India-UK Free Trade Agreement: A $34 billion game-changer for exports and employment: Indian Express 25th July 2025

 A positive outcome of the tariff saga started by the US is that countries are getting together to sign deals with one another. The Free Trade Agreement (FTA) with the United Kingdom was finalised in May and has been consummated by the signing of the deal. This would be India’s biggest deal signed in 10 years and UK’s fourth since its exit from the EU. India has signed, with alacrity, a deal with the UK which will raise the total volume of trade to around $34 billion per annum from the present levels of around $2-25 billion. More importantly, it represents the first of many steps undertaken to sign deals with other nations to leverage mutual benefits.

The India-UK FTA would eliminate duties on 99 per cent of Indian exports to England. India will gain mainly through higher exports in fish products, chemicals, jewellery, leather products, readymade garments and electronics, which are largely labour-intensive, and will in turn benefit the small and medium enterprises (SMEs) specialising in these products. Intuitively, this will be a boost for not just the SME group per se but also for employment, as such treaties are signed with other countries, too. Units in Tirupur, Surat, Ludhiana, Chennai, and cities in Assam and elsewhere would stand to gain. The present deal seeks to eliminate tariffs on a majority of products that previously faced duties ranging from 4 to 16 per cent. Exports could rise potentially by 20-40 per cent, depending on the responses of the concerned industries.

Advertisement

From the UK’s point of view, there would be free flow of goods such as automobiles, whisky and gin, among others, which will also help push up employment, thus bringing about symbiotic benefits to both countries. There would be easier access to around 64 per cent of UK’s exports to India. Further, as Indian companies invest more as part of the expansion plans in the UK — it can go up to £6 billion — there would be more jobs created which can cross the 20,000 mark. The effective tariff rate for goods from the UK would come down from 15 per cent to 3 per cent, which includes duty on whisky coming down from 150 per cent to 75 per cent immediately and to 40 per cent over a period of 10 years.

One area that will work well for India is agriculture, covering various crops as well as fisheries. This includes spices, vegetables, fruits and pulses. As India works to leverage the strength of its agriculture, this FTA provides space for expansion and will take us closer to the target of $100 billion which has been targeted by 2030. At the ground level, there would be streamlining of the sanitary and phytosanitary regulations in the UK, which has hitherto been a major hurdle in the export of farm products.

The other significant benefit for us would be in textiles where duty-free exports would be permitted. This is significant as countries like Bangladesh, Pakistan and Cambodia have had the advantage of similar structure, making it tough for our exports, presently in the region of just $1.5 billion. This comes at an opportune time when there could be other pressures on our textile exports to the US.

A similar gain can be seen in the case of engineering, where our exports were just $3.7 billion to the UK, which imports as much as $195-200 billion from the world. With the free trade agreement in place, it should be possible to double our exports to the UK. Similar benefits can be seen in pharma, electronics, software, jewellery, etc. In fact, the NHS would start to use generics manufactured by India — a big boost to the industry.

At the individual level, there has also been a deal on allowing Indians to work in the UK on a temporary basis with fewer pressures on paying for social security being one of the main gains. Indians would gain from cheaper import of higher-end cars as well as chocolates and whisky, with the duties coming down substantially, thus making them more affordable.

How can this deal be viewed? First, it is something which provides a thrust to our exports and hence employment. Second, furthering relations with the UK opens the door to negotiate with other nations and the EU should be next on the radar. Third, such a deal also provides a template to be followed when it comes to negotiating one with the US, already in the discussion stage. Fourth, the deal has focused on an entire array of goods and while manufacturing always looked to be on the cards, the fact that agriculture has a lot to gain is significant as we are harnessing the strength built in this sector. This will help to make the sector more commercial and farming more remunerative as such deals are struck with other nations. Finally, this deal reflects the government’s strong commitment to boosting exports as part of its broader effort to integrate the Indian economy into global supply chains.

Spectrum: A Template For Railway Reforms In The Next Decade Free Press Journal 22nd July 2025

 

The focus on railways has largely been on introducing faster sophisticated trains, adding new lines, developing metro systems, etc., which has added quality to the services. As the government would continue to spend on railways, this would be an opportune time to also bring in reforms to align with services in other model countries

The government’s capex over the last 10 years has been concentrated in two areas besides defence. These are roads and railways. The focus on railways has largely been on introducing faster sophisticated trains, adding new lines, developing metro systems, etc., which has added quality to the services. As the government would continue to spend on railways, this would be an opportune time to also bring in reforms to align with services in other model countries. 

Two areas come to mind here. The first is to reform the overall systems in certain aspects of its functioning, which will enhance security and quality. The second is privatisation of railway stations to enable the railways to earn a return from the same. This will fall in the category of leveraging assets to create new revenue streams. 

Given the series of learnings from various incidents in the last year or so, attention can be paid to the security issue. First, the train compartments in suburban trains need to have automatic closing doors. This will reduce the chances of commuters getting injured while travelling on trains. This is necessary to make travel more humane for millions of people. 

