Book review | Mumbai: A Million Islands: Financial Express 28th December 2025

 Mumbai is the financial capital of India and probably the biggest attraction for youth looking for a living. But has one stopped to study and observe the city? Delhi as a city has a lot of historical significance, which has been brought into focus extensively through literature and art. But that kind of attention is missing for Mumbai. It is here that Sidharth Bhatia makes a mark with his brilliant book, Mumbai: A Million Islands.

The ‘million islands’ suffix is interesting as this a narrative about various sights in the city. Mumbai is endless in terms of the stories that can be told, and this holds true for its culture as well. The history of the city is not just of a homogenous entity, but that of several islands which shape what the city is today.

Balancing the present with the past, the author gives the reader a feel of both simultaneously as we turn the pages. Several thought-provoking points are made by the author in the book. For instance, he starts off by talking of ‘Mumbai is upgrading’, which is something one sees in the construction work of bridges, coastal roads and metro lines all across the city, something that is a continuous process. These have been pain points for citizens who have borne the brunt for years. There is a distinct tilt towards the rich, the author conveys, as seen by the luxury residential complexes that have come up, or the ostentatious structures in Bandra Kurla Complex.

The author also talks of the evolution of areas dominated by the Muslim community and portrays their fears and inhibitions. Contrary to conventional wisdom, parents in this community want their children to get an English education, hoping for upward mobility. There has been significant ghettoisation because of the community living in the same areas for decades and which looks distinctly underdeveloped compared with other geographies. A major challenge for Muslims is to find accommodation because of the prejudices that have been ingrained among the city as a whole. And this holdsirrespective of one being a commoner or a celebrity. The author talks to people in these communities and there is some recollection of the infamous Mumbai riots, during which they were at the receiving end.

Written in a very conversational form, Bhatia explores Mumbai through chapters dedicated to its various localities. The one on south Mumbai is classic as he delves into how British presence brought about a westernised look. The area of Marine Drive and Colaba carry a lot of history, and the author particularly talks of the architecture of these places. Houses had limited spaces for lobbies and took one directly to the lift unlike what we see today where vanity precedes everything else. There is commonality in the architecture in most buildings constructed at that time which is interesting. In fact, reading the book, the reader is compelled to go to Marine Drive and see for herself this distinct trait. Similarly, when he describes the walls around these buildings as being low and how the buildings ‘talk’ to those on the road reads very poetic.

He also takes us through the historical context of some of the dining places in Mumbai and starts with their foundation in the early twentieth century and their genesis. Liquor was not permitted in those early days and one needed a permit for it. Dress codes were a norm, and these hotels could get risqué with cabarets leaving nothing to imagination.

Bhatia describes his own escapades when talking to developers who are looking to create homes for the ultra-rich, resulting in buildings scaling heights both in terms of structure and price. Several areas in Mumbai now have been converted into major construction sites not just because of the metro but also for re-construction. Yet, something seems unplanned when one looks at how focus has shifted from Nariman Point and Reclamation in south Mumbai to Bandra Kurla Complex, which today is a nightmare for everyone as entry and exit to the place are challenging. Those who depend on public transport struggle to find one, while those with their own vehicles are left frustrated in their quest to park and exit.

There are 11 chapters capturing such images of the city, and while it is evidently not comprehensive, the book does cover most of what was known as Mumbai to begin with. The chapter on ship breaking and slums takes us thorough the property of Mumbai Port Trust and its evolution or neglect. The one on ‘Mills Become Malls’ is a must read for the present generation which is only aware of the high-end premium shops with high snob value and gourmet dining, and which excludes the proletariat through their pricing. These spaces were mostly textile mills with a history. Bhatia takes us through the trade union movement in this context and the story of its annihilation.

The Hidden City’ is the last chapter which will make us think harder. Starting from RK Studios, which was earlier known for glamour, he takes us through an area called Deonar and beyond. There are 124 five-storey buildings in the area that one will not notice. It was never advertised but was constructed by the famous builders like Hiranandani and the Shahs. These were rehabilitation buildings where one resident had just 225 square feet of living space. In the author’s words, which are eloquent and soul searching: “All of these buildings look like a vertical slum, a brutalist creation like council estates elsewhere. Add to it the fact that it is in the back of beyond, and the sense of alienation and exclusion is complete.” This is very hard-hitting considering that all this re-construction is otherwise considered as upgrading the city of Mumbai!

Fiscal boost: What works, spending or tax cuts? Business Line 26th December 2025

 Whether apocryphal or true, it is said economist Arthur Laffer, while dining with some government dignitaries in a café, used a paper napkin to draw a curve which mapped lower taxes to higher growth. This became the famous Laffer Curve in supply side economics; it was believed that lower taxes make people work more which generates higher income and hence growth. Simultaneously, the tax revenue also grows. This approach was part of what became Reaganomics.

