Rupee slide: is there a case for a rate hike?

 The fall in the exchange rate of the rupee is the biggest concern at the moment. 

The current account deficit is expected to widen to around 2 per cent of gdp in the wake of the surge in oil prices. That is not a big deal by historical standards. We were comfortable with a CAD of at least up to 2.5 per cent of gdp, meaning we could find enough sources of foreign capital to finance the deficit.

Not so today. FII flows have been hugely negative and net FDI too has been negative. We could get public sector companies to raise foreign borrowings with a commitment from the government to cover exchange rate risk. We could resort to NRI foreign currency deposits. And the like.

But why not just raise the policy rate?

Former MPC member, Janak Raj, writing in BS, argues that we should not. He gives his reasons.

Empirical evidence suggests that defending an exchange rate with interest rates rarely works except in a full-blown panic, and even then, it requires very sharp hikes.

In theory, that's not true. Any rate hike, by raising the differential with respect to rates abroad, must cause the rupee to strengthen. Maybe not appreciably. But it should certainly help halt the relentless slide in the rupee. 

Further, he argues: 

The policy rate is an instrument for inflation control. Since exchange rate depreciation impacts inflation, the policy rate should be raised only if inflation breaches the target. That is, the MPC should only be concerned with exchange rate pass-through to inflation. 

By implication, the MPC should react only if the inflation rate exceeds the upper band of 6 per cent. At present, inflation is projected to be around 5 per cent.

The problem is that, if the MPC were to wait until the upper band is breached, the fall in the rupee would have fallen far too far for comfort. The momentum of rupee depreciation may become irreversible. Every fall in the exchange rate of the rupee has its implications for the fiscal deficit, given the reluctance to pass on prices fully to the consumer. 

So, with inflation projected to be in the region of 5 per cent, a judgement has to be made. Given the current geo-political situation, is there a prospect of oil prices rising above, say, $110 per barrel? Even at the present level, are FII outflows likely to persisit?

If the answers are in the affirmative, then there is a heightened probability of inflation breaching the upper band of 6 per cent. That creates the case for a rate hike. No need to wait until the horse has bolted.

Raj argues that the main problem could that India has taxes on capital gains that competing markets do not have. But that is a new situation. It has always been the case. Nevertheless, foreign investors have come in droves because stock returns in India too are higher so that the post-tax returns compare well with those in other markets.

The depreciation in the rupee is not the entirely the result of rising oil prices. Earlier, investors bolted after India was subjected to punitive tariffs by the Trump administration. Not that the CAD was seriously impacted but investor sentiment turned negative. We were told that they did not view with favour a market towards which the US administration had a hostile stance.

The point about hiking the policy rate is that we can expect the effect to be immediate. All other instruments will take time in producing results. 

 

Migrants head back to villages as LPG price hike bites

 FT reports that migrants have begun to find life unaffordable in cities following the LPG price hike and are heading back to the villages. I must confess I was surprised as I have not seen such a story in the Indian newspapers.  

.......Shreya Ghosh, a labour rights activist from the Centre for Struggling Trade Unions, an umbrella group, estimated the number of departing workers was “in the hundreds of thousands”. “The LPG [liquefied petroleum gas] price rise made life unbearable,” she said. “No one can survive on wages even close to [the monthly minimum of] 11,000 rupees.”

In UP, the government has hiked wages by 21 per cent in order to stave off protests from workers. Industry is upset and says that many units will become unviable as a result.

“A steep rise in minimum wages will render operating costs unsustainable for industries across sectors,” said the Confederation of Indian Industry in a written statement to the state government, which is led by Modi’s party. “This may prompt companies to consider relocating or expanding operations in other cost-competitive states.” 

I have to wonder how the Indian press missed the story. 

Oil prices above $100 expose a vulnerability in Indian economy

The plunge in the exchange rate of the rupee has come as a rude shock to policy makers and businessmen. The plunge comes at a time when India's economic fundamentals are better than before. 

Despite seemingly sound fundamentals, FIIs are exiting India. Why? For most of 2025, it was because India came to attract Trump tariffs of over 50 per cent including punitive tariffs of 25 per cent for buying oil from Russia. FIIs saw the US administration posture towards India as a negative. That problem was resolved in February 2026. Then in March came the Iran war which pushed oil prices to well over $100 a barrel.