Second, the concept of general compartments in long distance trains needs to be done away with. It has been observed that this service is generally used by the relatively less literate people in lower income groups. The compartments are overloaded with 2X the capacity, if not more, which leads to other problems such as brawls and accidents. All tickets should be sold on the basis of reservations. This will lower the chances of stampedes at railway stations where passengers rush in to get seats. 

Third, the safety equipment used should be made first in class to eschew accidents which have taken place in past due to faulty rails, signaling, etc. Fourth, the compartments need to be changed or revamped to make the toilet systems modern in terms of disposal of sewage. Fifth, all railway stations need to be fenced completely just like airports to ensure that the perimeter is sealed and that it is open only to passengers. This will ensure that touts and petty criminals do not have access to these facilities. 

Last, the capex of the government could also address the issue of lengthening platforms across the country and levelling them to enable trains with higher capacities to run based on feasibility as well as ensure safety of passengers boarding or alighting from trains. This will also address the issue of general compartments being dispensed with. We must have futuristic planning, buffering in a higher number of passengers.

These suggestions are basic hygiene issues that can be addressed quite comfortably with the requisite budgetary allocations. In fact, the Western Railways in Mumbai had lengthened all the city platforms to accommodate 12 coaches from 9 in a seamless manner, which shows that the ability to implement is quite good. 

The other aspect is privatisation of railway stations. The model works on similar lines as airports, where there is an enhancement of facilities combined with user charges. It has been seen in India that when fares are increased, traffic is rarely affected, as people have to travel and the railways provide the connection to most places in the country. As a corollary, the modernisation approach can include these user charges. 

First, entry to all stations should be for travelers with the ticket code allowing the same. While visitors should ideally be kept to minimum, it may not be possible to exclude them given the different age groups that travel. There can be a substantial increase in the platform ticket fare from Rs 10 to Rs 50, which will automatically reduce the number of persons coming to see-off families and friends. 

Second, there has to be an overhaul of the porter system, a closed group as of now, which exploits passengers. The charges that are fixed must be made mandatory for the porters, with penalties for any deviance. Simultaneously, introducing lifts and escalators will enable passengers to handle their own luggage. 

Third, the other exploitative service at stations pertains to taxis. A prepaid facility should be made mandatory with a GPS tracking system to ensure that all fares are tracked on a real time basis. Fourth, the refreshment stalls need a revamp to ensure hygiene. This is something that the developer can fathom in terms of the number of outlets as well as pricing. While ideally the pricing must be kept on the lower side, given the financial background of majority of the travelers, the demand-supply equilibrium can be achieved by an implicit price discovery process. There can be differentiated outlets to cater to those travelling by higher classes. 

There is a cost involved in bringing about this major transformation in the look and experience on trains which can be recovered as user fees just as it is done in case of airlines. Broadly, around 350 crore passengers would be travelling by long distance trains this year of which 300 would be in the second class and 50 in the upper classes. Charging Rs 200 on an average for higher classes and Rs 50 for the second class can garner Rs 25,000 cr per annum. 

Various permutations can be worked out on this count, which can be either divided between the government and private partner or, else, retained with the latter in case the stations are auctioned out to private parties. These two ideas need to be picked up and pursued over the next ten years across the country, which will surely yield results. 

Ratings: What works with bonds can aid investors elsewhere too: MInt 22nd July 2025

 https://www.livemint.com/opinion/online-views/credit-rating-agencies-securities-and-exchange-board-of-india-debt-instruments-private-placements-ipo-grading-insurance-11752841665161.html

A template for skilling: Financial Express 22nd July 2025

 One of the anomalies in our system is that there is talk of demographic dividend where there is a large young population. At the same time there is a constant lament that we do not have adequate trained youth who can be hired for various jobs. This is a serious issue of demand and supply, which on deeper thought leads to the question of skilling the population. So, while we have a large number of youth with varying levels of education, the skill gap is still quite high. That there is scope to improve on this metric is a no-brainer.

There should be a medium-term strategy to bring about an alignment. There is some urgency given that the large-scale spread of use of technology and artificial intelligence can exacerbate the problem. Post-Covid, there has been a tendency among companies to gravitate more toward using technology that is displacing labour.

Skilling must begin in schools

First, there is a need for students in schools to be exposed to different crafts such as rudimentary carpentry, plumbing, electrical jobs, etc. These are skills which would be required all through one’s life. While presently the majority do hire such workers for their jobs, having the knowledge helps in times of emergency. At the school level, the mind is also alert and receptive to acquiring skills. This is evidently the case with sports and should be extended to other skills too. Ideally, this should be a part of the curriculum for all schools. This can be kept mandatory for two years in the 9th and 10th classes.

