What to expect from the Union Budget 2025? Financial Express 28th January 2025

 The Budget is a statement of income and expenditure of the government just like the profit and loss of a company. But the thoughts that go into its formulation are important and spelled out in the Budget speech. Further, akin to a company’s balance sheet is the government’s liabilities schedule with debt statement being the critical component. While there may be limited flexibility in designing the Budget as almost all revenue components are contingent on the economy, governments do their best to provide incentives and support while drafting the document.

What can one expect from the Budget? These can be divided into three parts: macros, revenue, and expenditure. With macros, first priority is the fiscal deficit ratio target. The entire edifice is drawn up based on it, as there is a resolve to lower the ratio to 4.5% of GDP by FY26. With the revised deficit for FY25 expected to be 4.7-4.8%, a cut of 0.5% of GDP is likely this time.

Second is the assumed GDP growth rate. The first advance estimate for FY25 was relevant mainly to form the base for the Budget when targeting revenue numbers for FY26. The revised 9.8% for FY25, instead of 10.5%, will probably make the Budget take a conservative view of 10.5% for FY26. This will be the basis for calculating the tax revenue, normally taken as a proportion of this number. The ratio has been increasing in the last decade and a ratio of 12% can be expected this time.

On the revenue front, two areas need attention. The first is income tax rates. Past Budgets have sent a strong signal that ideally the government would like all individuals to move to the new tax system that has lower rates with no concessions. However, since consumption has been hit in FY24 and FY25 due to inflation, lowering tax rates could be considered. Providing relief only at the lower income levels may not lift aggregate consumption. This can be delivered in the new tax system by raising the tax slabs, including the basic exemption limit. Ideally these slabs should be adjusted with inflation. Such a cover will help protect real tax slabs.

Second, the tax rates across income streams may need a relook. All income is virtually taxed at slab rates. The exception is equity where long-term capital gains are taxed at 12.5% — the rationale is that it helps build confidence in the market leading to more investment. There is a strong reason to give similar benefits to bank deposits, as 18% of these funds are by statute invested in government securities and help finance the government borrowing programme. In FY25, there has been a migration of savings from banks to equity markets including mutual funds on this score. Both nominal and tax related returns are higher compared with deposits. So, declaring a lower tax rate on interest on all fixed deposits with maturity of above one year at, say 20%, could be a first step in narrowing the differential.

Third, given the evolving global conditions and the possible threat of dumping on the imports front, a detailed evaluation of all such steps should be done and a strategy drawn up to the counter them.

Fourth, a lower fiscal deficit ratio would mean the government’s gross borrowing programme would be stable in the range of Rs 14-15 lakh crore. An area that can be considered in light of the growing importance of climate issues is throwing open green bonds to retail with a tax-free incentive. This will address the issue of leaving more money in households for consumption.

On the expenditure side, while capex will be the primary tool to drive investment, diversification across ministries can be considered. In the last few Budgets which have witnessed spikes in capex, the three sectors that have benefitted are defence, roads, and railways. In particular, getting agriculture into the fold will help at a national level. Interlinking of rivers is a subject that demands urgency and cannot be carried out at the state level alone.

Second, the production-linked incentive scheme should be extended for micro, small and medium enterprises. Industries like auto parts, chemicals, textiles, handicrafts, etc. would benefit and are important components of the exports basket. For industry, the Centre could add an employment condition along with turnover. Last year, the government announced employment schemes involving payments made from the Budget for first-time employees, etc. By dovetailing the scheme with employment targets, the Budget can address the issue without straining finances.

Third, there can be a case for shifting social welfare spending to health and education. Budgets have concentrated on subsidies and cash transfers to vulnerable sections, improving living conditions. To make money work better by creating more social capital, the focus can also be on creating schools and hospitals as a joint venture with states.

A lot is expected from the Budget, in terms of measures to push for growth in consumption and investment. On the other hand, a more detailed look at the expenditure would be in order given that the government is well on the glide path of lowering the fiscal deficit ratio, to probably 3% in the next three-four years. That the economy is doing well is an advantage as no emergency measures are required and the focus can be on the medium term.