Oil prices of over $100 can push India's current account deficit (CAD) to over 2 per cent. That's a level that policy makers are okay but not foreign investors. India's CAD averaged 0.8 per cent in the last five years. They stayed low, thanks to oil prices staying well below $100 for the most part. 

I argue in my BS article that oil prices rising above $100 expose a vulnerability in the Indian economy.

Iran shock highlights India’s external vulnerability

Managing external risks may require reining in growth ambitions

Going by the revised gross domestic product (GDP) series, the Indian economy grew by 7.2 per cent, 7.1 per cent, and 7.6 per cent in FY 24, FY 25, and FY 26, respectively. This is a truly impressive growth record in an environment marked by the Ukraine conflict, high interest rates in Western economies, and Trump tariffs. have posed serious challenges. 

Even a tariff rate of over 50 per cent on much of India’s exports to the United States could not stop the Indian economy in its stride. With the inflation rate at an extremely benign 3 per cent, it appeared that India was finally set on a 7 per cent growth trajectory even in a difficult global environment. The conflict in Iran, now paused for two weeks, threatens to  undermine these expectations.  

The truly unsettling element in the scenario has been the fall in the exchange rate of the rupee. The fall predates the Iran conflict. The conflict has merely accentuated an underlying trend. The nominal effective exchange rate of the rupee has fallen by 8.5  per and the real effective exchange rate by 8.1per cent in the period from February 2025 to February 2026 (trade-weighted 40 currency basket). The latter is well beyond the Reserve Bank of India’s comfort zone of 5 per cent. 

 A growth rate of over 7 per cent, an inflation rate below 3 per cent and a current account deficit of 0.8 per cent scarcely justify a fall of this order. The fall has to do entirely with capital flows. There was a net foreign portfolio investment (FPI) outflow of ~1.52 trillion in FY26. These are the highest FII outflows ever in any given year. They exceed the outflows of ~1.22 trillion in the Covid-impacted year of 2021-22.  

In 2021-22, the growth outlook was nowhere as positive as it is today. The inflation rate was running at 5.5 per cent. The banking system was under considerable stress. The flight of FII funds was entirely understandable. Why would FIIs want to exit an economy growing at over 7 per cent, with inflation at 3 per cent and banking system indicators that are highly favourable?

The outflows are perceived to have happened on account of the punitive tariffs imposed on India by the Trump administration. FIIs were said to perceive the US administration’s stance towards India as a big negative for the economy. It was a risk factor that argued against staying exposed to India.

The tariff issue was resolved with the Indo-US interim trade agreement in February 2026. In the same month came the judgment of the US Supreme Court striking down the Trump administration’s tariff regime. For the present, India, like everybody else, is subject to tariffs of 10 per cent on its exports to the US.  It cannot be that the tariff factor is material to the exchange rate of the rupee any more. 

The material factor is the war in Iran. It has changed the outlook far more drastically than the Trump tariffs had done. The impact on growth and inflation are still manageable. Several agencies now project India’s growth at 6.5-7 per cent or even 6 per cent, down from 7 per cent earlier.   Inflation is projected at 4.5 to 5 per cent, which is within the RBI’s inflation band. Neither projection is scary.

It is the current account position that is seriously impacted by higher oil prices. Analysts see the current account deficit (CAD) going up to 1.8 per cent of GDP if oil prices remain at $85 per barrel throughout the year. That is what the RBI has assumed for FY 27 in its April Monetary Policy Report. If oil prices are above $100, the CAD could be higher than 2 per cent.  

That does change the perspective drastically for foreign investors. India’s policy makers have always believed that a CAD of up to 2.5 per cent is manageable. What investors will focus on, however, is a significant worsening in relation to the past five years. When FIIs see CAD increasing steeply from an average of 0.8 per cent of GDP in the past five years to around 2 per cent, expectations of a depreciation in the rupee are inevitable. As FIIs head for the exit to protect their returns, these expectations will prove self-fulfilling. 

It is clear that improvements in the fundamentals of the Indian economy in recent years have concealed an important vulnerability:  The impact of oil prices above $100 a barrel on the current account deficit. This vulnerability was not noticed because world prices have stayed below $ 100 for most of the past five years, except for about four months in 2022 after the Ukraine conflict erupted. They have stayed below $80 over the past two years.  

