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

 

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Governance Gap: Unlocking India’s Superpower Potential

Shashi Budhiraja 
Edited by 
Rajeev Budhiraja
Rupa Publications

Pp 296, Rs 695

The importance of innovation: Financial Express 14th October 2025

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity Trap poses policy challenge: Business Line 26th September 2025

 

It’s all about the idea: Stories of successful startups and their strategies: Book Review in Financial Express 28th September 2025

 It is a well-known fact that most startups tend to fail within a few years of inception. Yet, there is a clarion call to give a push to startups because they bring in new ideas as well as have the potential to become what are called unicorn (companies valued at over $1 billion). There have been several instances of such unicorns spurting in India, which houses one of the largest numbers in recent years.

This is what is explored by Aditya Arora and Surya Pasricha in their book Startups of Bharat. They take the reader through different success stories and have certain lessons for those who wish to get into such ventures. There has been a tendency for several engineering and management graduates to get into something new; and with the spread of technology, has become easier. These startups have chosen the online route often to deliver new products and services to customers. In fact, as the authors show, most of these ideas germinate when they are studying in college and fructify as they end their courses and opt for this unconventional route rather than try for the placements. This is reflective of a very advanced level of intellect where students are already in this entrepreneurial role, albeit in the mind, from an early age.

The authors claim that this is not a book that teaches or preaches. It is more a collection of various ideas that have gone into creating startups that have worked. Hence, one cannot ask about those that have not worked. Each story covered in the book gives a gist of what the enterprise does and then traces how these ideas came up and were implemented. At the end of each chapter there are key takeaways. This would closely resemble a brief playbook that could be adopted by anyone thinking of such ventures.

Some of the questions that are posed relate to the business, while others are more behavioural, which will vary across persons. Hence when they talk of being resilient or dreaming big and being bold, the concept may look fairly nebulous. But talking on systems and not the product or focusing on communities and not just customers will be more specific thoughts that need to be pursued.

These stories of entrepreneurs have resulted into considerable amounts of money being raised in the market, with some achieving unicorn status. These startups have not just brought in new ideas but also created jobs. This is one way to go for the economy as conventional jobs become repetitive and probably scarce as technology-driven AI can create a certain modicum of redundancy of labour.

Trying to trace patterns in these enterprises, the authors conclude that there are essentially three prerequisites that have to be met for a successful venture. The first is the product or service (which they term as problem) should be one with a large potential market. This sounds logical because scale is important when bringing in any technology as otherwise there would be a levelling of demand. Along with size of the market, there must be what they call a ‘problem which is repetitive’ so that the venture can garner an income on a regular basis. This too sounds fair, because for the market size to be maintained over the years, there must be high growth registered continuously or else the idea will wane. Last, the product must be considered an essential and not of discretionary value. This is important because as economies progress there are business cycles. If products are not a necessity, then there will be reduction in demand in the natural course. However, if it is essential, then it would work well.

In this book, Arora and Pasricha provide several case studies to drive home this point. The first thought that comes to us would be education, which is something that is large given the demography of India. Several startups have focused on this field and derived fair returns over time.

Providing a platform for cattle is another rather novel idea. We are aware of a second-hand automobile market which is conducted online by several such enterprises. But trading of cattle is different which eschews the bother of going to cattle fairs. Besides the platform and other technical issues that have to be in place, there is a need to give wide scale publicity to these ideas so that a market is created.

They talk of another venture that created India’s largest student community where one can come and learn new skills and network with peers. Another example provided is of a property management app that helps landlords and property managers automate rent collection and streamlining tenant onboarding.

They also provide some guidance on how one finds mentors as this is something that is useful for sure. Similarly, they pose and answer questions on the funding aspect of such ventures as well as on where to register the company. Raising money is always a challenge for any individual, especially if the idea that is being worked on is new and not tested. These are useful tips where the suggestions are not based on any theoretical basis, but practical experience of how various entrepreneurs did the same.

The 15 chapters that are included here are what the authors quite appropriately call the 15 levels of simulation as each level has advice based on a specific company’s experience. This book will surely be of interest to anyone who is looking to do something new as it does do some hand holding from the stage of ideation to making the project work. For those who are not of this variety, the book provides interesting reading as it talks of how things got done for all these companies (the names have not been mentioned in this review as it would take the fizz out from reading the book).