Same same, but different: Book review of Malcom Gladwell : Financial Express January 26, 2025

 We are aware of the fact that a sudden rise of a superstar, like say Virat Kohli in cricket, can lead to hordes of men donning the pointed beard. This is the starting of a trend. Can we call it an epidemic? Probably yes, as this is how such fashion plays out, and this is how companies create trends. This was broadly the idea of how we reach tipping points in life, wrote Malcolm Gladwell almost two and a half decades ago, when he explored reasons why ideas turn into social epidemics. He is back now with a new book, titled Revenge of the Tipping Point. There are certain turning points in life when things pivot to a larger story. Therefore, there is a super-story and a super-spreader, which are the two elements used in this book.

The themes are similar to what one came across in The Tipping Point, as he uses psychology and observation backed by research to explain things that may not be too obvious to the reader. Each story of his has a takeaway which will make the reader say—of course, it has to be this way. Gladwell’s perspective looks at the darker consequences of various phenomena. It includes the surge in bank robberies in the eighties in Los Angeles, the Medicare fraud epidemic in Miami, and the opioid crisis in the United States, etc. In each case he explores how various subjects like individuals, institutions, and environmental factors create tipping points that manipulate or exacerbate societal problems. He consciously draws parallels between criminal epidemics, institutional failures, and examines how small influencers and seemingly minor decisions can lead to widespread, sometimes devastating, consequences.

For instance, Gladwell talks of how the Covid pandemic started. He talks of a biotech firm having a meeting of all global leaders in Boston and logically explains how one person probably started the spread. He had come from China to begin with, but did not know that he was carrying the virus. A successful presentation with hugs to colleagues ensured that most of the staff returned home carrying the virus and spread it ahead. This is an example of a physical epidemic. The description could be that of the author, but the conclusions drawn are important.

On similar lines, Gladwell has some various interesting conclusions. Just like the theory of 10,000 hours of practice of learning in any profession makes one an expert, so is it when there are opinions floated. If 25% is veering in one direction, the majority follows. This is an observed fact, which is stylised by the author. Similarly, with 30% or 1/3 of members of the board of directors being women, they are able to put more weight on decisions taken. Gladwell examines this concept in the context of corporate boards, where having at least three women on a board transforms group functionality by reducing tokenism and fostering collaboration. This, he calls the magic third. So, whether it is 25% or a third, the conclusion drawn is that we do not need a majority to turn the decision. This also will resonate at the electoral level in India where often the winning team may not need to get more than a third of the popular votes!

Try and answer this question. Why do Ivy League schools care so much about sports? It is not all schools, but definitely Harvard. He gets into the process of selection of students and where the predilection to sports leads to the institution having special quota. This, along with the facilities provided, makes sure that the college is able to excel in every field. His takeaway is that the effect of lower entry criteria for athletes is not to take in disadvantaged students, but rather to tilt to the wealthy elite. This follows from the fact that to be a young tennis champion one would need to have parents with the time and wealth to support development of such children. The rather distressing side to the admission process is that there are relatively few seats for outsiders as there are fixed proportions for different categories, with merit being only one of them. The acronym of ALDC holds with privileges being given to athletes, legacies, dean’s interest and children of faculty. In short, one can say that there should not be disappointment in case one does not make it to the school with high marks.

The section where he explores the impact of media on social change is quite an eye-opener. The famous serial Will and Grace brought about the acceptance of homosexuality, which was a taboo earlier. Similarly he shows that a 1978 TV series, Holocaust: The Story of the Weiss Family, made people aware of the holocaust. Otherwise it was a foreign issue and largely unheard of in the USA. Not surprisingly, the number of memorials and museums focusing on the holocaust sprung up after it became popular on TV—a case of the overstory and the super-spreader!