There can be a buy-in with the boards to set aside some marks for completing such courses. Several school boards also include foreign languages as part of the grading process. This can be included in a similar manner. In fact, schools have classes for art, craft, and physical training that can be extended to these skills too. Children from the lower income groups would be going to state-assisted schools—also called municipal schools—which should be covered in a more comprehensive manner. At a practical level, it may make sense for state boards to include these options in the curriculum and then expand to all-India boards depending on the outcomes.

Second, we need to have specific courses which look at honing these skills. Just like there are streams like arts, science, medicine, engineering, and information technology, there could be ones looking at practical skills that make students fit for joining industries such as construction, automobiles, or textiles that suffer from a skill shortage. By making it a formal course with a degree instead of a certification from vocational training institutes, an element of seriousness is introduced. In fact, there can be aptitude tests to guide students on what courses suit them best. The qualifying marks in school, which is normally fixed for professional courses, can be fixed at a lower level to draw students who are not good at academics. Also those who are unable to pass the school-level board exams can be nudged to these courses that are oriented more towards actual use of skills rather than textbook learning.

Link training to real jobs

Third, the employment-linked scheme of the government introduced last year was largely successful. The concept of having internships with companies is a novel way to get the youth have access to on-the-job training. Some public infrastructure spaces can be the perfect ground for grooming such students. There is a lot of investment in railways, ports, airports, among others. These organisations can accept students who have finished basic courses in schools and colleges and need to be provided jobs on real projects.

Here, the government can get youths to register with their qualifications in a database that can then be evaluated periodically and candidates short-listed for internship programmes. The companies which require such labour and are willing to train them in the requisite skills can also be enrolled. In this manner, demand and supply for such skills can be matched. The government can offer incentives in the form of a tax break or allow the cost to be reckoned under corporate social responsibility. A similar modality has been implemented in the internship scheme announced last year by the government; it can be modified for this purpose.

The problem is acute today given that employment generation has been a challenge. Spaces like logistics, retail, and construction have generated a good number. While some jobs like delivery do not require specific skill sets, they may not be sustainable for the individuals in the medium term as one cannot build a career in the same. As more unemployed individuals join this workforce, the earnings tend to get depressed. Construction too has challenges where developers are not able to get skilled persons like carpenters, electricians, etc. The major headcount is in menial jobs, which again do not help one move up the income

Hence a relook at our education system is necessary where a separate opportunity can be created for those who aren’t good in academics. In this manner the skill requirements in industries such as construction, auto repairs, sewing, handicrafts, etc. can be filled by creating a formal workforce with these qualifications. The on-the-job training via internships should focus more on manufacturing rather than services as this is where there is more value to be added. Besides, when we are talking about India becoming a part of global supply chains in manufacturing, having a skilled manpower is an imperative. It must also be noted that the government is only an enabler and has taken the first few steps. The states need to join in focusing on fine-tuning the education systems, but at the end of the day it is private enterprise which needs to hire and train labour. This can be a template that can be pursued for the next five years or so until 2030.

Companies controlled costs in FY25: Interview with Business Today 20th July 2025

 https://www.businesstoday.in/magazine/interview/story/companies-controlled-costs-in-fy25-bank-of-baroda-chief-economist-madan-sabnavis-484450-2025-07-14

Book review: Talent management: Financial Express 13th July 2025

 When one thinks of a startup, one visualises a pack of youngsters with unbridled enthusiasm working round the clock, trying out new ideas that might work. There is fun and hard work and the environment is electric. This is a stylised fact about startups. But there is also the case of founders or staff gradually losing steam after some time or looking for jobs outside. There could be conflicts within, and so on. An area often not looked at seriously is human resources development, where everything is taken for granted. Often, one of the founding members takes on this role to get the right people. But after a point there is need for professionalism. This is the starting point of Saurabh Nigam’s book, People Powered Startups.

The title is apt, because startups are all about people who make an idea fructify, and there has to be focus on these resources. These people could come with different backgrounds in terms of qualifications and experience that make these ventures work well to being with. But, managing this eclectic set of people with different skill sets and egos becomes very important. Therefore, attracting, retaining and nurturing talent becomes very important as the organisation evolves, and requires a different approach to people management. These structures, according to the author, need to be flexible and dynamic and cannot mimic those of large companies. Very often this point is ignored by these startups and there could be less attention paid to these finer points.

Some of these points can be elaborated upon. To attract the right talent, the employer branding is important and often the founder names become the brand. This, it has been seen, has been the most powerful factor when it comes to attracting talent. The talk is always about a venture which has been started by a person X with a team that has A, B and C which are all very well-known names in the industry. The approach to recruitment has to be creative and compensation carefully structured to balance between the ability to pay in the medium term as well as being above the market to entice potential recruits. In a way there is some risk being taken by the potential recruit in joining such an enterprise. Here, employee engagement becomes important because it should not be the case that the best come and leave because they feel out of place.

The author provides several examples to drive home these points. He also emphasises the  importance of compliance and a positive workplace culture, giving examples of Zerodha and Zomato —names that will have high reader-connect. He also emphasises the need to have the right performance management systems in startups with continuous feedback, along with goal setting, so that a direction is clear for everybody. Within feedback he shows how important it is to stress on strengths, areas of improvement, collaboration, communication, etc. All these traits are even more important in a startup organisation.

