Economic Reflections As We Celebrate Our Independence: Free Press Journal 18th August 2025

 

We got our independence in 1947. Interestingly, every block of around 22 years marked a turning point when it came to economic policies. For the first 22 years we followed a mixed economy approach, which was a mishmash of everything where it was felt that the private sector could coexist with the dominant public sector.

We got our independence in 1947. Interestingly, every block of around 22 years marked a turning point when it came to economic policies. For the first 22 years we followed a mixed economy approach, which was a mishmash of everything where it was felt that the private sector could coexist with the dominant public sector. 1969 was a turning point, when we went in for nationalisation, which marked a distinct preference for a socialist set -up. This started with banking but deepened in industry, trade, investment, and consumption. 1991 was another turning point where, under the force of circumstances, we went in for overwhelming reforms that opened up the economy, which changed the way in which we looked at the economic policy. 

Another 22 years later, from 2014 onwards, there was an even more aggressive push for reforms, which further made doing business easier. The big difference was that this came with a human face, as the government used money more effectively to ensure that even the vulnerable sections were taken along with a plethora of schemes, which culminated with the free food scheme for 800m.

Looking ahead, the next 22 years, which will end in 2036, the Indian economy looks set to cross the mark of $10 trillion. This will mean doubling our per capita income and taking us to the last leg of moving towards being a developed nation by 2047, which will happen in the subsequent decade. 

India, today, is still a contradiction. At the upper end, it resembles any developed country. This is manifested by two sets of factors which have grown in scale and quality. The first relates to infrastructure. The thrust given by the centre in particular has brought about a sea change in all segments. The new airports that have come up in both the metro cities and other urban areas are comparable to those in the West, and the pace of spread has been remarkable. In fact, the metro airports would compete for positions in the top 10 in the world in terms of look, size and facilities. Further, the innovations brought about in the railway system have been quite amazing, with high-speed trains plying on several routes, which are again comparable to those in the West. The thrust on highway development has also been significant and, while it is a work in progress given the initial conditions, will continue to be one of the engines to future growth based on investments.

The second relates to consumption. For those who have lived in the seventies and eighties, the transformation has been more than revolutionary. From an era of shortages, the nation has moved over to being surpluses. Prior to 1991, there was rationing of virtually everything, starting from licences to foreign currency to food grains. The rich and the poor had to line up in ration shops to procure food items, as there was not enough in the country. Those who were lucky enough to go overseas would come back even with foreign pencils and erasers for their kids. Today, as we all can see, virtually every foreign brand is visible in the country, with most having set up their facilities through the FDI route or through import channels. 

The contradiction comes out when we see disparity in incomes which, though narrowing, has a system where the rich have become too rich even while the poor have become relatively less poor. There are challenges of unemployment, slums, inequality in health and education and the rural-urban divide. This is typical of any economy in transition and was also seen in East Asian economies and is now visible in Latin America. 

So, what has made India tick? The first is the effort put in by governments successively to bolster growth. While 1991 was a compulsion, 2024 was quite visionary. Here, the reference is to the digital transformation where the UPI has been a major enabler for better delivery of government services. 

Second, the size of the population has made it the most attractive market for any company seeking new markets. Third, a combination of the first two has also made India an attractive destination for foreign investors, which can be seen from the high flows into almost every sector. Fourth, the high growth prospects for the country are another reason for the interest of the portfolio investors, as an economy which has the potential to grow by 7% to 9% on a continuous basis would also mean that India Inc. will be contributing a lot here.

While the economy moves along this high-growth sustainable path, there are certain areas that need to be prioritised in the policy framework. The first is health, where access and cost factors have to be tackled. Second, education has to be given priority because the main challenge is that the creation of a large demography also requires commensurate growth in skillsets. 

The next two are more of challenges as we move along the future path. The spread of technology has two edges. While the IT sector has forged ahead in the last few decades to drive our services exports, we need to have the right blend of technology and manpower in an age when AI has swept across various sectors. The redundancy of human beings in a labour surplus economy is worrisome. 

Last, climate change is something which we have been witnessing enveloping the entire world, with extreme heat conditions being as prevalent as flooding, earthquakes and other natural disasters. Therefore, any focus on growth involved compromising with nature needs to be evaluated, as we have seen the repercussions in India today. 

