How hungry and able is consumer: Economic Times: 16th September 2025

 

Why corporate borrowers need to track the credit default swap rates: Mint: 14-15 September 2025

 https://www.livemint.com/opinion/online-views/sovereign-ratings-india-credit-p-moody-s-fitch-government-bonds-cds-brazil-south-africa-israel-insurance-swaps/amp-11757666673267.html

Why targeting headline inflation is essential to control inflationary expectatio...Forbes September 9 2025

 The credit policy targets headline inflation, which is the practice in almost all countries. The Monetary Policy Committee (MPC) also targets the same in India as this has been the mandate from the start and not changed when it was reviewed after running for the first term. However, each time the policy is announced, there is the economist’s debate on why core inflation should be targeted as, in the last year or so, it has run lower than headline inflation. The reason is that, last year, food inflation was high, which increased headline inflation while core inflation was relatively low.

An ideological issue is whether policy should narrowly focus on core inflation, which is theoretically what can be targeted by monetary policy. The logic here is that food prices cannot be influenced by policy. There can be no argument here as prices of pulses or cereals are not dependent on interest rates but supplies. Therefore, core inflation makes more sense. Or so goes the argument.

The argument here is that monetary policy deals with the entire economy and not just the ‘core inflation’ sectors. Policy is to impact inflationary expectations and adjust the real interest rate accordingly. After all, the rate influences not just lending but also savings and, hence, cannot ignore the broader macros. Therefore, the headline inflation number should be under focus.

Now let us look at how inflation has behaved in the last 15 years or so since the CPI index was instituted. The average headline inflation has been 5.8 percent since 2012-13. In the last 10 years, which is roughly when the MPC was actioned, it was 5 percent. And in the last five years, it was 5.7 percent. The corresponding numbers for core inflation were 5.6 percent, 5 percent and 5.2 percent. Therefore, we can see convergence of the two series inflation averages. The differences are mainly due to the food segment, which kept the headline numbers higher in general. Hence, if one went by pure numbers, the rate action should have largely been unaffected on almost all occasions, though monthly trends could have led to different outcomes. Quite surely, the MPC would have looked at these trends when coming to a decision.

An issue which comes up here is that if the core inflation argument is based on the premise that interest rates do not affect food prices, does this hold for core inflation at the theoretical level? Clothing and footwear (weight of 6.5 percent) is rarely financed by loans, though credit cards are used. Normally, purchases are based on need, which can be a festival where interest rates may not matter.

The same holds for, say, housing rent (10 percent), household goods (3.8 percent) which is rarely based on leverage. This can also be said about education (4.5 percent), personal care (3.9 percent), health (5.9 percent), recreation (1.7 percent). A part of transport inflation (1.3 percent) may be affected by policy, though prices are rarely affected by demand conditions.

Therefore, when one looks at policy targeting, it has to be headline inflation as this is what drives decisions on savings as well as investment. The repo rate has to be aligned with real interest objectives, which may not be overtly stated. Just like it is said that some minimum inflation is needed for industry to produce, as there has to be profit made, the same holds for savers where there needs to be an incentive. Further, even industry looks at both interest rates and inflation when taking decisions. Foreign funds look at comparable real interest rates when taking a decision to invest. High inflation economies can be a deterrent, especially if monetary policy is not aligned. Last, targeting headline inflation is essential to control inflationary expectations.

Based on these arguments, it stands to reason that monetary policy should continue targeting headline inflation. Should it target wholesale price inflation instead, where manufacturing has a higher weight and so does core products? This can be a different discussion as the WPI (wholesale price index) is more susceptible to excess demand forces, which can be influenced by interest rate policy. But this is not the mandate of the MPC, which looks logical, too, for two reasons. The first is that the WPI is incomplete as it excludes services. The second is that it does not represent the major segment of the economy: The consumer.

Hence, the present practice of targeting CPI headline is appropriate. It can be argued which number it should be and whether 4 percent or the band is appropriate. But, quite certainly, the argument for targeting core inflation is not convincing. As a consolation, for those who favour core inflation targeting, as pointed out in the beginning, there has been a tendency to converge with the headline numbers and would, hence, not have changed the outcomes.

The silent de-dollarisation: Financial Express 10th September 2025

 US treasuries are considered the safest forex asset as the dollar continues to be the main global currency. In fact, the US virtually controls the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payments system, as all banks get linked to this set-up. When the Ukraine war started, all payments to Russia were blocked by the US which had imposed sanctions on the aggressor. The blow was severe but also a signal to other nations of such possibilities. US treasuries, hence, are still preferred by all central banks; but things have been changing.