The conviction in the markets has been that oil prices will stay in the mid-60s under President Donald Trump. The rise in oil prices to well over $100 a barrel  over the past month has upset all calculations.  No surprise that, until the announcement of the ceasefire in Iran, the downward pressure on the rupee seemed relentless.   

There is not much the government can do about the prices of oil and related products. It can at best focus on ensuring supply and cushioning the price impact on consumers. So far, it has done a good job on both counts. 

As for the exchange rate, intervention by the RBI can only manage the fall in the rupee, it cannot prevent it. If the ceasefire does not last and oil prices stay elevated for a long period, the RBI may  have little choice but to increase the policy rate. The cumulative reduction in the RBI’s policy rate of 125 basis points since February 2025 is now beginning to look somewhat imprudent. With the economy growing at around  7 per cent, it may have been wiser  to have exercised restraint , given the enormous uncertainties in the international environment ever since President Trump assumed office in January 2025. 

 There is an important lesson here for policymakers. If we are to effectively manage risks in the economy, if stability is not to be compromised, it is necessary to rein in aspirations for GDP growth. In a troubled global environment, a growth rate of close to 7 per cent is not something to be sniffed at. Macroeconomic policies that seek to accelerate the growth rate at the current level of savings and investment expose the economy to avoidable risk.

Indo-US trade deal: India's problem is not the current account but the capital account

Much of the analysis of the Indo-US trade deal centres on what India has gained or lost in terms of trade. But the point about the deal is not that it improves our export prospects while opening up selectively to American goods. 

It is that the deal improves the prospects for capital inflows, FDI and FII. These inflows have been distinctly unsatisfactory consequent to the US's imposing additional tariff of 50 per cent on Indian exports (barring a few specified items).

Foreign investors do not view favourably any emerging market towards which the US administration is ill disposed. That would have meant a downward pressure on the rupee indefinitely. Any further fall in the rupee had the potential to destabilise the Indian growth story. The rupee exchange rate rising to around Rs 90 from Rs 92 or so before the deal was announced is an indicator of how the attitude of the US towards India matters.

More in my BS article, Indo- US trade deal is not just about trade

Indo-US trade deal is not just about trade

The deal shifts the US posture towards India from hostile to neutral, and that matters for growth

T T Ram Mohan

The India-US trade deal, for which a framework for an interim agreement has been agreed, will not lack critics. The Congress party has called it a surrender. A farmers’ organisation has called for protests. Many will pore over the fine print once the details are finalised and argue that the deal is more favourable to the United States.

We need to be clear about a couple of things.

First, any nation negotiating a trade deal with the Trump administration must expect the deal to be tipped in favour of the US. President Donald Trump has made it clear that his priority is to reset America’s economic equations with the rest of the world. He is determined to use the economic and military might of the US to do so.  

For the entire post-War period until recently, the US was happy to let the advantage lie with many of its trade partners. It believed that it was economically strong enough to do so. Sharing prosperity with partners, the US believed, would make for world peace and it would also keep the world safe from communism. 

Not any more. Mr Trump rode to power in 2016 by insisting that the time had come to reorder trade relationships to the benefit of the US.  He didn’t quite manage to do so, partly because his initiatives were scuttled by Washington establishment status quoists in his Cabinet. In his second term, Mr Trump is determined not to make that mistake.  He has filled his administration with loyalists who will faithfully execute his orders. 

Last July, Mr Trump reiterated his perception of where matters stand. He said in a post, “The United States of America has been ripped off on TRADE (and MILITARY!), by friend and foe, alike, for DECADES. It has come at a cost of TRILLIONS OF DOLLARS, and it is just not sustainable any longer - And never was!” In any trade deal, therefore, it will be Advantage US.

Second, we must be clear that the overall relationship with the US is contingent on arriving at a trade deal that America approves. Not doing a trade deal means courting US hostility across the board. In negotiating a trade deal with the US, every nation faces a choice: Does it want the US to be a friend or a foe? 

Mr Trump’s trade deal with the European Union is an excellent illustration of the two points made above. For the EU, the issue was not just access to the vast American market. It was also American support to Europe in the Ukraine conflict, including the supply of critical weaponry and intelligence and America’s involvement in the North Atlantic Treaty Organization (Nato) itself. Faced with the prospect of jeopardising its defence relationship with the US, the EU settled for terms that were widely seen as humiliating.