The path for higher growth and development looks clear, as do the main pillars in the policy framework that need to be looked at all the time. 

Liquidity framework can be fine tuned: Business Line 15th August 2025

 

India’s rating upgrade comes at the right time: Indian Express 15th August 2025

The upgrade of India’s rating to BBB from BBB (-) by S&P is significant for two reasons. First: It was long overdue. On several forums, it has been argued that India deserves a higher rating given its consistent high level performance on all scores before and after the pandemic. Second: The timing is appropriate. It vindicates the view that India is one of the best performing large economies in the world. And this has been the story for the last three to four years.

S&P has evidently reposed faith in India’s performance over the years and believes that while the tariff saga needs to be watched closely, the overall story is more or less in place. The main areas of delight have been the following. First, India’s growth has been stable and the path for the year is well placed. S&P is talking of growth being around 6.8 per cent for the next three years which could look conservative as it is likely to cross 7 per cent during this time period. It buttresses the view that growth will be around 6.5 per cent this year too which is a big test given the tariff trauma. It has been stated that the tariff issue will not be a barrier to growth this year given that growth is propelled by the domestic economy.

Second, fiscal consolidation has been carried out quite aggressively. The fact that there was no large scale largesse during the pandemic has made it easier. More importantly, there has also been a lot of cleaning up which has been done through the delivery of subsidies. Further, the quality of expenditure has been improving with the focus on capex. The impact on infrastructure is visible. This has been done without straining fiscal balances.

Third, inflation has largely been under control which is important as it guarantees stability. Fourth, monetary policy has been streamlined and has effectively navigated the growth-inflation tradeoff. Fifth, the external sector has been an epitome of resilience as seen in the strong balance of payments and the buildup of forex reserves. Interestingly, S&P does not see much threat on the issue on oil imports. While there would some strain in terms of cost, this is something that can be absorbed easily.

The attractiveness of the Indian economy reflected in the FDI and FPI flows. Here decisions are based on hard research and the political and economic dynamics and future outlook are examined threadbare. India has historically been an attractive market among the emerging economies. The final pat came from the inclusion of Indian bonds in global indices such as JP Morgan, and Bloomberg. The upgrade should infuse more foreign flows as often fund houses have limits to trading in countries with differential ratings.

So what does this upgrade means for us?

To begin with, it comes after a relentless intellectual battle the government has waged with the rating agencies for quite some time now. While the one notch upgrade is not big as the outlook is still stable, there is scope for a change to positive before a further upgrade becomes due. Understandably, these ratings are sticky and decisions are taken after considerable deliberation and progress is tracked minutely before any change is made. Therefore, while an upgrade looks likely, it can take another two to three years.

Second, this is something which will always make other rating firms like Moody’s and Fitch reconsider their position on India. While each agency has its own distinct approach, there is a possibility that they would also have an upgrade on the rating table when the issue comes up.

Third, this one notch upgrade will sound well in the market. The Indian government does not borrow in international markets and hence is not affected directly in terms of its debt programme. However, several Indian companies which borrow in the global financial markets can draw a marginal advantage in terms of cost of borrowing. This is so as normally the sovereign rating becomes the base rating for all entities. And finally, considering the noise and controversy over the tariff issue, this does send a positive signal on the strength of the economy.

Going ahead, S&P does see scope for a further upgrade depending on how the fiscal consolidation process works out. One can be confident that this will continue as it has been shown in the last few years that the deficit as well as debt ratios have been the main focus of the government. A similar approach will have to be adopted by state governments as well too to support the overall effort.

Credit policy clears the air: Financial Express 7th August 2025

 Maintaining status quo in the credit policy is significant for several reasons. To begin with, the policy announcement in June did flag that there were limits to which the repo rate could be lowered in order to increase growth. This sent a strong message to the market: rates cannot be lowered just because inflation was coming down. While growth can be revived, there are limits to that. In a way, the change of stance from accommodative to neutral after lowering the repo rate aggressively by 50 basis points (bps) signalled a new wave of thinking in the Monetary Policy Committee (MPC). This was based on the principle of front-loading which would then be given time to work through the system. To complement this approach, the cash reserve ratio was also lowered by 100 bps, albeit from September onwards. It was hence a comprehensive package.