Some of the case studies of Gladwell can be unsettling, especially when he talks of the Medicare fraud in Miami. As individuals we do see how hospitals in India in metro cities push everyone to undergo procedures that are very expensive and probably not necessary, while those in other cities or areas do not suggest the same. It is all about money and the insurance cover which make a difference. In a similar manner, Gladwell explores another anomaly seen across different states in the USA where opioid use was prevalent. Illinois had a low rate of opioid abuse relative to Indiana. The reason was that Indiana, like many states, did not do any monitoring and hence salespersons from Big Pharma companies came in and pushed the drug OxyContin. This made access easy for those taking drugs. Illinois, by contrast, ensured that there was a prescription given in triplicate—one each for the pharmacist, patient and regulatory agency. The three-tiered process became the overstory or governing idea of opioids being different, which made physicians pause and think before prescribing them.

If one is a fan of Gladwell, these stories will excite the reader as it sounds like vintage stuff. The mix of psychology with facts is quite alluring for anyone to draw conclusions, which the author does with some élan. His style is one that blends history, science, and narrative to reveal how subtle societal changes can snowball into transformative shifts. Some of the ideas presented here may sound repetitive, but then this holds for any author who talks about any theory or ideology—which in this case is the tipping point.

Book details:

Title: Revenge of the Tipping Point: Overstories, Superspreaders and the Rise of Social Engineering

Author: Malcolm Gladwell

Publisher: Hachette

Number of pages: 368

Price: Rs 799

Budget could do with a shift in goalposts: Business Line 23rd January 2025

 

90-Hour Workweeks: A Corporate Demand Sparking Ethical And Health Concerns: Free Press Journal 18th January 2025

 

Can 90-hour workweeks balance productivity, health, ethics, and corporate expectations in India?

There is a growing call from CEOs in the private sector urging employees to work more hours. One CEO previously proposed a 70-hour workweek, and more recently, another suggested a 90-hour week. This could become the new private sector ethic. A 90-hour workweek works out to 15 hours a day for a six-day week or 18 hours a day for five days. Even if stretched to seven days, it would mean almost 13 hours of work daily. Aside from the controversies these statements have sparked, this is a serious issue for anyone working in the private corporate sector.

Two Points to Consider

Before delving into the issues, two points must be made. First, it is not uncommon to hear top CEOs express that post-retirement, they wish to take a holiday or spend time with grandchildren. Evidently, their regimen in office didn’t allow such luxuries in their youth. Second, an RBI Governor who headed the central bank during some of the most turbulent times made it a point never to miss a new Bollywood release. His view was that such things happen constantly, and one cannot halt their life merely because the rupee is losing value. This makes sense.

The 70-hour ethic originated from a person who led an IT start-up that has since undergone a metamorphosis to become one of the top earners in the market. The 90-hour rule refers to one of the oldest companies in the world, which operates in a diversified capital goods and infrastructure space. It would still be considered an old economy company driven by the market spirit. This shift is part of new capitalism in India, where working long hours has become the norm. It is not just a case of investment bankers facilitating deals or management consultants finalizing contracts within the famous 90-day window. This practice holds across all industries. The ultimate justification is the ‘market requirement,’ as employees are working for shareholders and need to do everything to increase profit. How should one position themselves as an employer or employee in such an environment?

From the employer's standpoint, let us examine two sides.

1.    No Written Rules: Existing rules on working hours imply that any extension is more of a practice than a strict rule. Therefore, there are no written mandates for a 70- or 90-hour week. Daily working hours typically range from 7 to 10.

2.     Rewards for Hard Work: Employers justify these demands with rewards such as bonuses and stock options. Though rewards tend to be distributed unevenly across hierarchies, over time, they offer employees an opportunity to rise within the ranks and earn these benefits.

3.     Employee Choice: Companies often argue that they are not coercing anyone to work excessive hours. Once the rules of the game are established, the choice rests with the individual. If someone leaves, plenty of candidates are eager to take their place.