Managing people may not sound important when a startup is in the formative years. However, when there are myriad changes taking place in terms of size of the organisation, both in terms of turnover and people, HR management becomes critical. For navigating change there is a lot that needs to be done. This can include having leadership training programmes, for example. People who are good in doing a certain job would also have to be groomed as the firm expands in size. They need to move to a different level where they spend more time on strategy and less on implementation and have to build and lead teams. This will lead to better innovation, which will be the crux to accelerating growth of the form.

There are three specific themes which Nigam talks of in the area of innovation in HR. One is the frontiers of the workspace, which has become progressively very important. There has been an increase in the concept of remote working as well as hybrid models that have to be considered, as the new generation of professionals is no longer attracted to coming to work every day physically.

Further, the transformative potential of AI is something that cannot be ignored and has to be part of the process of decision making. The other is the importance of DEI—diversity, equity and inclusion.

This, according to Nigam, can be a strategic advantage for the startup as it helps in building employee engagement. The last is of significant importance, where the wellbeing of employees is addressed.

Burnout is quite common in such setups and the job of the HR vertical is to ensure that employees are healthy and happy as these are preconditions to attain higher levels of productivity.

Another aspect that the author highlights which probably is taken for granted in such enterprises is the need for continuous learning and development. He gives several examples of what different companies, including Google, had done in their formative years to keep this box ticked.

Nigam also talks of conflict management that can be due to personality differences or even work related, which can cover goals of the startup or the strategies to be followed.

In today’s age, having a strong social media strategy is important as this is probably the strongest mode of communication that reaches out to a large audience. This is the route chosen for creating a strong employer brand, which is important. This is quite a useful playbook for startups to see how many boxes have been ticked.

Do low interest rates spur growth? Business Line 12th July 2025

 https://www.pressreader.com/india/businessline-mumbai-9WVZ/20250712/281809994915281?srsltid=AfmBOoooYY_tT_EVsdTKq8WQKm_XBBw41hU8vsnWzmINRm1CTpUx5QKv

India's consumer habits cannot be second guessed as they evolve: Mint 30th June 2025

 https://www.pressreader.com/india/mint-mumbai/20250630/282106347632934

Devolution dilemma: Centre, states and a way to share the pie better: Indian Express June 28, 2025

 https://indianexpress.com/article/opinion/columns/devolution-dilemma-centre-states-and-a-way-to-share-the-pie-better-10093634/

What Could The Israel-Iran Imbroglio Mean For Us? Free Press Journal 23rd June 2025

 

The reason is that in the case of the Ukraine war, Russia was a major supplier of oil to the world and hence tilted the scales on the energy front, as several countries were dependent on oil and gas from Russia.

Just at the time when it did seem that the world economy was getting into some sort of nervous equilibrium against the background of the tariff threat held out by the USA, the war in West Asia has upset the applecart. Crude oil prices have started increasing sharply, with Brent going at $75/bbl and poised to go further, depending on the state of the war. In this context, it is worth examining how India can be affected, as the impressionist view is that there could be higher inflation and possible pressure on the budget.

The Israel-Iran war is more like the Israel-Hamas war and not the Russia-Ukraine war. The reason is that in the case of the Ukraine war, Russia was a major supplier of oil to the world and hence tilted the scales on the energy front, as several countries were dependent on oil and gas from Russia. In the case of Israel-Hamas, neither had much to do with energy resources, and the only fear was that other nations producing oil could join the war, which did not happen. However, in the present situation, Iran is a producer of oil with a share of around 4%. But, there is an embargo on buying anything formally from Iran, which has been imposed by the West. Hence, the oil exports from Iran are limited, and that too in a limited manner to China. Therefore, there is unlikely to be a demand-supply imbalance on account of this war.

This factor is critical because when a nation controls a significant supply of a product, any decline in exports can affect the demand-supply balance, as it is not possible for others to supply more given the turnaround time involved. With Iran virtually out of the supply chain, the physical impact would not be there. However, the prospect of any other country with considerable oil resources supporting Iran directly can impact these flows. Presently, it does not appear that the war is likely to spread and will be localised. Hence, the impact as such will be muted.

Coming to how India can be affected by this war getting prolonged, the following can be conjectured: First, the price of oil has gone up for sure but should mean revert once the war ends. Here it is hard to say when the battle will be done, as the Ukraine war has been on for almost 30 months. But even in that case, prices did correct after three months or so, and hence, the effect was not long-lasting. That said, India has been importing from Russia a little over 2/3 of its requirements at a discounted price. Therefore, the full cost will not have to be borne, as the imported cost will tend to be lower than the global price.