The US’s infallibility was questioned when the debt ceiling issue emerged on several occasions. These limits were then raised, but discussion has focused on exploring alternatives to the dollar. This is why countries have been diversifying their forex holdings, even as the dollar remains dominant.

Shifting patterns in US debt holdings

A look at the ownership pattern of US treasury securities is interesting. Over the last 10 years or so, the US’s total public debt increased from $18.15 trillion in March 2015 to $36.21 trillion in March 2025—an increase of almost 100%. The share of foreign holdings, largely those held by various central banks, was as high as 34% in 2015. It has come down to 24.9% in March 2025. This does reveal two things that are reflections of each other. First, central banks are diversifying their holdings. Second, the US government is less dependent on foreigners for subscribing to their debt, which is compensated for by domestic holders.

Further, the holdings of the Federal Reserve has come down from 41.4% in March 2015 to 31.8%. This can be explained by the fact that when the Fed went into the quantitative easing mode, banks tended to sell their treasuries to the Fed for liquidity. As this process eased, the Fed’s share tended to move downwards. Mutual funds have increased their treasury holdings—the share has gone up from 6.4% to 12.2%. The support provided by the Fed is still very significant, at almost a little less than a third. This can be contrasted with the Reserve Bank of India’s holding of central government debt—12-13%. Clearly, the US government’s dependency on the central bank is greater.

The same also gets reflected when the share of currencies in overall forex reserves at the global level is considered. Between 2016 and 2025, International Monetary Fund data shows, the dollar’s share has come down from 65.5% to 57.7%. In contrast, there has been an increase for other currencies like the euro (19.6% to 20.1%), pound sterling (4.7% to 5.2%), yen (3.7% to 5.1%), and renminbi (from virtually nil to 2.1%). Such diversification is also the result of the gradual change in the balance of power across the world economy. While the dollar is still dominant, countries are investing in other hard currencies. The euro will continue to be the second most dominant currency as all member countries hold their forex assets in this form. It will get progressively popular as its acceptability has been growing, given the orderly management of the economy since the 2011 euro crisis.

Gold’s resurgence as a safe haven

It has also been observed that central banks have been increasing their gold holdings as part of their forex reserves over time. World Gold Council data for June 2015-June 2025 shows some interesting patterns. All big economies have increased the share of gold in forex reserves. Covid-19 was the turning point, followed by the Russia-Ukraine war, leading to sanctions being imposed by the US. With the tariff issue causing further uncertainty, gold becomes the natural safe haven.

Gold share in forex reserves rose from 5.9% to 13.1% for India, from 1.7% to 6.7% for China, 8.3% to 16.6% for the UK, 10.1% to 19.4% for South Africa, and 6.3% to 13.2% for Australia. In a way, there is a case to believe that countries are de-risking their interests from the idiosyncratic policies followed in the US. Even developed countries like Germany, Italy, and France have increased their share of gold holdings by over 10 percentage points during this period. It is not surprising that the price of gold has received an impetus due to this demand factor.

The recent episodes of tariffs, sanctions, and interference of the US in economic decisions of sovereigns would only hasten this shift away from the dollar. The world has already started moving towards more free trade agreements as well as economic blocs that the US is opposed to. As these agreements become stronger and wider in terms of coverage of nations, it is natural that the currencies used will tend to change. The payments systems will also see the rise of alternative channels to SWIFT. The lesson is that the US needs to be more flexible in taking on the role of the anchor nation and currency vis-à-vis developing and maintaining the global economic order.

With GST 2.0, bonanza for consumption and investment: Indian Express 4th September 2025

 The GST 2.0 regime will be effective from September 22 and has been timed really well. This would be the start of the festival season, where typically Indian households buy consumer goods and book homes. These are auspicious times, and households have held back purchases ever since it was announced on Independence Day that there was a rationalised scale to be announced in September.

The timing is significant for two reasons. First, a common lament from FMCG companies was that urban demand was down due to high inflation in the past. With GST rates being rationalised in the downward direction, this will be the cure for sure. There should be an immediate fall in prices that should spur demand. In fact, savings on FMCG products across the board should release significant resources for households to spend on other goods. Second, the tariff issue has reached a dead end with the 50 per cent rate now a reality. With several inputs now having lower GST rates, the exporters will get some relief on the cost side, which can aid in removing a part of the tariff disadvantage.