While this theory is neat, the willingness to work does not translate into more work being generated as companies do not operate this way. But if one were to look at this theory in a broader sense, lower taxes should help in augmenting spending and hence increase growth as well as taxes. This is the spirit in which the two rather important measures taken by the government on income tax and GST 2.0 can be viewed.

The income tax benefit was to release ₹1 lakh crore of income that is expected to be spent on goods and services. The ₹48,000 crore of revenue foregone by the government on GST on account of rate rationalisation is also expected to create demand as well as raise disposable income during the festival season. Thus, both these measures are growth-enhancing.

How Shakespeare captured this year's economic themes more than 4 centuries .....Mint 24th December 2025

 https://www.livemint.com/opinion/online-views/shakespeare-this-year-2025-economic-themes-trump-tariffs-jerome-powell-rbi-11766407836950.html

Lower repo rate link to lending: Financial Express 23rd December 2025

 

From Shock To Stability: How The World Absorbed The 2025 US Tariff Disruption: Free Press Journal: 22nd December 2025

 

In 2025, the US imposed higher tariffs, disrupting global trade like a once-in-a-lifetime shock. Despite fears of inflation, recession, and export slowdowns, countries negotiated deals with the US, and India stood firm. Inflation remained low, growth exceeded forecasts, and exports stayed resilient, showing that the world economy has largely absorbed the shock.

2025 started off on a shocking note with the economic war being evoked by the US President in the form of tariffs. It is this theme which has cast a shadow on the world economy, warring nations, central banks and governments, as all policies have paid obeisance to this major disruption. This disruption was as potent as Covid and was a once-in-a-lifetime shock, administered by the most powerful nation in the world. 

The president delivered on what he had threatened as higher tariffs were announced in April, which set a base of 10% that was much higher than the average of 3-4% average tariff that was prevalent all this time. This had led to several analyses of how things would pan out at the global as well as domestic levels. The tariffs were invoked from August onwards, and almost 5 months have passed, which makes a reality check relevant. 

First, at a purely theoretical level, one nation imposing tariffs on the rest of the world should have logically led to countervailing tariffs being imposed by the other countries. In classic game theory, such policies are pursued so that there is collaboration subsequently and an optimal solution is reached. However, this was not evident in most cases. Almost all countries went back to the table to strike deals with the USA. This involved lower tariffs for US imports as well as a promise to invest more in America. Hence, Canada, the European Union, England, South Korea, and Japan, among others, had deals. This was a victory for the USA, as it got most trading partners to lower their tariffs on imports. This is not something the WTO was able to do. 

Two countries stood out. The first is India, which has stood its position notwithstanding the additional 25% tariff being imposed. Clearly, we would like to deal with the USA on terms which are not inimical to domestic constituencies like farmers. China, on the other hand, had the muscle to impose countervailing tariffs. They were able to do it because American exporters do rely on China as a major market for their goods. 

Second was the impact of tariffs in the USA. Logically, higher tariffs, which were to average above 10% relative to 3-4% earlier, should have meant higher inflation in the USA. This was the reason why it was largely believed that the Fed would not be cutting rates, notwithstanding the pressure put on by the president. However, the Fed has cut the rates, and there could be another 2 in the offing in the next two years. The supporting factor has been inflation, which is at around 2.9%. This means that the absorption power of the system has been much better than was first imagined. This is one reason why the Fed has been able to cut the rates. This has also led to the dollar weakening instead of strengthening, which was expected when the tariffs were imposed. 

The third fear was recession in the USA. This sentiment was based on two factors. The first is that with the inflation going up, the real purchasing power would be constrained, leading to lower production. Therefore, the fear of higher unemployment was palpable. The second was that with the work visa restrictions being placed by the government, there was a feeling that there would be a paucity of labour, leading to a slowdown in the economy. However, growth is projected to be 1.9% as per the Fed and will only improve in the coming years. Therefore, a slowdown that was expected has not materialised, and the economy is doing reasonably well. The unemployment rate is below the target rate of 4.6%, and, hence, there is no real worry here. 

Fourth, India’s exports were expected to slow down on account of the US market contracting. The US is the largest export market for India, with around 16-18% being directed here. Higher tariffs were to be a negative factor for exporters, as competition from countries like Vietnam, Bangladesh, Sri Lanka, and Thailand would be able to enter the US at a lower price. However, performance of exports in the first 8 months has been marginally higher than last year at 2.7%. But interestingly, in the last 3 months, since the 50% tariff was invoked, export growth has been positive in 2 of the 3 years. This could mean that our exporters have done well to counter this wave of tariffs. Either they have negotiated with the customers in the USA or rerouted their goods through a third country. 