Second, even in case crude oil prices remain higher at the level of $70 or $80 plus per barrel, consumer inflation may not be affected. The reason is that the fuel prices at the retail end in the country have remained unchanged through different cycles. Higher global prices have been absorbed by both the government and oil marketing companies. At the same time, the lower price benefit has not gone to the consumer but is shared between the government and OMCs. Hence, this policy has turned out to be prudent and will buffer against any price rise.

At the wholesale level, prices will increase, and the WPI index will show an increase but will not matter from the point of view of monetary policy. The WPI includes products like motor spirit, high-speed diesel, kerosene, naphtha, and aviation turbine fuel, among others. These prices would tend to increase and can have secondary effects on users of these products other than the retail end. The ATF price can have a bearing on airfares and freight rates, provided it becomes more permanent in nature.

Third, higher crude oil prices will affect the import bill, and given that the US tariff regime will be working against the growth in exports, there will be some pressure on the trade front. On the positive side, higher prices of crude will also mean higher realisations on the export of petro products. The net result could still mean some pressure on the rupee, which will mean more oversight from the RBI to control volatility. But any impact of a weaker rupee will work in favour of pushing exports at the margin, as India competes with other Asian countries in areas such as textiles, chemicals, precious stones, and electronics, among others.

Fourth, the impact on the budget will be quite insignificant. This is so because ever since the prices of petrol and diesel were decontrolled, there is a limited subsidy being given by the government. Presently, it is largely for LPG where prices are being revised periodically. Therefore, the pressure on the subsidy bill on petro products would not be there. The fertiliser subsidy can increase if global prices go up in the case of natural gas.

Fifth, one area which would be a concern will be in the logistics space, as shipping and insurance costs could increase on this score. There are possibilities of the Strait of Hormuz being closed by Iran to some degree, which will increase the time involved as well as the cost for moving goods, especially oil. This is something that can affect the entire world and cannot be ignored.

On the whole, the direct impact of the war could be limited, though the government and the RBI need to be watchful on the economic side, as markets can be whimsical. So far, it has been business as usual, but one can never tell.

The post-policy bond market: Financial Express 20th June 2025

 A week after the credit policy was announced on June 6, the financial markets looked quite different from what was expected. Normally when the Reserve Bank of India (RBI) lowers the repo rate there is unbridled enthusiasm with bond yields going down. The talk then centres on how soon banks will transmit the repo rate cuts.

This time the RBI had provided not just a rate cut of 50 basis points (bps) — generally more than what was expected — but also lowered the cash reserve ratio (CRR) at a time when the system was in a surplus of almost `2.5-3 lakh crore on a daily basis. At first sight, this would sound odd as providing liquidity when it was already in surplus would not have made any sense.

However, on deeper thought, the RBI has added certainty in the market by announcing the cut over four tranches post-September. This would also be the beginning of the busy season when demand for credit picks up. Therefore, the rate cut and the reduction in CRR are to be viewed more as a set of measures to tell the markets that the RBI would be providing full support to the system. In fact, it also signalled that the focus would be on growth from now on as inflation is well under control with the annual rate expected to be 3.7%.

This was probably a new approach taken by the RBI, which is refreshing as it blended certainty with surprise. The surprise element was the big-bang impetus of a dual boost through repo rate and CRR cuts. The market should ideally have applauded with bond yields going down. In fact, the 10-year bond should have gone to the 6.15-6.20% level but instead has now gotten into the 6.30%-plus range (going by both the new and old benchmarks). Why should this be so?

A clue to this development is the commentary used in the policy alongside as well as the post-policy interactions with the media. Firstly, the stance which was changed to neutral. While there is nothing sacrosanct in this change given that it can always be altered when circumstances so warrant, a change from accommodative to neutral combined with a large liberal CRR and repo rate cut sent mixed signals. The takeaway was that we should not be expecting any more rate cuts during the year. Second, this view was buttressed by the statement that the committee believed there was less scope for interest rate cuts to push the economy further, meaning thereby that there were limits to which repo rate can influence growth; and this limit may have been attained. This sounds logical because interest rates on their own cannot keep economies running and other factors such as consumption, employment, private enterprise investment, among others, also have to come together.

The bond market has been affected by this decision and articulation. With no signs of further rate cuts in future, the 10-year bond has stiffened even while the T-Bill rates have softened. In the past too, it has been observed that the bond yields tend to be influenced more by what the market thinks the RBI will do rather than what has been done. Often when the repo rate is lowered, and it is fully expected, the bond yields tend to be fairly intransigent even though they would have moved down in advance in anticipation. This is what is meant when it is said that the rate changes have already been buffered by the market.

Another factor coming in the way of bond yields is the state of US markets. While the RBI is clear that it does not take decisions based on what the Fed does, the same does not hold for the market. The market looks at what the Fed says and how the US treasuries are moving. Now, the US 10-year bond is hovering in the range of 4.30-4.50% and moves based on developments on the tariff front.

The Fed has held back rate cuts even though inflation is more or less within acceptable limits. The reason is that the steep tariffs announced are likely to increase inflation which would require the Fed to react. In fact, the balance will be delicate because in the worst-case situation where growth also slows down (though not turn negative to become stagflationary), a more nuanced view will have to be taken. But as of now a long pause till September is expected.