The EU now faces a baseline 15 per cent tariff on its exports to the US. In addition, steel, aluminium and copper exports from the EU will face a 50 per cent tariff. Car exports would be subject to a quota.  The EU has also agreed to buy an additional $750 billion in US energy products over the next three years and make investments worth $600 billion in the US by 2029. The EU, for its part, will eliminate tariffs on imports of all US industrial goods and provide preferential access to a wide range of US seafood and agricultural products.  A more abject surrender is hard to visualise. Mr Trump has likewise signed deals with the UK, Japan and South Korea — all close allies of the US —that are conspicuously one-sided.  

The lesson for India is that the Indo-US trade deal is not just about access to the US market. India has weathered Mr Trump’s 50 per cent tariff on Indian exports much better than expected. India’s total exports are up 4.4 per cent year on year despite Trump’s tariffs. Nor have exports to the US suffered — they are up 9.8 per cent in April-December 2025.

The problem for India is that capital flows are flagging. This is happening at a time when India’s current account deficit of 1.3 per cent of gross domestic product (GDP) compares favourably with that of a range of countries, including Canada, the United Kingdom and Australia, as the latest Economic Survey notes. India had no difficulty financing current account deficits of a much higher magnitude in the post-reform era. Today, we are hard-pressed for capital inflows, and the rupee is under pressure despite a highly favourable set of economic indicators. That is not something to be treated lightly.

Gross foreign direct investment (FDI) fell marginally by 2 per cent in calendar year 2024. This may be in line with the general decline in FDI flows in recent years but it does not help us at all. At the same time, outward FDI from India as well as repatriation of profits by foreign firms in India have increased sharply. As a result, net FDI in April-November 2025 was a mere $5.6 billion. The bigger problem at the moment is with foreign portfolio inflows (FPI). It was (-)$3.9 billion in April-December 2026.  

There could be many reasons why FPI inflows have turned negative. You can be pretty sure, however, that the orientation of the US administration towards India is an important factor. When India is subject to a punitive tariff regime by the US, fund managers are unlikely to view India as a good place to invest in. The Treasury department houses individuals, including the Treasury Secretary, with strong links to Wall Street. They are known to work the phone lines with fund managers on a range of matters. 

Absent a trade deal, therefore,  we must reckon with rough weather in respect of capital flows, however good our macroeconomic indicators. (Using the future tense, as in the original version, because the deal is not finalised yet- TTR . And who knows, services exports to the US will not be subject  to punitive action as well? Also at risk are  defence collaboration, technology transfers and the entire strategic partnership that has been built over the past two decades. Thus, India’s strong economic performance in the present year is  no assurance that it can be sustained in the absence of an Indo-US trade deal. 

The point about the Indo-US trade deal is not that it involves compromises, such as cutting back on oil imports from Russia or scaling up imports of goods from the US to $100 billion annually for the next five years. It is also not just about getting a tariff rate of 18 per cent, one that is lower than that of many of our competitors. The substantive point is that it moves the US posture towards India from hostile to neutral. That is good news for the Indian economy.

 

Indo-US trade deal: some preliminary thoughts

It's a trade deal, not an agreement. The broad contours have been agreed between PM Modi and President Trump. Now the details have to be filled in.

Trump made a number of claims in his post on Truth Social:

• India will stop buying Russian oil
• American exports to India will be subject to zero tariffs and there will be no non-tariff barriers
• India will buy $500 bn of American goods

None of the above appears likely.

India will scale down purchases of Russian oil but will not scrap oil purchases altogether- the relationship with Russia is too deep and too valuable for India to attempt such a radical step.

Zero tariffs on all American exports are also a pipe-dream. Some exports, particularly agricultural exports, will face tariffs. No government will survive if it allows agricultural products to come in freely.

India imports about $40 bn worth of goods and $83 bn of goods plus services, so $500 bn appears way out- unless spread out over several years. Even if India steps up oil and defence purchases, $500 bn appears distant.

The tariff of 18 per cent is slightly lower than that for competitors such as Vietnam but that in itself is not going to confer great advantage. All trade is linked to FDI- and unless US FDI rises considerably, we are not going to see any great increase in Indian exports.