However, companies must also consider that with Gen-Z and millennials, who tend to be indifferent to such rewards and prefer a work-life balance, there is a constant threat of high attrition. High turnover means the resources invested in young staff are wasted as they are replaced. At some point, this group spends more time searching job placement sites for employee-friendly options than working. This is not favorable for companies.

The Employee’s Perspective

For employees, the reality of working 90 hours a week is complex.

1.     Peer Pressure: Working 90 hours can become a necessity, especially if others are doing so. The iterative process of late-night working is often driven by a chain reaction: one sits late because their boss does, the next level of boss sits late, and so on. Not falling in line can jeopardize one’s career.

2.     Health Concerns: There are limits to how efficiently the human mind can work. Long hours can lead to fatigue and, in extreme cases, raise serious health issues, such as coronary diseases, diabetes, and burnout, especially for those in the 30-40 age range.

3.     Career Risks: Not adhering to these demands has a serious downside beyond slower career advancement and compensation. The proverbial bell curve ensures that those who are non-compliant risk being included in staff rationalization. If someone ‘needs’ a job, following the rules becomes unavoidable.

The Way Forward

What could be the best way out? A new social contract is needed to ensure balance. Quality of work should take precedence over quantity, and targets set should be realistic. Unrealistic targets push employees to unreasonable limits under the guise of working for shareholder value. A healthy, happy workforce is vital for the progress of any company. Rewards should be appropriately mapped to ensure that employees do not leave due to ‘adverse working conditions.’

This contract must be transparent, where the rules of the game are clearly defined for employees so they know what they are getting into. Employees, too, need to assess the work-return tradeoff before joining an organization. If both sides adhere to their respective parts of the contract, harmony will follow. Developed countries focus on quality of work with 40-50 hour weeks (over five days) and have made significant progress. In contrast, we are now discussing seven-day workweeks. It is time for some introspection.

India Budget: Can the Budget provide a delta to the China plus one effort? Economic Times 13th January 2025

India Budget: The China plus one or C+1 thought is now almost 5 years old when it was felt that there was scope to step in when China was targeted by the USA in particular for opaque trade dealings. The pandemic changed the narrative as all countries were busy protecting their turfs; and as the world got out of the lockdown, China closed doors. Now with China back in the fray, the talk has veered towards the plus one policy again.

 Four things need to be kept in mind when talking of China plus one strategy as the paradigm is not as easy as it looks. The first is that India and other countries have worked on this concept even before the pandemic but have made limited progress. There is evidently a need for introspection.

Second, all countries are in the fray to leverage such a possible opportunity and hence there is a lot of competition in this space. Any strategy will have to take into account what other countries are doing. Third, the USA will be a different entity that the world will be encountering as the new regime is going to be tough on all countries from where imports are sourced.

Hence, while China has been singled out specifically, others will have to protect their own interests to begin with.

Last, post pandemic, several countries are looking to do more within their geographies as dependence on other nations for goods did prove to be a major barrier when the pandemic struck. All this means that a concerted effort has to be put in by not just the Government but also industry. The Government can at best support with facilitative policies.

How can Budget make India benefit

In such a situation, how does India go about the act of being a part of China plus one? To begin with there is a need to segregate exports into those which are largely final goods and those that are major inputs which come under intermediates. This will actually make the task easier when it comes to becoming a part of global supply chains. Final goods include products like readymade garments, electronic goods like mobile phones, automobiles, processed oods etc ..

Those that come as intermediates would be engineering parts, auto ancillaries, chemicals, etc. Here the options are either investing in other countries or becoming a major supplier to the world. Investing in other countries through the subsidiary or joint venture route is an option which several companies are exploring and this is borne out by the outward FDI data.

Given this distinction, what can the Government do? Such a task is actually work in progress as it needs a series of facilitative policies over a period of 2-3 years which makes goods more competitive. This is important because SMEs contribute to over 40% of exports which needs more concerted effort from the Government as they are not in a position to push forth their products on their own. In this context, the budget could possibly take up some issues both from the point of view of general expo ..