Startups of Bharat: Stories of India’s Million-Dollar Founders Under Thirty
Aditya Arora, 
Surya Pasricha
Penguin Random House
Pp 240, Rs 399

Can’t Bet On Gold To Continue To Rise At The Same Pace: Free Press Journal: 22nd September 2025

 Global uncertainty caused by either war or any extreme policy, which can surround crude oil prices or tariffs, generally causes excess volatility in all markets. With a plethora of developments taking place in the current context, it is hard to conjecture whether currencies will decline or get stronger. The bond markets remain in flux as central banks evaluate the situation before taking a call on interest rates. The same holds with stocks, which get more volatile and can change direction daily depending on the sentiment. It has been observed that in the last two years or so, one asset which moves in a single direction and tends to thrive in such chaos is gold. This has actually been the story ever since Covid, as it has gained in strength for a variety of reasons.

From an average of $1462/ounce in 2019-20, the price has gone up to $2585/ounce in 2024-25. This is an increase of around 76% over 5 years. However, in 2025, due to the tariff issue, there has been a substantial rise from $2709/ounce in January to $3532/ounce in the first week of September, which is an increase of 30%. This comes at a time when stocks have been volatile, bond yields rising, and currencies moving in no particular direction. How can this be explained? And more importantly, can this be expected to continue?

First, gold is considered to be a safe haven and always does well when there is uncertainty. In the last five years, there have been several periods of uncertainty, including the pandemic, wars, political changes and, more recently, the tariff issue. Therefore, investors diversify their portfolios to include gold. The fact that one can invest through financial instruments makes it even easier from the point of view of transacting in the same. There may be no compelling reason to buy physical gold. The derivative market is active both overseas and in India, and the ‘future’ momentum gets reflected in the physical market too.

Second, gold ETFs have received a fillip as large institutional investments flow into these funds. As ETFs do maintain a backup of physical stock of gold, there has been an increase in demand for the metal, which has kept the price rising in the market. In fact, this has been one of the major sources of demand in the last five years, which was not the case earlier.

Third, central banks have been a big purchaser of gold. Ever since the Ukraine war erupted, there has been talk of de-dollarisation. Central banks have been picking up gold in parallel from the market to build their reserves. As gold does not belong to any country, it is a very good way of diversifying foreign exchange reserves. Some of the central banks, which have bought progressively more gold in the last few years, are from India, China, Turkey, the Czech Republic, Poland, etc. When central banks buy gold, it tends to be of considerable quantity and value, which adds to the price momentum.

Fourth, at the individual level, a boom in prices becomes self-fulfilling as individual households rush in to buy jewellery, trying to beat the cycle. By doing so, they contribute to the spiralling demand, which in turn pushes up the price. India and China are the two biggest consumers of gold. In fact, with interest rates declining in India, there is more reason for households to prefer to buy gold as a long-term investment. There was a gap in spending during the first phase of the pandemic, when there were lockdowns across the globe and it was difficult to buy jewellery. However, subsequently there was the pent-up demand phenomenon, which led to an increase in purchases, leading to the price increase.

The question to ask is how will the price go? The past track record has been impressive in the last five years. But there were periods when gold remained quite grounded. From roughly 2007 to 2015 the CAGR, over a ten-year period, tended to be in double digits every year. This was the period following the Lehman crisis, which acted as a good prop for gold.

However, it is only the upsurge in 2024-25 that has pushed the CAGR once again to the region of around 8%. During the interim period, the price tended to be volatile without any significant movement in either direction. Therefore, it cannot be assumed that the price will continue to increase by leaps and bounds, as has been witnessed in the last 18 months or so.

In the last 10 years, on four occasions there was high double-digit growth in the price of gold, while there were 3 years of negative growth. Hence, it cannot be assumed that the price will increase every year. While it can reasonably be assumed that the global environment will remain volatile for the next year, due to the realignments taking place in global trade and hence currencies, conjecturing beyond may still be tough. Besides, with the price of gold at a level of $3500/ounce, a sharp increase from now on would not look likely in the absence of a major shock.

While the theory of gold delivering good, steady returns would still hold over the longer term, the annual increases could be muted. A lot will also depend on how the ETFs and other investors look at gold as an investment when it comes to buying the metal. The central banks’ acquisition is always in a gradual manner and can be expected to tick along as they continue the diversifying act over the next five years.

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.”