Fifth, with exports being impacted, the effect on the GDP was also to be there, though not very significant. The impact of a 10% drop in exports to the USA would have led to a fall in the export growth by 0.4% or so. However, data on growth in the first two quarters has been impressive, which has also called for a revision in forecasts for the year to upwards of 7%. The RBI has an estimate of 7.3%, while that of the Bank of Baroda is 7.4-7.6%. Clearly the strength of the domestic economy has contributed to the growth in the economy, supported by major affirmative action from the side of the government in the form of GST reforms. In fact, all forecasts that started off in the range of 6-6.5%, when the tariffs were announced, have been revised to 7% plus by December, which does indicate the confidence in the growth story. 

Therefore, it does appear that the world has steered through this new shock quite well, and while there are still talks of some slowdown in 2026, it would probably not be at the global level. It does look like that while countries have lowered their tariff rates, the overall path of growth is still on the path, and this major shock has been more or less absorbed. 

Is the falling rupee a cause for alarm? Panel podcast by Hindu: 12th December 2025

 

Adventure deposits: A banking idea whose time might have come: Mint 10th December 2025

 https://www.pressreader.com/india/mint-hyderabad/20251210/282145002670052

Prices set to rise further as rupee touches the 90 mark: Free Press Journal: 8th December 2025

 

RBI rate cut a surprise, will it spur investment: Mint online 5th December 2025

 https://www.livemint.com/opinion/online-views/rbi-rate-cut-surprise-recent-signals-spur-investment-reserve-bank-of-india-sanjay-malhotra-11764917331958.html

From the horse's mouth: Book Review: Financial Express 1st December 2025

 

To cut or not cut the rep rate: Financial Express 29th November 2025

 

A golden surge that may not hold: Indian Express 29th November 2025

 The paradox of value is a concept taught in the Economics classroom. As per this concept, diamonds, which have little use, are priced high, while water, which is necessary, is cheap. This is due to the marginal utility attached to the product as well as scarcity, which prices them differentially. The same holds for gold, which has witnessed a steep increase in price this year. This poses the question: Will it rise any further?

Let us look at how the price of gold has moved in the last few years. From $1,462/ounce in FY20, it rose gradually to average $1,988 in FY24 and then rose sharply in FY25 to $2,594. For the current year it averages $3,465. But in these seven months or so, it rose from $3,207 in April to $4,053 in October.

The issue is not just one of price and value of investment. Gold has a weight of 1.08 per cent in the consumer price index, which means that the present inflation numbers on the core side (which excludes food and fuel items) are largely up due to it. This can pose a conundrum when setting the repo rate.

The other problem is on the imports side, where the bill has been increasing even though physical consumption has not surged to the same extent. In FY24, India imported 795 tonnes, which came down to 757 tonnes in FY25. For the first seven months of this year, the amount is quite reasonable at 300, though this will increase sharply in November and December, which is the wedding season. Gold now accounts for almost 9 per cent of the total imports of $451 billion in the first seven months of the year.

So why has gold demand gone up? First, since the Ukraine war broke out, the dollar has tended to be volatile. Gold has an inverse relation with the dollar. When the dollar weakens, gold tends to strengthen. Today, the view is that with the US Fed cutting rates, the dollar would only weaken, which is a prop for gold. However, if the Fed is slower on cutting rates, the dollar will remain strong and gold will stabilise.

Second, investors and speculators have used the weaker dollar pillar to take positions in the futures segment, thus pushing up the price. They may not take delivery and square off their positions, but do add to the momentum.

Third, individuals in China and India — the two largest consumers — have been buying gold in expectation of the price increasing further. Demand is for a physical purpose, but adds to the price spiral.

Fourth, ETFs have been a major driver of demand. They mandatorily keep as much as 70-80 per cent of the fund backed in physical gold. This has kept the price ticking.

And last, central banks have been diversifying their forex reserves away from currency to gold to eschew concentration in a specific currency. This is part of the de-dollarisation process.

The tariff shock has been largely absorbed in the global system with several deals being made. The future of the US economy is still uncertain. Rates could remain stable on balance. This means that a sharp upside looks less likely. But can the price dive downwards? One can’t say for sure. However, in the short term, the boom seen in 2025 may not be replicated unless there is another shock.