The budget has already announced an outlay of Rs 2 lakh crore in 2020 as the PLI scheme which was to not only make 15 odd industries more competitive but also boost exports. There would be need to study as to why this has had limited success in industries like renewables-related and mobile phones and not really caught on in others. While this would admittedly take time, it would be compelling to have a PLI exclusively for MSMEs which are targeting products that are part of the high export buoyan ..

Second, in the field of credit there is room for more announcements. The ECLGS scheme worked very well during covid and there would be some justification for having similar guarantee programmes for MSMEs to enable cheaper flow of credit. To this can be added an interest subvention scheme so that a direct subsidy is given for the MSME-PLI based industries. This can be a direct support just as is done for agriculture. This is important because countries like Vietnam are known to provide a large bo ..

Third, the old model of export processing zones could be revisited and revived to specifically focus on products which can be spelled out. A model of providing end-to-end solutions for these industries based on a cluster approach will be useful for the firms that are dealing with these products. This will also include, among other incentives, a single window clearance which cuts off bureaucratic delays.
Fourth, the structure of customs duties could also be reviewed and altered downwards as it can be helpful to exporters. Alternatively, further announcements in the field of replenishment can be considered.

Fourth, the structure of customs duties could also be reviewed and altered downwards as it can be helpful to exporters. Alternatively, further announcements in the field of replenishment can be considered.

Fifth, the budget can think of reviving the credit rating of MSME enterprises which were quite successful in the past on account of the subsidy element. A rating helps to lower the cost of borrowing. Considering that GST has formalised the economy to a large extent, data availability is less of a challenge for doing such ratings. In fact, having a rating also nudges units to keep improving to move up the ladder.

While this can be the push given by the Government, the initiative has to come from the companies where they need to innovate and drive forward the agenda. China plus one does provide an opportunity for sure. But the final push has to come from Indian enterprises in this competitive environment.

How ‘final’ are GDP estimates? Financial Express 13th January 2025

 Drawing firm conclusions on GDP numbers based on NSO’s first advance estimates is tricky. 

The 6.4% GDP growth estimate of the National Statistical Office (NSO) has drawn myriad responses on the state of the economy. It has now been used as a basis for conjecturing the final numbers which will come out in May. Several forecasters are talking of a scaling down of this number. At times there is a bit of an exaggeration with economists talking of a significant slowdown. A couple of points are relevant here.

The first is that after averaging 8% for the last three years, the growth number this year had to be lower and hence when the government stood by its forecast of 6.5-7% for the year and the Reserve Bank of India (RBI) lowered it to 6.6% in the December policy, it was expected. Therefore, slower growth was already a known fact and the number only was on the table for discussion. Now, the NSO has drawn up these forecasts based on extrapolations. Hence this is just an improvement over what it does at the beginning of the year when there is absolutely no data available and the forecasts are based on models which make several assumptions. This advance estimate is based on the knowledge of the first half of the year or eight months’ data for the variables involved. Therefore, it is not based on any specific collation of data from various entities. This year has been unusual as elections were held, which has held back spending by the government and had an impact on private investment too.

But such a forecast is necessary because it has to be used in drawing up the Budget. The revised fiscal ratios will be based on a revised GDP number in normal terms, which will be around `2 lakh crore lower than what was estimated at the beginning of the year. The past is important because for FY26, the GDP forecast has to be made. It can be around 10.5% again, which will then feed into the Budget model where tax ratios are juxtaposed with these GDP numbers.

The Excel files of economists have already run fresh forecasts based on the 6.4% number for both FY25 as well as FY26. The important question here is, how good are the first advance estimates of the NSO considering that they come when only nine months of the year are over and are available for an even shorter period?

To give us an idea, the table provides the forecasts for GDP at four points of time. There is a first advance estimate in January, followed by the second advance estimate in February and the provisional estimates out in May. There is also the ultimate number which comes with a lag of a year — which is what will be seen in any time series chart of India’s GDP growth rate.