Interestingly, historically the difference between the Indian and US 10-year bond has been in the range of 250-300 bps. Right now the variation is 180-190 bps, which is quite low. This may not have mattered except to academics but for the fact that this differential is important when it comes to investment flows, especially in debt markets. Debt investors normally benchmark returns with the US yields and then make adjustments for currency fluctuations. The rupee has definitely been one of the better performing currencies in the last few years notwithstanding the turmoil witnessed since 2022, which got exacerbated after the US elections and the announcement of the tariff policies.

This differential becomes important in the context of the interest of foreign portfolio investors in Indian debt. The inclusion of Indian bonds in global bond indices was a big positive that was to usher in larger investment flows. One of the factors driving such flows would be the returns and their differential with alternatives. The present differential may not be considered too favourable.

It is normally believed that the debt market reacts with alacrity to policy changes while banks take time to adjust rates. This is so as banks need to evaluate how the lending rates go down as loans linked to the external benchmark get repriced immediately. The marginal cost of funds-based lending rates need to also change, which can come down only if deposit rates are lowered. This is why transmission through the banking system is always with a lag as banks need to evaluate these matrices. The debt market this time has also been relatively less responsive as future actions on the policy front could be uncertain.

Contextualizing Stanley Fisher: Business Line 11th June 2025

 

The Rate Cut Is Praiseworthy But The Challenges Persist" Free Press Journal 7th June 2025

 

What does this mean going forward? The first is that there may not be any more cuts in future, as this has been frontloaded. With the RBI targeting an inflation rate of 3.7% (with Q4 being 4.4%), for a real rate of 1.5% to be preserved, a repo rate of 5.5% looks reasonable.

The RBI has quite aggressively lowered the repo rate by 50 bps and reduced the CRR (cash reserve ratio) by 100 bps to lower overall interest rates in the economy and provide durable liquidity to the system. The CRR cut will release around Rs 2.5 lakh crore in 4 instalments. These were surprises for the market, as it was widely believed that there would be a 25 bps cut in the repo rate and not 50 bps. Further, with the liquidity framework in place, the CRR was not considered a possible measure, as liquidity was induced through the VRR (variable rate repos), OMOs (open market operations), and forex swaps.What does this mean going forward? The first is that there may not be any more cuts in future, as this has been frontloaded. With the RBI targeting an inflation rate of 3.7% (with Q4 being 4.4%), for a real rate of 1.5% to be preserved, a repo rate of 5.5% looks reasonable. While the inflation rate will remain in the 3% range for longer, it must be pointed out that the inflation rate has been low largely due to the base effect and would tend to get reversed towards the latter part of the year.

But given that interest rates will move down in the coming months based on a repo rate of 5.5% (which will probably not go down further), the following could be the implications. Individuals who have taken home loans will see their interest costs come down even further, more or less on an automatic basis. Therefore, this is the right time for individuals to take loans to buy a house or a vehicle. As these loans are based on an external benchmark, which is normally the repo rate, there will be an automatic transmission of interest rates to the borrower.

The same will hold for an MSME, where loans are fixed to the external benchmark. In fact, this particular segment is one of the main beneficiaries of a declining interest rate regime, as their cost of credit comes down. Their interest rates normally tend to be higher than that of corporates, and hence the reduction of 50 bps in the repo rate gets transmitted with alacrity.

What about corporates? Companies borrow on the basis of the MCLR, which is formula driven. The major component is the cost of deposits. For the MCLR to come down, the deposit rates need to come down. Banks here do have a challenge. In FY25, there was a case of banks not being able to retain deposits as funds moved to the capital markets where returns were better. While the repo rate was at a peak of 6.5%, the banks could at best offer 8-8.25% for a certain bucket of deposits last year. Mutual funds have historically delivered returns of 10-12%, while direct equity could be in the 12-14% range. In such a situation, lowering deposit rates across the board will always be a challenge for banks. This will mean that companies borrowing on MCLR could get a lower advantage compared with MSMEs and retail loans, as the full 50 bps reduction will not be passed to all deposits.

However, the better-rated corporates have been able to access the bond market for funds where the transmission has been smoother. Typically, the corporate bond yields tend to get benchmarked with Gsec yields with a spread being maintained of 40-200 bps, depending on the rating. The Gsec yields, as well as those on treasury bills, have been declining since February, and hence, the bigger corporates have already drawn this benefit on the borrowing front.

However, from the point of view of the deposit holder, rates have already peaked in FY25, and the returns will tend to move downwards. Therefore, there is a choice which savers have to make. Either they have to continue with safe deposits or take a chance with mutual funds. While they deliver returns in the longer term, the same cannot be said in the short term, where the risk factor is high. In fact, bank deposits tend to concentrate in the less than 1 year or 2-3 years buckets, which typically give safe returns that cannot be matched for sure by the capital market when risk is adjusted. This is a call that has to be taken by the saver.