Planting six ideas for an agri culture : Economic Times: 26th November 2025

 https://m.economictimes.com/opinion/et-commentary/planting-6-ideas-for-an-agri-culture/amp_articleshow/125572378.cms

What can be expected from the credit policy in December? November 25th 2025

 

Why have forecasts gone awry? Businessline 24th November 2025

 

Pros and cons of a big bank push bl-premium-article-image: Businessline 19th November 2025

 The issue of having big banks has come back to the discussion table. The Indian banking system has a unique model where there are differentiated banks serving specific purposes.

Hence besides the commercial banks which are virtual universal banks, there are small finance banks, payments banks, and the cooperative banking system. There are evidently benefits from such a structure.

Case for big banks

With the aura of going global pervading economic thinking there are arguments being made for having big banks. First, there is the reputation issue. Today it has become axiomatic to be at the top — whether it is GDP or banks given the economic power that vests with India in the global space. Therefore, being a part of the top 100 or top 500 is an aspiration, and here size of banks matters. A globally integrated economy necessitates large banks.

Time is ripe for a pollution tax: Financial Express 14th November 2025

 With rationalisation of both direct and indirect tax rates this year, the Budget is betting on higher buoyancy in income to ensure the tax revenue increases. It is also seen that growth in nominal GDP can no longer be assumed to be 11-12%. With deflation in several product segments, nominal growth was less than 10%. At the same time, the expenditure commitments on social welfare as well as capex has increased over time, which cannot be lowered. This may be the right time to explore new avenues of revenue. Besides, there cannot be over-reliance on central bank transfers as such funding tends to amount to monetisation.

Here, a cue could be to introduce a comprehensive pollution tax. The concept is not new, as there are vibrant exchanges which trade in carbon credits. However, the idea here is more Pigouvian in nature—any polluting activity needs to be taxed. Arthur Cecil Pigou was an English economist who espoused the imposition of a tax on any negative externality caused by economic activity. Pollution is a clear case where society in general gets affected. Hence, the concept of tax moves away from the commercial variety of “cap and trade”—here, the idea is to directly tax either the producer or consumer of a product or service which causes pollution.

The idea of such a tax is twofold. First, all entities causing pollution must pay for the same, making it democratic. Second, if the entities which pollute the environment (as producers or consumers) choose not to get into such activities, it will mean lower revenue for the government; however, this will ensure better quality of life for society. For instance, if people switch fully to electric vehicles, the revenue will dip for the government but air quality will improve across the country.

There are different ways of imposing such a tax. The first approach is to tax the polluting industry. A very rudimentary criterion would be to look at the ratio of power and fuel to turnover. While this assumes that the only pollutant is power and fuel, it is still easy to implement. Companies’ profit and loss accounts can serve as the basis for levying tax.

It is also possible to complicate the system and move beyond a single expenditure item. There are classifications of industries under the pollution index—red, orange, and green categories, having scores of 60 and above, 41-59, and 21-40 respectively. The white category is virtually non-polluting with a score of 20 and below.

The corporate tax rate could have an additional surcharge of 5%; or the tax rate could be a flat 32% instead of 30% for industries in the red category. For green, it could remain at 30%, and 31% for orange. There is, however, the issue of classifying companies, as they often produce multiple products.Companies producing 51% of any product would get classified under this heading and taxed accordingly. The norm of 51% could also be changed to 33% to cover those involved in two to three main products. If companies produce multiple, “diversified” products, the sales of the top three products can be summed up.

This levy would be a direct tax and only affect profits and shareholders. It is, hence, a fair charge. A legitimate question could be on the possible allowances for companies involved in activities that improve the environment—common under corporate social responsibility spends. However, any allowance should be avoided as it can lead to tax arbitrage. The idea is to tax the polluting activity—any mitigating factors should not be allowed to be used as an umbrella.

The alternative approach can be through an indirect tax, where the levy is at the consumer end. Here, the end user pays tax on products classified under the three categories. Hence if petrol and diesel are taxed at 1/ litre, the cost is borne by the consumer. There will be an incentive to shift to other forms to escape the tax. The government can earn a lot of revenue on just motor fuel. The1 tax can fetch 15,000 crore annually. Intuitively, any increase can lead to proportionately higher revenues for the government. Further, every air ticket can have a pollution tax that is part of the fare—a100 tax on 200 million passengers annually can fetch `2,000 crore. The only consideration for the government, however, would be the inflation impact.

Balancing inflation with revenue will be the main consideration, and it is not possible to cover all products and services at once. It must be done in phases. The suggestion is to impose the tax selectively on the most polluting products—fuel and power, fashion, livestock, transport, data centres, construction, plastics, and chemicals—with the tax being variable.