The first thing that strikes the reader is that the final numbers tend to be at some variation with the earlier estimates. This means that while more data comes in and the assumptions or extrapolations are replaced with actual data, revisions would be made that can lead to different conclusions. In 2016-17 for instance, which was the year of demonetisation, growth was projected at 7.1% on three occasions but ended up at a high of 8.3%.

The final estimates have shown varying patterns compared with the first advance estimate. In four of the seven years, the final numbers were better including 2020-21 during Covid-19. On two occasions, it came in lower while it was spot on for 2022-23. Therefore, it would be hard to ascribe a direction for the final GDP growth numbers based on past data. This is because the revisions would be coming from different sectors at various points of time. Therefore, it may be difficult to assume that the final number will be better though it is tilted in this direction based on the seven observations.

In fact, even the May provisional estimate may not provide the certainty in the estimate as data is still in the process of being absorbed. In the last four years, the provisional estimates were better than the first advance estimates on three occasions.

Therefore, drawing any firm conclusions on the final GDP growth numbers based on the NSO’s first advance estimates is tricky. The economy has a very large unorganised sector on which data is not readily forthcoming, which leads to several imputations. The goods and services tax has brought about significant progress in terms of formalisation of the economy where several micro, small and medium enterprise (MSME) units have got registered. Similarly, borrowings by MSMEs from the financial system would entail providing data on their finances, which also helps in getting closer to their value addition to the GDP numbers.

It is not surprising that several forecasts have been lowered after the NSO brought out its first advance estimates. There is always a “follower” reaction whenever there is any estimate on growth by either the government, the NSO or the RBI. The rationale would be puzzling given that the economic environment prevailing till January was known and did not trigger any revision in forecasts or even overall view on the state of the economy. It would be of interest to see how the second advance estimates in February would view the economy.

Let's take cues from Piketty to raise India's tax revenue : Mint 10th January 2024

 https://www.livemint.com/opinion/online-views/india-should-take-cues-from-piketty-on-enlarging-its-tax-mop-up-budget-2025-expectations-thomas-piketty-taxes-revenue-11736330788099.html

India's lipstick effect: Forbes 2nd January 2025

 The economics of the beauty industry in India is being shaped by post-Covid consumer demand and corresponding supply, the chief economist of Bank of Baroda, and author, Corporate Quirks: The Darker Side of the Sun, writes

he Indian economy is slated to grow at around 7 percent for the next couple of years, including FY25. At the same time, there have been some pertinent concerns raised on urban demand not quite keeping up. The rural economy, however, is slated to do better due to the good monsoon and kharif crop. If one were to look at sectoral growth trends, the picture is mixed. Those related to infrastructure tended to do better than consumer-related products. High inflation, in particular food inflation, has been a dampener.

Now interestingly, playing in the background is the ‘lipstick theory’ which broadly says that when the conditions are challenging for households, they take recourse to consumption of beauty products and services that improves the ‘feel good’ factor. How is one to interpret this phenomenon in our context, where it is believed that the recovery is shaped by the letter ‘K’?

The ‘lipstick’ theory or impact has been witnessed in the country post Covid, notwithstanding the fact that headline inflation has been high. There are several economic forces that have been working in this direction. First, the return to normal post Covid has meant that individuals have gotten back to their physical place of work, which in turn has made physical grooming an integral part of office life. With most companies now insisting on workers coming back to their desks, even if for a specified number of days in a week, the desire to ‘look good’ has returned. It may be recollected that during the lockdown phase of the pandemic, where work-from-home was the norm, all business was driven by Zoom and Microsoft Teams meetings. The change now has meant a return to normal.

