fiscal space shrinking due to high interest rates and social unrest from cost-of-living crises. These imbalances threaten medium-term growth, necessitating urgent buffer rebuilding and structural reforms.

Widening Geopolitical Conflicts

Ongoing conflicts in Ukraine, the Middle East, and heightened US-China tensions have fragmented global supply chains, elevated energy and food prices, and introduced unpredictable shocks, ranking state-based armed conflict as the third-highest global risk for 2025.

Geopolitical risks, including cyber espionage, have spiked, disrupting trade (projected to halve to 1.6% growth in 2025), and adding risk premiums to commodities. This fragmentation fosters rival economic blocs, reduces supply capacity, and amplifies inflation, with escalation scenarios potentially driving oil prices 30% above baselines.

Overall, these dynamics signal a shift toward a more shock-prone, low-growth world, underscoring the need for multilateral cooperation to mitigate downside risks and foster resilience. Which unfortunately is not happening. In fact, recent events have highlighted that the global leadership might be progressing in the reverse direction.

The following are some of the noteworthy events giving rise to global uncertainties: Saudi Arab-Pakistan strategic agreement, Israel attacking targets in Qatar; the US demanding possession of Bagram airbase in Afghanistan; Russian jets and drones transgressing into neighboring countries; the US intensifying sanctions on India (penal tariff of 25%, extraordinary fee on H1B petitions; threat to leave Chabahar port in Iran); Iran and threatening other trade partners with sanctions over buying Russian oil; widespread civil unrest in several European countries against immigration policies

Conclusion

· Uncertainty remains elevated globally, though there is some modest easing in financial / macro uncertainty, but not enough to suggest a return to stable, low-uncertainty conditions.

· Inflation expectations are creeping up in the short to medium term, especially over 5-year horizons, though not exploding. Uncertainty about inflation is somewhat contained short-term but more diffuse long term.

· Fiscal deficits (especially in the US) are large and projected to remain so; that is feeding into risk premia and possibly inflation expectations.

· Market interest rates are sensitive to fiscal imbalance: higher debt projections / deficit forecasts are already pushing up yields / forward rates somewhat.

· Global asset prices might be diverging, a little too far, from the economic realities, and therefore, remain susceptible to a sudden and sharp correction.