The current policy of status quo sends some messages too. The first is, India’s growth story is still strong at 6.5%. More importantly, the adjustments to forecasts were not really required in the absence of any new information. This means the tariff impact was already factored in June as the US made the announcement in April. Although deferred till August, the tariff of 25% was not different from what was announced earlier. (That, however, got revised with an additional 25% tariff declared by the US on Wednesday). And surely, the Reserve Bank of India (RBI) had indicated that when there is new information on tariffs, revisions could always be made.

The other takeaway is on inflation. The RBI has dropped its inflation forecast to 3.1% from 3.7%. This is quite sharp based on the trajectory of food prices. Hence the forecasts for Q3 are also low at 2.1%. But then, it has been pointed out that inflation will rise to 4.4% in Q4 and 4.9% in Q1 FY27. This is of importance because any change in policy rate, when linked with inflation, has to look at the scenario in future. This is why monetary policy is always said to be forward-looking. This means that if inflation is 2.1% in Q2, with a repo rate of 5.5%, the real repo rate would be 3.4%. However, once we move to Q4, the real rate would be 1.1% and further 0.6% in Q1 FY27. In such a scenario, should the central bank be increasing rates?

Therefore, maintaining status quo can be justified even on the grounds of inflation being low today. Here the policy says more about why inflation is low. It is a pure case of statistical base effects, which means if inflation was high last year then the inflation rate will tend to get depressed this year. The same logic will take it to 4.9% in Q1 FY27 although there may not be any distortion in commodity prices.

Further, the low prices today are mainly on account of prices of food, especially vegetables. Food prices tend to be volatile and they can rise any time when crop supplies falter. Therefore, one should not get carried away by low inflation as a result of falling food prices.

Also, non-fuel non-food inflation numbers have tended to rise and are over 4%. This core inflation will be sticky for some more time as companies are increasing their prices to cover higher costs. This has been seen in education and health, where charges have been increased across the board.

Similarly for consumer products and household goods, there has been a tendency for companies to hold on to costs for an extended period as demand was sluggish. In the last year or so, they have been increasing prices to cover the costs. Thus, in both manufacturing and services there has been a series of increases in prices that had added to core inflation.

The RBI has also cleared the air on liquidity issues, specifying that the current liquidity framework is good enough where the weighted average call rate would be targeted and support provided through variable rate repo and reverse repo auctions.

Here too, the RBI was expected to revise the framework as the tri-party repo market had become more popular. But the committee instituted to analyse it has concluded that the present policy is adequate and there was no need to change the target for now.

So how can one look ahead? Will there be any further rate cuts? Given the present dynamics of inflation and growth, it looks like that if the RBI forecasts hold, there would be no need to tinker with the repo rate for the rest of the year and the terminal rate can be 5.5%. The only trigger can be if growth falters sharply. This is a tough call as it does not look like growth could slip by another 0.1-0.2% in case the tariff issue turns nasty.

As long as growth is in the 6.2-6.5% range, the growth story is unlikely to be seen as under threat. Lower inflation for the year may not matter as of now as what is critical on the price front is the Q4 outlook. This should not change as the future assumptions are unlikely to get altered. Under these circumstances, the most optimistic scenario for industry could be not more than one 25-bps cut possibly in December depending on the prevailing environment.

But the market will look for external signals, which can be the Fed cutting rates, to have a bearing on RBI decisions. The Federal Reserve has been quite recalcitrant to lower rates in the tariff quagmire. But assuming it does from December onwards, the movement in foreign investment funds as well as the currency could be another justification for the RBI to lower rates. While this may not be on the MPC’s radar, the market will use it as an anvil to ask for more.

Tariffs: India could offer exporters a relief package: Mint 6th August 2025

 https://www.pressreader.com/india/mint-chennai/20250806/282192247055043

Book Review | India’s growth dilemmas explored in ‘A World in Flux’: Financial Express 3rd August 2025

 

A World in Flux, edited by AK Bhattacharya and Amita Batra, compiles expert essays on India’s economic priorities in a volatile world. Covering trade, monetary policy, agriculture, and globalisation, the book offers clear, data-driven guidance for policymakers and readers alike.