But for India the deal is not really about pushing exports. Overall exports have not suffered in FY 26- despite US tariffs, exports are 4.4 per cent up over the previous year. Indian exports to the US in the aggregate have not suffered either, thanks to electronic and pharma exports that are not subject to tariffs. Gems and jewellery, apparel have taken some hit, though, but these sectors have not suffered as much as feared, partly because of support from the government to cushion the impact of Trump tariffs.

For India, the deal is about capital flows, FDI and FII and the impact on the rupee. The rupee has bounced back from Rs 92.04 to around Rs 90.28 after the deal was announced. The deal certainly brings stability to the rupee. 

The deal is also about the overall strategic relationship with the US, including defence supplies and an understanding on containing China in the Indo-Pacific. We do not wish to be an ally of the US but nor do we wish to be seen as a foe. Commentators have noted that trust will take a long, long time to restore but the trade deal is a good start. 

Economist freaks out on India

Is India back in flavour- with the western media, if not with foreign investors? The Economist has as  many as four articles on India in its online edition- two on PM Modi, one on the Indian economy and a review of the book on the Indian economy by Arvind Subramaniam and Devesh Kapur. The tone is extremely favourable.

The title of the piece on the economy is telling: Rising giant- The Ascent of India's economy. The Economist lauds India's gdp growth of 7.4 per cent in a year in which it has been hit by a 50 per cent tariff on exports to US. The paper ascribes India's performance to three factors: luck, macroeconomic policy and structural reform.

India has been lucky to have had a second year of good monsoons which have boosted agricultural output and caused food prices to fall by 2.7 per cent in the past year. A low inflation deflation has boosted real gdp growth. Macroeconomic policy includes fiscal consolidation, a reduction in the Goods and Services tax and cuts in interest rates. Structural reforms comprise the reduction in labour codes from 29 to 4, financial regulation overhaul, removal of the cap of 100 per cent FDI on insurance and opening up of  nuclear power to the private sector. The government has signed three trade agreements: Britain, Oman and New Zealand. The Economist gives credit to Trump for spurring India's reforms.

The Economist says adversity has caused PM Modi to focus even more on economic reform and growth. It urges more reforms, some of the "big bang" sort that many economists have urged over the years but which the government has rightly eschewed:

The recent reforms are not enough. Some merely correct recent errors. Although India’s average tariff rate is drifting down, it is still higher than it was when Mr Modi first won power in 2014. Much-needed reforms to agriculture are still locked in a box marked “too hard”. So are changes to make it easier for companies to acquire land. India’s awful schools continue to waste hundreds of millions of young minds. Smog and traffic jams steal some of the boost India could gain from urbanisation. Unforced errors remain common: this month India’s Supreme Court alarmed foreign investors with a ruling that has thrown into confusion what tax they must pay on capital gains. 

Foreign commentators must understand that India will reform in its own way, with due regard for popular sentiment-  and this is an approach that has worked. 

India's labour reforms: more ease of business but greater cost of labour

India's long-awaited labour reforms make for greater ease of business. They reduce compliance costs for large firms  but will add to costs for small and medium firms and also push up labour costs. It's hard to see the reforms providing any great thrust to business in the medium term. 

These reforms had been enacted nearly five years ago but they have been notified only now. They reduced 29 laws to 4 labour codes; slash the number of regulations that cover businesses. They make compliance easier for big firms.

The new codes cover all workers instead of specified industries in the earlier version. This will mean compliance or more compliance for a whole range of firms, especially small and medium firms. Large firms already comply with many of the norms, so will not feel the pinch as much.

Industry's main demand was ease of firing. The new code raises the threshold were permission for layoffs is not required from 100 workers to 300 workers. This is not going to induce investment into labour-intensive sectors such as textiles, leather, auto compoents etc. along the lines of Soutth-East Asia. Moreover, most states already have the higher threshold, so the higher threshold will not much of a difference on the ground.

The new laws cover gig workers. They will specify minimum wages across four categories of workers under six different working conditions. All workers will be covered by welfare benefits such as Provident Fund, insurance, sick leave, mandatory health check-ups for workers over 40, etc. This will tend to push up labour costs.  It will hugely impact businesses such as Uber, Ola, Amazon, Flipkart etc. 

It's hard to see businesses complying with the requirement of benefits to workers. They will outsource jobs from firms that do not comply - and that means more income for government officials who monitor compliance.