 Second, the pent-up demand phenomenon has been witnessed everywhere in the economy. It started with people going out and buying physical goods and then spread more significantly to services in FY24 and FY25 (ongoing). This can be seen in the PMI (purchasing managers’ index) numbers too. An enhanced demand for services has included travel and tourism, as well as hospitality. Intuitively it can be seen that once people start moving out to revel in these services, there is a tendency to also dress-up for the same, which has led to demand for beauty products. In fact, an interesting phenomenon post Covid has been a rapid rise in the supply of entertainment, which can range from movie releases to international concerts like those of Coldplay or Dua Lipa, besides the conventional classical music and Indian language concerts. This has enhanced the ‘outings’ of almost the millennials and Gen-Z groups. This has also increased demand for such products as appearance is more important than the subject when attending these concerts.

Third, the pricing of these products has also been rather different from other products. To begin with, beauty product companies did not raise prices even though input costs rose in 2022, when there was an attempt to hold back on price hikes to ensure that customers were not affected. Subsequently, there has been an attempt to increase the prices, albeit gradually, as can be seen within the category of inflation on ‘personal care and effects’. But this has been well absorbed by users. The main reason is that while consumption increases, the expense bill is still small given the quantities that are used. This does not reflect in family budgets, unlike the vegetable or cereals basket. Hence, in a way, consumers have fairly inelastic demand to these products and services. In fact, the higher price may induce the demand through the ‘snob effect’.

Fourth, the income distribution pattern of the country has changed. While there is high inequality, those at the bottom and mid segments have witnessed improvement in their incomes and several jobs have been created at the lower level in industries, like delivery services. Therefore, the consumption class has increased. Here, the famous theory of ‘demonstration effect’ enunciated by Thorstein Veblen (formalised by economist James Dusenberry) has a role to play, where individuals would like to follow what the ‘other influence groups’ do. This has led to demand, especially for services in beauty parlours, which includes services like tattooing and grooming, and also includes male customers. A couple of decades back, such products and services were largely consumed by women.

Last, with demand for such products increasing, there has been a sharp increase in their supply. This can be seen by both the mushrooming of beauty parlours even in slum areas, besides the rural and semi-urban regions, as well as the rise of the informal sector producing these beauty products. This has made these products and services more affordable, as the prices tend to be lower than those of the organised sector.

 Therefore, the lipstick effect or theory has worked quite decisively in the Indian context, with both sides of demand and supply working well, with each force-feeding into the other. This symbiotic relationship holds promise for the future too as the economy continues to grow and create more jobs where consumption of such products becomes a habit.

 

Key Global And Indian Economic Themes For 2025: Free Press Journal: 3rd January 2025

 As we step into 2025, five crucial economic themes will dominate the global landscape. These themes, with their respective sub-themes, will shape the global economy over the year, even as the world remains in a state of flux. While global growth is expected to be steady, decisions made in the West and China will have significant repercussions on other economies, particularly emerging markets like India.

1. The Policy Approach of the USA
The first theme is the policy approach of the United States, which remains a key driver in global economic affairs. Despite the decreasing level of globalization, where nations interact more as individual players than as one cohesive group, the shadow of the USA looms large over every corner of the world. This influence is not just about warnings against de-dollarization or the imposition of tariffs but also about the broader economic policies that a new US President may initiate. These policies will inevitably affect countries worldwide, particularly through trade relations, inflation, and fiscal policies.

Donald Trump, who has made his economic stance clear during his election campaigns, is expected to implement many of his proposals. His position on migrant labor, for instance, could lead to a labor shortage in the US, pushing wages higher and fueling cost-push inflation. Additionally, his plan to cut taxes for corporations, although designed to stimulate investment, will likely increase the US deficit and borrowing, resulting in higher interest rates and global inflationary pressure.

Trump’s aggressive tariff approach, especially towards China, is another factor to watch. His rhetoric suggests that no country, not even traditional allies, will escape his wrath, with a 10-20% tariff on all imports from various countries. This will exacerbate inflation and will compel the Federal Reserve to consider a different approach to interest rates. Bond yields, which are often affected by US Treasury bond movements, will likely continue to fluctuate, making global markets more volatile.