A World in Flux is a book of essays written by various experts in the economic field and put together by AK Bhattacharya and Amita Batra. As the title suggests, these essays are all about what should be India’s priorities in a world in a state of flux, especially post-Covid where there have been several political developments. The latest shock of tariffs, which affects potentially all countries, is not covered here as it is very recent, but other issues such as the world moving towards protectionism, climate change and economic policies required to move forward are included.

The book is also in honour of Shankar Acharya, who was former chief economic adviser with three finance ministers and also worked with the World Bank on the famous World Development Report. All the authors had either worked with Acharya, or developed a long friendship with him over the years. Acharya was also an integral part of designing and implementing the economic reforms package in the country in the Nineties. Almost all the views that have been put forward are aligned with Acharya’s thought process in his time, reflecting some remarkable foresight.

The book covers a variety of subjects such as trade, monetary policy, fiscal issues, agriculture, investment and so on. The essays are very academic and based on detailed data and research, which makes each writing a delight to read. Shorn of jargon and strong in content, the authors provide clarity on the path that should be taken by the government, which will find acceptance with the reader.

Sajjid Chinoy talks of the three imperatives for sustainable growth being the quantity and quality of employment, growth in exports and increasing public revenue and containing fiscal deficits. This is something that will resonate with policy makers. These concerns are very relevant as they succinctly capture the conundrums for India. Jobs have been created but the quality of jobs is not optimum, and do not provide the kind of income to generate demand required for keeping growth ticking. Similarly, the point on exports is also spoken of by Martin Wolf, who strongly puts forth the argument that no country can grow without exports being one of the engines. Therefore, taking the stance that India is a domestic economy that insulates us from global disturbances works to an extent but is not tenable if we are talking of high sustained growth in the years to come. In fact, this may be the right time to leverage the China plus one situation where India can step in and seize the opportunity.

Michael Patra’s essay on monetary policy challenges is another excellent piece written by someone who has been part of the process of implementing inflation targeting policy for many years. He shows how different our approach was compared with other countries in a time of crisis. First, liquidity easing was temporary which meant that rolling back was never a challenge as it was gently brought to normal. This is unlike other central banks which are still grappling with the issue of rolling back on quantitative easing used post-Lehman. Second, he also points out that by not lowering the policy rate to the levels done in the West (we had stopped at 4%), it was again easier to move up the ladder to a normal level. More importantly, he highlights how there is effective collaboration between the government and the central bank, making policy implementation smoother.

From Agriculture to Global Trade: A Wide-Angle View

AK Bhattacharya’s essay is quite direct in its critique of reforms. He captures all major reforms since 1991 till contemporary times, but highlights the importance of taking states along when it comes to furthering them. This can be contrasted with Patra’s view on the government and RBI being aligned which made policy formulation successful. The initial reforms are easier to implement, but when it comes to ticklish issues like farm laws or even land reforms, a majority government at the Centre still has to work with states to get them through. This is a major lesson learnt that has to be kept in mind. He also talks of success of the GST, attributing it mainly to the collaborative rather than unilateral approach of the government.

In a similar vein, Mahendra Dev writes on priorities for agriculture and argues for better coordination between the Centre and states, given that this field in the purview of the latter. While the nation has done well in terms of output, we do need reforms to improve total factor productivity with aggressive reforms in marketing. Subsidies can only help in the short run, but agriculture cannot sustain in this manner. Here he emphasises the greater use of technology, as well as investment, to elevate the overall quality of this sector. He goes a step further and recommends that MSP be replaced with direct benefit transfers so that there is better alignment with the market forces.

There are interesting essays by Radhika Kapoor on SMEs and their contribution to economic growth given the fact that they are highly labour-intensive. Rakesh Mohan writes on urbanisation and the challenges that lie here, especially in the area of how cities have to manage climate change. This is something that we can relate to as we see constant flooding in some of the metro cities as well as pollution in the capital.

At the global level, Ajay Chhibber discusses the relevance and role of multilateral institutions that were set up under Bretton Woods, while Shyam Saran picks up the issue of participating in China-led financial initiatives, given that it has made progress, though limited, when it comes to creating a parallel payments system in the regional context. At a broader level, Amita Batra talks of how the WTO stands with limited progress being made, as bilateral contracts have caught on along with preferential trade agreements among countries.

This book has an eclectic mix of both global and domestic subjects and offers the right blend of thoughts in a globalised setting that have to be considered when charting out the path of growth for the Indian economy. This will surely be a book on every policy maker’s shelf.