Overall, there are benefits for companies as well as workers with the new codes tilting more towards the latter. 

RBI's deregulatory moves raise concerns

The RBI did not announce any rate cut at its MPC meeting earlier this month. Instead, the governor uneashed a wave of deregulatory measures.

The government has constituted committees to examine the entire gamut of regulations and see how regulations that weigh heavily on businesses and individuals can be axed. The committees are looking at non-financial regulations. Financial regulations, one presumes, will be looked at by the concerned regulators. The RBI has made a start.

Nobody doubts that Indian businesses are hamstrung by a whole slew of regulations, a large number of which need to go. I would argue, however, that banking regulations are a different cup of tea and need to be handled with care. Some of the deregulatory measures announced by the RBI earlier this month do give rise to concerns.

More in my BS column, Deregulation is the flavour of the season

FINGER ON THE PULSE
Deregulation: The flavour of the moment

T T Ram Mohan

In a year in which India has been hit with additional tariffs of 50 per cent on exports to the United States, you would not have expected India’s gross domestic product (GDP) growth projection to be revised upwards from 6.5 per cent in April to 6.8 per cent in October. Or the inflation rate to be revised downwards from 4.0 per cent to 2.6 per cent.

Yet, that is what the Reserve Bank of India (RBI) did in its latest monetary policy statement earlier this month. The tariffs will indeed impact growth. However, since they kicked in from September, the impact will be felt in the third and fourth quarters. The RBI’s downward revisions for these two quarters indicate the impact will be extremely modest. For the year as a whole, the impact of tariffs in the second half of the year is overshadowed by GDP growth of 7.8 per cent in the first quarter of FY26, which was a good 100 basis points (bps) above expectations

Commentators have been crying gloom and doom for the Indian economy ever since Donald Trump’s announcement of reciprocal tariffs on “Liberation Day”, April 2. Little of that has materialised in all these months. Analysts were projecting India’s GDP for FY26 to be shaved by around 50 bps, from 6.5 per cent to 6 per cent or below. The RBI believes nothing of the sort is on the cards.

But then the Indian economy has a habit of delivering pleasant surprises in recent years. In FY23, a year in which the Ukraine conflict erupted and unfolded in a big way, India’s GDP grew at 7.6 per cent when analysts were unsure if growth of even 6.5 per cent was possible. In FY24, GDP growth shot up further to 9.2 per cent, a number that defied all forecasts by a wide margin.  

These outcomes cannot be said to be accidental. They are the result of sound macroeconomic policies, regulation, and governance. The economy has become resilient in the face of serious challenges.

What we are faced with at the moment is uncertainty. We do not know exactly how the tariffs will unfold, where they will settle, or when. Geopolitical shocks have thus far not spiralled out of control but nobody can bet on that. The answer is not “big bang” reforms, dramatic measures that exacerbate uncertainty in the present while promising returns in the distant future. Instead, the focus must be on reducing uncertainty in the present while creating a more enabling environment for economic agents.  The government is right in moving deregulation to the top of its agenda, even as it maintains the momentum of public investment. 

That also appears to be the thinking behind the stance of the RBI in its latest monetary policy statement. With inflation at a record low, there seemed to be little risk in cutting the policy rate. The RBI resisted the temptation to do so. With a projected growth rate of 6.8 per cent in a challenging environment, there is not much upside to be had from cutting the policy rate at this point. Better to conserve ammunition for when the growth rate threatens to sag. 

The RBI has instead announced deregulatory measures that are intended to boost credit growth at banks. Bank non-food credit has grown at 10.2 per cent over the previous year, down from 13 per cent in the year before. It is driven mostly by growth in consumer loans (11.8 per cent). Loan growth to industry is a disappointing 6.5 per cent and it is propped up by growth in loans to micro, small and medium enterprises (18.5 per cent), once regarded as a problem area by banks. Growth in loans to large corporations is a mere 1.8 per cent

The RBI says that industry is taken care of by funds from non-bank sources. In 2025-26, the total flow of resources from non-bank sources to the commercial sector increased by ₹2.66 trillion, more than offsetting the decline in non-food bank credit by ₹0.48 trillion.  One does not know why the RBI is coy about providing the figures for the flow of funds from different sources (banks, non-banks, external commercial borrowings, internal resources, etc), as it used to in the past. 