Another ideological issue is taxing pollution caused by farming and livestock, given that it falls under the unorganised sector. Exemptions will be required, given the sensitive nature of such products. Hence, in the first phase, the pollution tax could be imposed on specific industries and services that are less controversial and easy to administer.

A pollution tax can be a major alternative revenue stream for the government, and it can be harnessed gradually. It will bring in more consciousness within the society and help reduce overall levels of pollution in future.

The changing face of savings and investment in India: Free Press Journal 10th November 2025

 

In Bihar and beyond, don’t dismiss cash transfers. They serve the general good: Indian Express 10th November 2025

 Cash transfers make headlines during election cycles. The latest to grab attention are those announced for women in various states, normally just before the assembly elections or topped up if the schemes already exist. While some concerns have been voiced, such transfers may not be negative.

Studies show that 12 states are offering such schemes, amounting to around Rs 1.7 lakh crore – 0.5 per cent of GDP. The amounts given can range from Rs 1,000 a month per woman in a family in Chhattisgarh to Rs 2,500 in Jharkhand. Several other states are debating introducing such schemes. Interestingly, larger states such as UP, Gujarat and Rajasthan do not appear to be doing so. There are several positive consequences of “cash and kind” transfers. Remember that the free food scheme has helped to raise several families out of poverty and proves that direct interventions work. The same holds for benefits given to farmers either directly through cash or through subsidies.

Three issues need to be discussed. One, whether such transfers provide direct economic and social benefit. Two, whether they upset fiscal math. And three, the ideology of the role of the state.

These cash transfer schemes cover almost 100 million women. This has led to empowerment as they are less dependent on their spouses. It helps them spend money more meaningfully, which matters in lower-income groups. Schemes like free bus rides have helped increase mobility, easing access to educational and occupational institutions. Schemes which involve distribution of laptops, cycles or sewing machines help in social advancement either through better education or providing avenues for employment. Hence, “cash and kind” transfers are good if directed well. The broader question is whether this process can be sustained when governments spend more on such avenues and less on, say, infrastructure. Here, the Fiscal Responsibility and Budget Management Act ensures fiscal discipline. There are rules in place on how much a state can borrow. The issue is whether such unconditional transfers in cash or kind are better than, say, an infrastructure project, considering that even money transferred adds to spending and growth.

This leads us to the role of the state. It is to ensure fair distribution, and giving cash is a direct way of raising living standards, just like how the free food scheme has benefited society at large. States have been allocating funds for capex, too. But, at times, these have been pruned to meet fiscal targets. This can be considered the cost of keeping the less privileged in a society above the level of deprivation.

Schemes involving unconditional cash transfers do serve the general good. Though, arguably, in the long run, more jobs must be created. There is no substitute for that.

Money saved with banks serve worthy purposes: Why deposits need a break: Mint 6th November 2025

 https://www.livemint.com/opinion/online-views/india-bank-deposit-fd-interest-income-tax-equity-mutual-funds-new-regime-old-regim-11762248036130.html

Why are 10-year bond yields sticky downwards? Businessline 27th October 2025

 

India's economy faces critical tests, results by March 2026 Free Press Journal October 27, 2025

 

Book review: Fixing the system: Financial Express 19th October 2025

 For a person who has been tracking Indian polity and economy for about eight decades, Shashi Budhiraja brings out a rather hard-hitting book on India’s progress, titled The Governance Gap. As the title suggests he points out the gaps in our political and economic systems based on facts and data and devoid of emotion. The political superstructure needs reforms that can come only from within, as people design the systems that they ultimately operate. The economic scenario needs improvement, which can be done provided we get the political ideology right, which is hence a circular puzzle. Yet, he is very optimistic about the future of India.

The book is partly a narrative of developments in various sectors since independence, along with his commentary on them. While these facts are well known, putting them together cogently with deep analysis is what makes Budhiraja’s book stand out.

Let’s start at the beginning. Yes, India has had fair elections since we started our democratic journey, which is something that we can be happy about, given how democracies have tended to wilt at different points of time. However, he points out that over time elections are driven significantly by money power and the majority of those who get elected have high levels of wealth. Moreover, given that up to over 40% of legislators have a criminal background does not bode well for a democracy.

The same degradation gets reflected in the quality of proceedings in both Parliament and state legislatures. Backed by data he shows how the number of sessions have come down, with most of the time spent in heckling one another, thus making meaningful debates impossible. Due to paucity of time it has been pointed out that even serious policies like the Budget have been passed without any discussion. He brings up an imperative point when he says that criminality and corruption are now well permeated in the legislature. This, he points out, holds true for all parties and none have been an exception, which is worrisome.