How do prospects for consumption look? The government has announced that the overall revenue loss would be Rs 48,000 crore. This is not as large as has been estimated by analysts. There is a gross revenue foregone of Rs 93,000 crore, of which Rs 45,000 crore is being recouped by higher duties on a set of luxury items. Any revenue foregone is a gain for the consumers

The way the GST council has segregated goods is interesting. All necessities go at a lower rate of 5 per cent or are exempt from the tax. Comforts, which include consumer goods, go at a lower rate of 18 per cent, while luxuries, including sin goods, go with a higher rate of 40 per cent. This is probably the most equitable way of rationalising rates. Demand for necessities and comforts should go up. In fact, for consumer goods, including auto, it is a major boost as costs come down substantially. An entry-level car of Rs 5 lakhs will save Rs 50,000 as GST, which is a big gain. The same holds for two-wheelers and tractors. For sin goods and luxuries, the GST does not matter as demand is inelastic. There could not have been a better reclassification.

Will government fiscal balances be affected? The revenue foregone of Rs 48,000 crore can be absorbed in the budget, given that other revenue has been buoyant and the RBI transfer of surplus was higher than expected. Therefore, in the absence of any slippages, the fiscal deficit number can be maintained at 4.4 per cent. The compensation part for states has not yet been announced. But given the intrinsic buoyancy in the economy, there should not be a major challenge. In fact, higher spending by households should generate a secondary chain of GST revenue for the Centre and states. Bond yields have reacted positively, which vindicates this position.

How about GDP growth? Prima facie, consumption should increase immediately, and if the pent-up demand for the last two years is clubbed with tax cuts as well as the income tax relief given by the budget, we can expect a big jump in spending. This, in turn, should also help the industry as capacity utilisation improves and companies go in for fresh investment at the secondary stage. This could materialise towards the end of the year, depending on how good the spending is. Therefore, the two major engines of consumption and investment should be positive during the second half of the year, which will add to GDP growth.

The biggest impact will be on inflation as consumer prices come down. The government will have to ensure that companies do not hold back these gains, and the anti-profiteering clause needs to be implemented with alacrity. The core inflation part will see a decline, which will have a soothing effect on headline inflation. The advantage is that this benefit will flow over a period of a year, as lower prices will get reflected over higher base numbers in the last 12 months. This can help in moderating the inflation projections of the RBI in FY27, too.

Will this impact credit policy outcomes? Here, there is a shoulder shrug. Lower inflation will prevail in the coming months, which will bring down projections for sure, providing more room to the RBI when it comes to rate cuts. On the other hand, growth prospects look better after this announcement, and the rate of 6.5 per cent does look very much on the cards. If so, then it will be a subjective call to take on rates as inflation will trend lower while growth will hold up. A pause for the time being looks more likely.

The GST council, however, has not included fuel products, which presently have the highest effective taxes when excise and VAT are combined. This will probably be the last frontier that has to be addressed at some point in time, as the rates are way above those of other goods and services.

The GST has been one major success story in the process of reforms, which has withstood several challenges, including Covid, where revenue ground to a halt, thus affecting overall collections. This made compensating states a challenge. This was overcome quite successfully and the system has reverted to normal to enable the council to bring about this rationalisation. Growth in collections is a direct function of overall growth, which has to tick to enable the same. The present dispensation rationalises rates as well as corrects inverted duty structures where inputs are taxed at higher rates than the final output.

Hence, the government and RBI have set the right preconditions for growth: The former through the fiscal incentives on income tax and GST and the latter on interest rates. Theoretically, this should work well, and the final result will be known in the next two quarters.

GST rationalization can be key to increasing consumption: Free Press Journal 1st Sept 2025

 https://www.freepressjournal.in/analysis/gst-rationalisation-can-be-key-to-increasing-consumption

Ruminations on inflation targeting: Business Line 3ed September 2025

 

Book review: The Economic Consequences of Mr Trump by Philip Coggan: Financial Express 31st August 2025

 Donald trump is known for everything except consistency. He likes to have his way by making ‘deals’, and his sycophantic followers provide the eulogies for him being a deal maker. His tariff armoury is one of its kind, which has shaken the entire world simply because in an era of globalisation, no country has even attempted this measure. It goes with the macho image he projects, and his reaction to the now famous TACO—Trump always chickens out—was to announce something even more bizarre. This and more are presented by Philip Coggan in his rather delightful book titled, The Economic Consequences of Mr Trump, in an apparent nod to Keynes’ book titled, The Economic Consequences of Mr Churchill.  