2. The China Factor
The second theme revolves around China, whose economic recovery post-Covid will be a pivotal aspect of global economic dynamics. The Chinese government, having enacted both fiscal and monetary stimulus, is eager to rejuvenate the country’s economy. However, its relationship with the USA remains fraught, particularly concerning exports. Any drastic action by the US against Chinese exports could disrupt global supply chains, creating a ripple effect that would affect economies worldwide.

China’s growing assertiveness in other regions, particularly in Africa and parts of Asia, could be the result of its efforts to offset any trade restrictions imposed by the US. While India’s economy is more reliant on domestic demand, China’s growth remains highly export-driven. This means that India, too, will need to monitor China's actions closely, as any significant policy shift in China could impact the supply of key commodities, such as rare earth metals, that are vital for various industries worldwide.

3. The Union Budget of India
The Union Budget, set to be announced in February, will be another crucial theme in 2025. Unlike the previous year, where the budget was split into an interim and regular budget, this one will cover the full fiscal year, providing a clearer roadmap for the nation’s economic policy. The budget will focus not only on numbers but also on policy directions. For instance, the government’s fiscal roadmap, including its target for a 4.5% fiscal deficit ratio for FY26, will be keenly scrutinized.

With inflation having eroded the real purchasing power of many taxpayers, there will be an expectation for some form of relief on the taxation front. This could take the shape of income tax cuts or other relief measures designed to boost disposable income. Another area of focus will be the government’s capital expenditure plan. How much will be allocated to infrastructure and development projects? This will give insights into how the government plans to drive growth and create jobs in the coming year. Additionally, the government’s borrowing program will be under the spotlight, with the markets looking for any signs of fiscal consolidation.

4. The Credit Policy and Inflation Management
The fourth theme is the Reserve Bank of India’s (RBI) credit policy for FY25. The last credit policy of the fiscal year, which is expected to be more critical than the April policy, will be shaped by several factors. A major shift will be the appointment of five new members to the Monetary Policy Committee (MPC), whose perspectives on repo rates and the growth-inflation dynamics will be key in shaping policy. The guidance given on inflation and growth in this policy will set the tone for the next financial year, particularly regarding rate cuts.

While the inflation data may not change significantly, the RBI’s interpretation of this data will guide future actions. This will be important not only for the RBI’s monetary stance but also for borrowers and lenders, who will be watching for signals about future interest rates. If the RBI’s stance indicates that inflation is under control and the economy can bear rate cuts, there could be a downward trajectory in rates, helping ease borrowing costs. For now, it appears that deposit rates have peaked, and there is unlikely to be much upward movement in the short term.

5. GDP Growth Projections
The final theme concerns GDP growth projections for FY25 and FY26. Multiple estimates will emerge from January onwards, but the most significant projections will likely come from the government’s Economic Survey, the Union Budget, and the RBI’s own growth forecast. This year’s growth numbers are particularly interesting as the final number for FY24 was a surprising 8.2%, a significant upward revision from earlier estimates.

The expectations for FY25 are more tempered, with estimates ranging between 6.5% and 7%. This number will have profound implications for the government’s fiscal planning and the markets. The final growth number, expected in May, will provide clarity on the overall health of the economy and how well it has withstood global pressures.

Additionally, the combination of the growth forecast from the Economic Survey and the Union Budget will provide insights into the government’s expectations for FY26. These numbers will be important not only for economists but also for markets, including stock, money, and foreign exchange markets. The interplay between these projections and actual outcomes will be closely monitored by investors and policymakers alike.

In conclusion, these five themes—US policy, China’s economic recovery, India’s Union Budget, the RBI’s credit policy, and GDP growth projections—will play out through 2025. While some of these issues, such as the budget, are fixed events, others, like US-China trade dynamics and inflation management, will evolve throughout the year. The key question for India will be whether its economy can sustain a higher growth trajectory in FY26, driven by these themes and other emerging global factors.

As we enter this new year, these economic themes will provide the framework for much of the global discourse, influencing policy decisions, investment strategies, and market dynamics across the world.