In the same vein, he highlights the challenges of governance. As criminality and corruption dominate elections, the winning set of parties have to accommodate all winning candidates. This has led to larger jumbo-sized ministries with several ministries being split to keep all parties happy. Coalition politics makes it expedient to do so. Yet, in recent times, he observes that the PMO has become even more important, with several decisions being taken without the ministries concerned being taken into confidence. This has actually meant that while there can be ministries and ministers, the power lies right up at the PMO. He gives examples of major revolutionary policies like the response to Covid or even demonetisation, which were all decided at the highest level. Also, there have also been conflicts in federalism. While the Finance Commission ensures there is distribution of income based on a formula, the process of allocations has been questioned by states as those that do well get fewer funds.

In the same vein he also has spoken of how the judiciary had to get involved even four to five decades back with constitutionally elected governments being dismissed. The problem at the judicial level can be seen by the number of pending cases. The courts are understaffed and vacancies pending for several years, which makes it hard to deliver speedy justice.

Lastly, on the political front, he discusses the touchy subject of reservations. These numbers can go up to 60% in several states. The politics in play is the inclusion of various categories of people under reservations for political gains. This is totally against the ethos of the concept when they were introduced. When we read on this subject almost every year in the media, one can sense the author’s angst as the issue has become fully political in most states, with every party supporting groups from where votes can be garnered.

Quite clearly these cogs need to be removed as India moves towards becoming a developed nation. The author then analyses progress in the economy with a historical perspective. The issues highlighted are agriculture, education, health and workforce. Rather than talking of the achievements in sectors such as manufacturing or services, which most books do, Budhiraja directly focuses on areas that need to be addressed.

India’s progress in agriculture has been remarkable, but in the past few decades it has slipped, with greater dependence on subsidies, resulting in overuse of fertilisers affecting the quality of soil. Clearly, the progress we made at the time of Green Revolution is not sustaining of late, and politics again has focused on issues like subsidies and loan waivers. This has resulted in little incentive at the farmer level to become more productive.

The issues of health and education are also well known and have to be addressed, as this has led to inequality in the country. The author quotes several standard publications to show that there is a lot of work to be done on this front.

While demographic advantage is definitely a strength, we often harp on this without paying attention to skilling the workforce, which starts with education. Mere enrolment does not help and we need to have more teachers and better administration of the curriculum to change the structure.

The fact that the bottom 50% own just 15% of income in the country means that development has missed a large section of the population. While growth at the macro level has been impressive without taking this section along, one can imagine the high potential if there is greater inclusion.

What one can conclude from this book is that India can become better. There has to be more political determination to improve social indicators, which is the route to foster equality. The political superstructure, however, still remains in suspension, and the author says things have not exactly improved over time. Clearly, it is the people that matter and there is need for a larger change to take place.

The Governance Gap: Unlocking India’s Superpower Potential

Shashi Budhiraja 
Edited by 
Rajeev Budhiraja
Rupa Publications

Pp 296, Rs 695

The importance of innovation: Financial Express 14th October 2025

 

he future of growth models will be driven by innovation, and this is both a challenge and an opportunity, as reflected in this year’s economics Nobel winners

The story of Kodak is now well-known to all—how the leader in the business of cameras became outdated. The same story was witnessed in areas such as music, where cassettes gave way to CDs that have now been replaced by the virtual delivery of content. Businesses built on these edifices have closed or had to innovate to remain viable. A similar wave can be seen in the electric vehicle or renewable spaces where the future of a petrol-driven car can be uncertain given how the world is moving. The oil-producing nations are cognisant of these change.

At a more macro level, AI has swarmed all businesses, and everyone is trying to balance its use with the given skill sets. Job losses are being spoken of in hushed tones. This is something which was never envisaged and jobs done by AI—starting from a rudimentary search on the Internet—have changed the way in which business operates. What does all this mean?
The future of growth models will be driven by innovation, and this is both a challenge and an opportunity. This is what Joel Mokyr, Philippe Aghion, and Peter Howitt have studied for decades. Their work on the subject has been rewarded with the Nobel Prize in Economics this year.

The role of innovation in driving economic growth is not new, though its importance is greater today. Innovation was also highlighted by economists such as Robert Solow who spoke of the importance of technology in getting out of the low-productivity trap. There were limits to productivity of labour and capital, which tended to come down beyond a point. The only way forward was to bring in technology to improve productivity given the same levels of factors of production (land and labour) and eschew the economic process of diminishing returns.

The Nobel winners have worked on this subject more at the macro level with mathematical models showing how progress in terms of growth can be accelerated with the use of innovation. The underlying concept, however, is the same.