Mr Trump does not really think before speaking, and this is manifested in his talk on taking over Greenland for security or calling the head of Canada as governor of ‘another state of the USA’ or even taking over the Panama Canal. His announcements in April, which he called Liberation Day, were nothing short of baseless. The concept of reciprocal tariff was based on the ratio of trade surplus to imports from the country. Not surprisingly, it led to absurd numbers for some countries. In fact, even countries with which the USA had a trade surplus were levied a minimum base tariff of 10%. Therefore, the entire policy had no intellectual rationale.

Further, the entire world, according to the author, had already lowered their effective tariff rates to something in the single-digit range, and hence calling it reciprocal was incorrect. The main trading partners such as Switzerland had a rate of 1.7%, while EU had 2.7% and China 3%. Hence the Liberation Day announcement chart was quite ridiculous. But, then as president of the largest economy in the world, there was no questioning him. The only country that stood up was China, which imposed similar duties on American goods, and this caused a temporary peace with the dateline being pushed forward.

Now, Trump has gone through with his tariff deals overruling courts and without bothering to get sanction from the Congress. More importantly, normally any such policy would have worked out various numbers in terms of impact on growth, inflation, trade, employment and so on. But this was probably never prepared, let alone presented, as he has assumed that his wisdom is better than that of others put together. In fact, one can remember the Covid period when he had actually said that people should drink insecticide to kill the virus, which was ridiculous and dangerous.

The president has come up with a number of $600 billion a year as additional revenue that would be generated through higher tariffs on an annual basis. This, he has argued, will let all those with less than $200,000 of taxable income be free from taxation. This is a compelling argument, provided it works out. But both historically and theoretically, tariffs are seldom used for raising resources, as this would also mean that at the end of the day someone has to pay higher prices, which will be both the exporter and final consumer.

A major conundrum that Trump has posed to producers as well as importers in the USA is what to assume as being the final stance on tariffs. There have been several changes in the structures and the articulation has added to the confusion. Where should they be shifting their production locations? Christmas is just a few months away, which is also the biggest spending season in the USA. The small businesses have made representation that their inputs should be exempt from these tariffs as this will make their production processes unviable. They would be driven out of business, leading to increased unemployment. And today they are also not quite sure how long will the Trump tariff package last. Investment will now be hit the most as there is no clarity in the so-called ‘deals’ firmed up with various countries.

Coggan dissects Trump’s pet justification of America being ‘ripped off’ and ‘pillaged’ by the world. He starts with the argument as to why does USA import goods? The answer is simply because they are cheaper. America can also produce garments, but Vietnam and Bangladesh sell much cheaper mainly due to lower labour costs. He draws the analogy of a mom-and-pop store complaining that the supermarket next door is ‘pillaging’ the business by selling at lower costs! There can be no counter-argument here.

What can be the damage to the American economy? Here the author quotes an IMF paper which shows that an increase in tariffs by 3.6% can reduce growth by 0.4% over five years. This is a study for 151 countries. Now, with USA increasing tariffs by substantially more than 3.6% given that the base level is fixed at 10%, the impact can be catastrophic on growth. This happens due to four factors. First, labour moves over to less productive sectors that are protected by tariffs. Second, exports become less competitive as the currency is pushed up. Third, MNCs will see their cost of inputs increase substantially, and finally, economic activity will speed up before the tariffs are imposed but then slow down sharply subsequently (the book covers all aspects till July).

Coggan also talks of the employment effect. When it comes to low-skilled employment, US manufacturers face a problem of higher costs in making them in the country. Motorola had to shut down 12 months after opening a factory due to higher labour costs as average pay was twice that of China and six times of Vietnam. The same argument holds in textiles and metals where Asia has a distinct advantage. But employment has increased in high skill and margin businesses like pharma where there is a distinct advantage. Yale has calculated that this tax will lead to 0.4% increase in unemployment and GDP growth to be lower by 0.7%. 

Another thinktank has estimated that after-tax income of individuals will reduce by $1183 per household in 2025, or 11.%.Coggan summarises the entire exercise as ‘nailing jelly to the wall’. The number of changes made and the direction reversal during the course of writing this book made it extremely challenging. A question which the reader can genuinely ask is, when all this is so clear to everyone, why has Mr Trump not absorbed the same. Here, the author quotes from the popular book of 1925, The Great Gatsby: “And many billionaires in his coterie can cause vast destruction to the economy and then retreat back to their privileged lives. They will always be fine. As a corollary, others have to clear the mess.”