The RBI continues to be positive on growth, which is important. Post the announcement of the GDP numbers for FY25, the ministry of finance reiterated its growth forecast range of 6.3-6.8%. It does look like that, given the measures taken by the government and the RBI, there will be an upward movement of consumption and investment which will aid in maintaining the GDP growth in the 6.5% range. The challenge, however, will be to push it past the 7% mark.

The RBI has lowered its inflation forecast for the year to 3.7%, which was expected as the inflation rates have tended to be, surprisingly, on the downside. This tendency would continue due to the base effect, which is caused by prices being very high last year.

This has been a hat trick of rate cuts in an era where several central banks have been lowering rates to bolster their economies. The Fed has been the outlier so far, and logically so too. The current state of the USA is quite uncertain, given the tariff issues that are pending. This is one reason why the Fed has been more gradual with rate cuts, as the threat of inflation is real. This also has tended to keep the dollar volatile, which is tending to weaken presently. This uncertainty will persist for some more time.

The era of Swadeshi: Financial Express 1st June 2025

 

Discover India Before the Ambanis by Lakshmi Subramanian — a compelling journey through India’s business evolution from the 19th century to pre-liberalisation. Explore the legacy of pioneers like Tata, Godrej, and Kirloskar who laid the foundation for India Inc. A must-read on Indian economic history.

Lakshmi Subramanian looks at a unique aspect of India’s economic history —evolution of business—in her book, India Before the Ambanis. She traces how Indians took to business actively, roughly from the middle of the 19th century till the time economic reforms were introduced.

Quite befittingly, the book has been called India before the Ambanis, as Dhirubhai Ambani stands as a symbol of new Indian enterprise. Coming from a non-business family, the stupendous climb to the top exemplifies his entrepreneurial spirit. Building an empire covering the entire upstream and downstream products make his story fascinating.

The book starts with the pre-modern era and brings its story to more contemporary times. Business was conducted even in the Mughal period, though was rudimentary in nature. It gained momentum and came to the fore with the entry of the British through the East India Company. Merchants, she points out, followed money all the way and hence were able to bring scale to business. Thus the so-called merchant capitalist existed for several centuries, though they metamorphosed to something significant only during the past two centuries or so.

The two hotbeds of business were evidently Calcutta and Bombay (going by the original names). The entry of the East India Company through Bengal probably gave it the advantage, while Bombay benefited from being a port in the early colonial times. The Anglo-Parsi collaboration started with Jamsetjee Jeejeebhoy and was concentrated more in export trade and shipping where opium played an integral part. The Parsi tilt was then best exemplified by the rise of families such as the Tatas and Godrejs. If one juxtaposes the history of Birlas and Bajajs, the story gets even stronger.

The founder of Tata Empire, JN Tata, started with cloth and then went to steel and the creation of Jamshedpur city. Ardeshir Godrej had started with surgical instruments, which did not quite succeed. But the move to making locks, which seemed a low value product, became the main line of business. The call for swadeshi at that time helped to gain traction, which expanded to safes and cupboards, which still have a strong brand name. There was close alignment with the political landscape that was the Nehru vision of modern India. The author gives the example of the Madhya Pradesh State Electricity Board offices that were designed with Godrej products and became quite iconic in being minimalistic and modern. In the decades after independence, Godrej became a story of objects, notably storwel, office chairs, and the now extinct typewriter.

At a different level, the author also takes us through the concept of market or bazaar, taking a deeper look at the concept of money and its evolution. This is a critical part of trade. Here she talks a lot of the concept of the traditional bill called ‘hundi’. Its evolution was critical to the development of the money market and systems of payments that are in the most sophisticated form today. This concept also gave birth to the concept of negotiable instruments, which even today is the nucleus of the payments system.

On the engineering side she looks at two major enterprises that were set up. One is the Kirloskar family in Pune and the other was the TVS group. These stories are quite fascinating as they trace their beginnings several decades back. The engineering business goes ahead to encompass power and transport. Alongside there is the story of the Bajaj family with different businesses, though today it is synonymous with automobiles.

A question that the reader may pose is why is it that several other businesses have been excluded? This can be a fair point given that the title talks of India before the Ambanis and there are admittedly several other industrial groups that have made significant contributions. This book is probably not meant to be an omnibus as it picks up some stark stories that lay the foundations of India Inc. Hence it should be read keeping this in mind as all stories cannot possible be included.

What the author tries to bring out is that while each story is about eccentric drive and impulse, there are certain patterns that evolve, which probably is the main thrust of the narrative. In each case, the protagonist was focused on the production of a public good essential for the country.

Therefore, all examples given during the pre-independence time sought to make India self-sufficient. There was also a commitment to disseminate these core values down the ladder to successors who turned out to be effective captains of industry. They worked keeping in mind the independence of India and their vision was to partner with the government in making India great.