Quite significantly, they draw a lot from Joseph Schumpeter’s concept of creative destruction where a natural process for obsolescence comes in. Economic evolution begins with inventions that take countries by storm, just like the Industrial Revolution did in the mid-19th century. But, after a point of time, there is a tendency to imitate where it becomes difficult to distinguish superiority or quality of products. Thus, monopolies turn to what economists call “imperfect competition”. With innovation, there would be a natural process of creative destruction—those who innovate move ahead, while the others wither away. This engenders subsequent growth cycles, seen when innovative products in automobiles, electronics, engineering, etc. replace existing ones. Innovation has driven the East Asian story or the ascent of China. The same held for Japan in the ’60s and ’70s and the Asian tigers subsequently..

Mokyr, Aghion, and Howitt did not just stop at these principles but also emphasised the role of the state. This is critical because countries need to have systems that encourage such creative processes. For that, countries need to invest a lot in R&D which can happen if there are high savings. Mokyr specifically spoke of distinguishing between what he called propositional knowledge, which is theoretically sound but not practically feasible, and prescriptive knowledge, which is what really works in the real world. So to derive the best results there is a need for support from the financial system that provides funds at competitive interest rates even as cost of experimentation can be high and results uncertain. This is probably why some economies of the West and East have galloped at high growth rates for sustained periods while those in say Africa, or even Latin America, have seen slower progress.

The question that comes up is how India stacks up in this theory of innovation-led growth. Significant strides have been made in several sectors, manifested not just by innovative products and processes but also in start-ups that have leveraged technology to contribute to growth. India is considered a pioneer in start-up founders. Also, in a globalised setting, borrowing technologies is easier than when the world economy was not flat. The fact that Indian manufacturing has done well can be judged from the fact that almost all products that were earlier imported at the consumer end are manufactured within the local economy. Further, with a favourable business environment being created, foreign direct investment has poured in. This has been the most convenient way to bring in innovation as technology comes along with such investment.

Funding too has become universal where besides investment, it is easy to borrow from external sources that can fill the gap in financing innovation. The government has had several schemes that offer direct support to start-ups. In fact, the performance-linked incentive scheme is another incentive provided by the government to encourage innovation and production.

Therefore, the importance of innovation in the growth process is extremely high. This is probably the only way to excel growth. A globalised world makes it easier to borrow both ideas and funds to prune the time taken to grow faster. At the micro level, firms have to constantly innovate as there are always new ones with new ideas that have an advantage over legacy companies which find it hard to dislodge outdated shibboleths.

Making sense of stock market in view of a high growth rate: FPJ 13th October 2025

What's behind the new depths being tested by the rupee against a weakening dollar? Mint 8th October 2025

 https://www.livemint.com/opinion/online-views/rupee-vs-us-dollar-exchange-rate-rbi-usd-to-inr-forecast-indian-depreciation-analysis-forex-current-account-deficit-11759732447150.html

Why are pvt investment levels not robust? Financial Express 4th October 2025

 The decibel levels calling for the private sector to invest more have gone up ever since the goods and services tax (GST) rates were rationalised. The argument is that when the government has done everything within its powers to increase consumption and the Reserve Bank of India (RBI) has cut rates by 100 basis points, it is time for the private sector to deliver. It is expected that the private sector will respond by investing more, which, by itself, will help generate more jobs and thereby initiate a new virtuous cycle of spending. While this is a logical expectation, the real world could be different.

Investment is surely happening in the country—the gross fixed capital formation (GFCF) rate is at around 30%. But the proviso here is that it is not broad-based but concentrated in industries that are more aligned with infrastructure—steel, metals, machinery, chemicals, etc. It is also limited to a handful of companies in the consumer goods space. It does look like where there is increasing capex, the government spends at the front end, but there is also a backward linkage to the industries concerned. In the best of times, the GFCF rate was 34-35%, and at the same time growth in GDP also averaged above 8%. Why, then, is investment not forthcoming?

First, companies typically invest when they find robust demand—it is only when this level crosses 80-85% that companies do so. Here, both current as well as future consumption matter. Companies need to see a higher growth trajectory in sales for a prolonged period to go in for fresh investment. This varies across industries and companies as well as across time.
This issue gets tied up with consumption or the ability to consume, which has been hampered a lot by high inflation over the years. While inflation is down presently, household consumption has been affected by cumulative inflation in the past, with income growth not keeping pace. It can be hoped that with the fiscal concessions on both direct and indirect taxes, there would be a turnaround this season.