More than satisfying: Financial Express 30th August 2025

 The GDP growth figure for Q1 was eagerly awaited for several reasons. First, in light of the tariff trauma inflicted by the US on India, this number was going to be important even though the decision has been implemented only in late August. Second, it will be a major lever for the Reserve Bank of India (RBI) when it takes a decision on the repo rate. The direction of policy has changed from inflation to growth in the past few policies and the 7.8% number definitely does not indicate any weakness. Third, given the final growth projection of around 6.5% for the year, it will provide a cushion to any downside in the coming quarters.

The performance has been more than satisfying as growth is broad-based in all the services segments, and two in the secondary sector grew at impressive rates. Agriculture has provided the expected support while mining and electricity have been the low performers, which was expected as the growth numbers mirror what was already known in the index of industrial production (IIP) numbers for this quarter. Hopes are high of a recovery in urban demand this festival season with the government also likely to take some affirmative steps.

One of the major contributors to manufacturing growth has been a steady increase in profits, notwithstanding a lower IIP growth. In fact, the highlight of corporate performance was lower growth in turnover mainly due to the urban consumption challenge, but smart rise in profits which is a major part of the concept of value added. If one were to look ahead, the scenario is one which can be “stable to better”. The reason is that the element that can drive manufacturing is expected to be consumption, where the government has already given a boost through income tax relief. The goods and services tax (GST) cuts should come into effect next month, which will also help boost consumption. Nominal consumption grew by 9.1% this quarter, and it should get better to support growth at a time when inflation is rather low. The monsoon has been good and augurs well for rural consumption too. The investment rate has also been stable this quarter at 30.4%, which can improve gradually as consumption picks up.

Construction has been another star performer with a growth of 7.6%. The contribution has come from both the government focus on infrastructure as well as the housing sector. The latter has witnessed signs of revival, which can be expected to sustain, if it is not bettered, during the festival season when individuals normally buy homes.

The services sector has once again been the engine for growth. Given that ours’ is a services-driven economy, a lot of support comes from this segment. In fact, it has to counter the repercussions of tariffs, which is likely on manufacturing. Trade, transport, etc. clocked growth of 8.6% as consumer spending continued to be brisk with “experience” still being a driving factor. The boom in e-commerce and retailing has also contributed to the growth. And a greater use of phones and internet has increased output from the communications segment.

The financial sector continued to register swift growth of 9.5% in line with that in deposits and credit. This may remain stable for the next couple of quarters as growth in credit is expected to pick up in the busy season. Similarly for public administration and defence services, 9.8% growth over 9% last year is impressive as the government has been on target with spending both at the central and state levels.

A point of curiosity that will be nagging the reader is that while the direction all these segments took was on expected lines, the numbers have been high. This can be explained by the way in which GDP numbers are reckoned. All numbers are generally calculated in current prices that are available. These numbers are then scaled down based on price deflators. These deflators tend to be the wholesale price index (WPI) in most cases. This has to be done to convert nominal numbers to real. This year, the WPI has tended to be either very low or negative. This comes out from the growth in nominal GDP which was 8.8% this quarter—just 1% higher than the real GDP growth. Normally these two numbers have a difference of 3-4%. Given that inflation is expected to be benign and low for at least Q2 and Q3, there would be a tendency for an upward bias in the real GDP growth numbers.

All this also means that achieving the 6.5% growth number, which the RBI has projected for the year (at the time of forecast it did not take into account the additional 25% tariff imposed by the US), is possible. Tax benefits have been granted to individuals on income and a similar benefit is expected from GST. Both will aid domestic demand, which is now crucial for steadying the boat assuming that exports to the US will take a hit due to the tariffs (likely to materialise after three-four months). With expectations of a normal monsoon, kharif production—which is a good proxy for potential rural spending—seems to be on course. Therefore, this is a good augury.

The next question is, how will the Monetary Policy Committee look at this number? If there will be an upward bias due to the deflators in the coming quarters too, then the overall GDP growth will definitely be one which may not cause concern. Besides, the transmission of past actions is still on with the cash reserve ratio cut to be invoked from September onwards. It may be tricky to support a rate cut at this time based on growth numbers—either of Q1 or the full year. Yet the tariff impact on the micro, small, and medium enterprise sector in particular will always be on the radar. It would be an interesting call nonetheless.

To ban or not to ban: Financial Express 22nd August 2025

 https://eikona.mediatrack360.com/Print/330/3321819

BBB effect: India's S & P rating upgrade should cheapen loans and ....MInt 20th August 2025

 https://www.livemint.com/opinion/online-views/standard-poor-s-moody-s-fitch-india-sovereign-rating-fiscal-deficit-debt-to-gdp-indian-gdp-growth-foreign-direct-i-11755510788746.html

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.

More rate cuts: Not so fast: Economic Times 31st July 2025