Interestingly, the author points out that it was only with the successor generation that there was some angst against licence raj and the plethora of controls that were imposed by the government under the banner of being socialistic. This new generation also put a lot of focus on education and technical expertise. A blend of paternalism and professionalism created this new entrepreneurial culture that helped survive family feuds and wrangles, and, more importantly, protect their reputation. This can be seen even today for family-owned businesses, which do not carry the vestiges of what they were decades or centuries back.

This book is a quick read on the history of Indian business and should resonate with the reader. It is written well and keeps the reader engaged, which is the USP of the narrative.

Madan Sabnavis is chief economist, Bank of Baroda

Book details:

Title: India Before the Ambanis: A History of Indian Business, Money and Economy

Author: Lakshmi Subramanian

Publisher: Penguin Random House

Number of pages: 320

Price: Rs 699

GDP numbers augur well: Financial Express 31st May 2025

 The National Statistics Office’s (NSO) estimates on GDP for FY25, at 6.5%, are the same as the second advance estimates and hence does credit to its forecasting skills. Thus, there are no surprises for the market, and it will be business as usual. The NSO’s accuracy in forecasts need to be commended given that the exercise is quite mammoth due to the considerably large unorganised sector in the economy.

The internals for the year as well as the fourth quarter are quite impressive, especially as the last quarter has posited growth of 7.4%. All through the year, various high-frequency indicators such as goods and services tax collections, e-way bill issuances, purchasing managers’ index, and export of services have been sending very positive signals. The high base effect of 9.2% growth in FY24 was supposed to bring down the rate, so 6.5% is an impressive number.

Agriculture has been the big winner with growth of 4.6%, which suggests a good monsoon resulting in a stable kharif crop followed by a similar rabi crop can keep the rural economy ticking. In fact, this is a necessary condition for attaining sustainable growth over a longer period. As the monsoon forecast for FY26 is positive, indications are that rural consumption should continue to tick this year. This would be the supply side of the sector, and given the increase in minimum support price across the board for the kharif season — it will probably be replicated for rabi crops — higher output should result in higher income for farmers.

Manufacturing, however, has been the only segment that has registered relatively much lower growth than the previous year. Growth at 4.5% comes over 12.3%, so there is a big base effect. But it is also known that corporate profits have been under pressure this year due to demand-side factors. In fact, the manufacturing story is quite skewed with infra-oriented industries like steel, cement, engineering, and energy faring well while consumer-oriented ones delivered a mixed performance. High inflation has been the main factor militating against demand. With households spending more on food items, there is less money left for discretionary spending. Thus, the fast-moving consumer goods sector has been particularly affected. This will need monitoring in FY26. Revival of consumption is expected with the government’s fiscal incentives on the tax front.

Related to the slower growth in manufacturing is the slight decline in the gross fixed capital formation rate at current prices from 30.4% to 29.9%. Here too, investments made by companies have been rather narrow-based with industries like power, steel, and cement showing an increase in the face of good demand. Thus, both manufacturing growth and capital formation will be inexorably linked in FY26.

The construction sector has been one of the drivers of growth — it reflects both the contribution of housing as well as the government push on capex. The housing sector has gone through difficult times with interest rates being high over the last two years. There was an uptick in premium houses while the middle class stayed away. Government spending on roads, bridges, and irrigation works has been the major drivers of construction, which has kept growth ticking. Given the spare capacity, there is immense potential to expand construction in India. This trend may be expected to prevail in FY26.

The services sector has registered growth of 7.2% against 9% last year. The trade, transport, hotels, and communication segment has grown by 6.1%, which does not adequately capture the high level of spending by people on “services experience”. There has been a spike in spending on travel tourism and experiences, which should have resulted in higher growth in the segment. Financial services and real estate also registered lower growth of 7.2% on a high 10.3%, mainly due to the slow growth in deposits and credit in FY25. The movement of savings to the capital markets did come in the way of deposit growth. Public administration and other services maintained 8.9% growth with both the Centre and states meeting revenue budgets.

The fact that the Indian economy clocked growth of 6.5% over 9.2% (FY24) reflects a rather strong foundation. This would provide sufficient buffers to counter the global uncertainty building up periodically. Being a largely domestic-oriented economy, maintaining growth in the region of 6.5% would not be a problem. The challenge would be to move to the 7%-plus territory.

For that to happen, the demand side must be worked out. So far, the focus has been on the supply side, where the Reserve Bank of India has been lowering rates to push up investment. But investment is a result of higher capacity utilisation rates that can be achieved only when consumption increases and companies need to infuse fresh capital. This process normally takes at least one or two years. It can be hoped that FY26 will provide this initial push to consumption.

The heartening fact is that official data hints at the creation of more jobs. But they need to be in high-value production and services where income is typically higher. Right now, the jobs are concentrated in construction, logistics, retail, etc. which do not provide the wherewithal for high discretionary consumption. As the economy keeps growing, this matrix will change. It can be hoped that overall growth will be more broad-based with the manufacturing sector providing a major push.