Donald Trump’s Tariff Strike: How Potent Is It For India? Free Press Journal 2nd August 2025

 The apprehension over the possible new tariff rate to be imposed by the USA on our imports had created quite a bit of turbulence in the markets. The rupee had fallen since July 28, as had the stock market, as they turned jittery over the prospects. The announcement did finally come on the 30^th, with the US announcing a 25% tariff on Indian goods with an additional penalty for dealing with Russia. The latter has not yet been specified and would be open as of now. What does all this mean for us?

The 25% tariff rate is marginally lower than the 26% rate announced in April, and it should be remembered that there has been no deal with the USA as of the present. Where deals have been signed, as with the EU, the UK, and Japan, the rates have come down to the 10-15% range. It does look like that when the Indian government is able to strike a deal with the USA, this rate could also come down to a similar range. However, for the present, the 25% rate would hold.

The USA is our major export partner, accounting for between 15% and 20% of the total export, and hence, any change in the demand matrix will affect them. This is more so considering that Indonesia, Vietnam, and Korea have gotten away with lower rates of 19-20%. The question will be as to how our exporters respond to this challenge if the competing country is able to sell cheaper because of the cost factor. There will, hence, be some rebalancing to be done where exporters lower their costs or share the tariff burden by absorbing a part to retain the market share. At the aggregate level, a fall of 10-15% in exports to the USA can affect the GDP growth by around 0.2%. This may not be very significant, given that the economy is to grow by 6.5%, according to the RBI.

The challenge will be at the industry level, especially so as the SMEs get caught in the web. This holds for pearls and precious stones, engineering, garments, leather products, etc. There is uncertainty on the rate for electronics and pharma, but these two industries are also dependent to a certain extent on the USA. These industries need to look at alternative markets too to ensure that the potential loss of the US market is compensated. Therefore, the micro effects would be significant, while the macro picture would not really be affected much. This is so, as India is basically a domestically orientated economy. While it is true that economies that grew at high rates have always done so on the back of exports, the lacunae for us has helped in this situation.

The stock market has been affected for sure, as the indices started lower on Thursday. However, as has been seen in the past, there would be a correction soon in a couple of trading sessions once there is calm on the tariff front. There could be more announcements coming for other countries, which can keep the market jittery. But it should revert to normal once this blows over.

As tariffs for all countries would be above the threshold of 10%, intuitively it can be seen that inflation will inch upwards in the USA, given that it is the largest importer of goods. This being the case, there is a case for the Fed to turn even more hawkish. Hence, the possibility of rate cuts has come down as the Fed will be cautious, given the high potential of inflation rising. This also means that bond yields would be at a higher level that will turn foreign investment towards the USA. This will not be good news for emerging markets, as there can be a deflection of funds.

This entire tariff structure, coupled with the Fed holding on to rates for longer, would mean that the dollar will get stronger, which has already been witnessed. This, in turn, will pressurise other currencies, which tend to depreciate. This is where the game begins, as almost all countries will be happy to see this deprecation. These new varying tariffs would affect the competitiveness of all countries as they look at their nearest competitors. In this game, a depreciation will be welcome, as it will provide the price advantage as companies can cut their prices in the American market.

Hence, this new trade order will turn the focus on the RBI, which has to be more active in the forex market and take a call to ensure there is a balance between the depreciation of the rupee that is warranted with volatility, which can be self-fulfilling.

Finally, the threat of additional tariffs for having deals with Russia needs to be put in perspective. India now imports a good quantity of around 35% of oil requirements from Russia. When the price had escalated to $120-140/barrel in 2022, we were able to procure at a lower rate, which helped to balance our external account. However, as the international price of crude has stabilised in the region of $60-70/barrel, while Russia still maintains its position as supplier of the crude, the discounts have come down. In fact, at times oil from Iraq is cheaper than that from Russia. Therefore, even if there is some rebalancing of oil procurement, the overall impact on the oil import bill may not be that significant.

On the whole, the new tariff policy of the USA towards India would be a minor disruption. The macro picture would remain largely unaffected, though industries affected would have to strategise. The bond market has been unaffected, though the rupee will be volatile for some more time. Stocks should correct soon once this shock is digested. The government is working on a deal with the USA, which, when struck, should blunt this impact appreciably.