Second, when companies invest, they always have to evaluate the returns. Hence, the return on capital comes into play. Building capacity financed by leverage involves a cost. There has to be commensurate output and profit for any investment.
This is one reason as to why companies hold back on prospective investment until it is absolutely necessary. Governments, on the other hand, have an outlay specified in the Budget that can be spent once approved. The government doesn’t have to bother about return on capital and the money can be spent—the focus is on achieving targets in terms of project completion. This difference has to be noted as the motivations are different for the two entities.

Third, with interest rates being lowered, logically more projects become viable. This begs the question why the private sector has not yet started investing. But as stated earlier, no company borrows to invest unless there is opportunity. Interest rates are rarely the limiting factor. For instance from 2005-06 to 2012-13, the average GFCF rate was as high as 34% and the repo rate averaged 6.85%. Yet, investment flourished—there was opportunity to invest as growth was buoyant. Therefore, investment decisions are not taken because of interest rates but “need”.

Fourth, the quantum of uncertainty in the economy has increased since April when the tariff issue came up. Until there is greater clarity, several industries—textiles, leather products, engineering, auto components, electronics, pharma, etc.—would not be in a position to invest, especially if there is export orientation.

Lastly, in a sector like real estate, the build-up of inventory has hindered fresh construction. Further, a sub-section in the area of affordable housing has slowed down mainly due to fewer projects being taken up. It is often argued that the value of such houses needs to be increased, given the cumulative inflation. In the absence of such a review, these projects have become non-viable fore realty firms.

All factors taken together, it does appear that building momentum in private investment will take time. It can be expected to gradually pick up across sectors and it may take up to two years for a more definite picture to emerge. The preconditions have been met to a large extent by the government, with affirmative action on taxation. The Centre and states’ commitment to capex does offer favourable conditions for private investment. Interest rates are down, and there could be another rate cut during the course of the year, though indications are the rate cut cycle has ended.

To reach a 33-34% investment level, big investments in infrastructure are needed. This is the main challenge. During 2005-13, when investment boomed, heavy industry was the driver. This segment can provide a big boost to capital formation as the industries in the consumer segment do not require bulky investment. In short, one needs to be more patient.

RBI MPC meet: A pause is most likely: Moneycontrol 30th September 2025

 https://www.moneycontrol.com/news/business/rbi-mpc-meet-a-pause-is-most-likely-13588571.html

The decision to be taken by the MPC will be interesting for several reasons. There have been several developments since the last policy was announced; and the uncertainty spectre still lingers. The tariff issue is still casting a shadow on global economic prospects. Amidst this environment the government has taken some aggressive steps to support the economy both in terms of aiding growth as well as bringing down prices through GST 2.0. Under these circumstances, one can logically argue for both a rate cut as well as a pause with compelling reasons. Hence, the majority view of the 6 members will be the clinching factor.

In the June policy, it was highlighted when the repo rate and CRR were cut that there are limits to which interest rates can support growth. That is true as no one borrows except if there is a strong reason which is growing demand. Therefore, the stance was changed to neutral indicating that this could be the end of this rate cycle. The bond market reacted with upward movement in the 10-years rate rather than a downward direction which should have been the case with the rate cut.

The GST cuts announced, however, changes the view now. With these cuts expected to raise consumption, there would be a tendency for capacity utilisation to improve leading to higher investment. A rate cut can then be justified on grounds of supporting growth.

The RBI forecast of inflation is quite benign at 3.1% for the year. With the GST cuts there would definitely be a downward revision for the year. As monetary policy is always forward looking, the inflation rate next year will be critical. For Q1FY27, the forecast was 4.9%. This will get moderated by 40 to 50 bps due to the virtual 10% cut in GST across a large basket of commodities; which means that it will be less than 4.5%. At this level, a rate cut can again be justified as inflation will still be within the acceptable limits. The logic here looks fair.

However, on the other side, there are compelling arguments for a pause. First, even at 4.5% inflation next year, the real inflation rate would be just 1%. This is the lower end of the thumb rule assumed for the real repo rate of around 1.5%. (This has never been defined but internal research of RBI had indicated a similar range). Second, heavy flooding in north and south west India has resulted in crop damage. Hence there can be some shock on the food prices front which will be known over the next two months. A pause hence makes sense. Third, a major reason for low inflation numbers is pure base effects which will automatically get reversed in the next cycle in FY27. Will we then be compelled to raise rates? Last, while transmission has taken place completely on the deposits side, there is still ample scope on the lending side. Hence, there should be more time given for such transmission to take place.

On balance, it does look like that a pause in rate cuts is what could be preferred by the MPC this time. Further rate cuts could always be considered whenever required given that the policy comes up every two months. Ideally, a rate cut, if at all is on the cards, should follow a change in stance which will provide the right boost to the bond market.