The deregulatory measures are about growing banks’ loan business at the expense of competing sources. The big deregulatory move is allowing banks to fund mergers and acquisitions (M&As). This is long-term funding that entails asset-liability mismatches. It also requires care in judging valuations of M&As. The RBI might  have allowed such financing for the better-rated banks to start with and then extended it to the lower-rated banks. 

Another deregulatory move is the removal of the framework that disincentivised lending to corporations with bank credit exposure of over Rs 10,000 crore. The RBI argues that the Large Exposure Framework suffices to manage risk at the bank level. The issue of lending to highly leveraged corporations, however, does not go away. As we all know, banks lent merrily to a high-profile, highly leveraged group. It required the shock effect of an equity research report for the group to bring its leverage down to more sensible levels. 

The RBI says it will address concentration risk through macro-prudential tools if necessary. Presumably, it does not see a problem of high leverage at corporations at the moment. Nevertheless, there is merit in specifying higher risk weights for bank loans to corporations with debt-to-equity ratio above a certain level (instead of specifying an absolute value of credit exposure). A third regulatory move- a proposal to license new urban cooperative banks- is truly mystifying. 

The deregulatory measures will boost credit growth and bank income but will not boost economic growth because, for the most part, they substitute non-bank credit with bank credit. It is not clear that low rates of credit growth are a serious problem for banks at the moment. Return on assets of scheduled commercial banks was a healthy 1.4 per cent in March 2025; for public sector banks, it was 1.1 per cent. Besides, banks continue to face the problem of deposit growth lagging credit growth: Deposits grew at 9.5 per cent in the last year while credit grew at over 10 per cent. Boosting credit growth without getting a handle on deposit growth is not a great idea. 

Deregulation in the economy in general is a good thing.  There is always a case for visiting regulations that have outlived their rationale and cramp business activity. In banking, however, it is wise to make haste slowly with deregulatory initiatives. Bank governance and risk management still have a long way to go. It makes sense to conserve the hard

Turbulence in the Tata group

For some reason I have not been able to fathom, some of the best reporting on the Indian economy and Indian corporates happens in the foreign media.

The Indian media has flagged the board-level disputes in the group and the fact that the government has stepped in to arrange a resolution. But it hasn't quite spelt out what the issues are. FT's report yesterday does that.

i. Operational issues: The Air India plane crash in Ahmedabad last year was bad publicity. Then came the cyber attacks on JLR in the UK and the involvement of TCS, which manages JLR's technology backbone. TCS also was at the cetnre of the cyber attack on Marks and Spencer as it happens to be the service provider. Then, the job layoffs- estimated at 12,000- have spelt controversy. 

Analysts are asking whether top management has a grip over the sprawling empire.

ii. In-fighting in the board of Tata Trusts which ultimately controls the group: Noel Tata, chairman, could not succeed in getting an extension for Tata Trusts member Vijay Singh, former defence secretary. It appears Noel Tata has also not been successful in engineering an exit for the Shaporji Pallonji group at Tata Sons in which Pallonji owns 18 per cent.

iii. Listing of Tata Sons: The RBI thinks Tata Sons is an NBFC and wanted it to list by September. Tata Sons is resisting the move apparently because it doesn't want greater scrutiny of itself and also doesn't want to cede control. 

We do not know what the government has conveyed to the group. 

India's purchase of oil Russia: Peter Navarro clarifies what the gripe is

President Trump's decision to impose punitive additional tariffs of 25 per cent on Indian exports to the US has sparked outrage as well as disbelief in India. The Indian position is as follows:

• India's imports of oil from Russia (88 million tonnes) are less than those of China (109 million tonnes)
• India was encouraged by the Biden administration to buy oil from Russia so that prices in the oil market (sans Russia) did not go up 
• India is not violating any sanctions in importing oil from Russia. There is no US or NATO ban on countries importing oil from Russia, only a price cap (which was $60). 
• India has every right to procure oil from the cheapest source as that benefits the Indian economy

India has articulated these points repeatedly in recent weeks. Trump's trade advisor Peter Navarro thought it necessary to counter the Indian position through an article in FT:

Importantly, before Russia invaded Ukraine in February 2022, Russian oil made up less than 1 per cent of India’s crude imports. Since then, daily imports have soared to more than 1.5mn barrels — more than 30 per cent of India’s total.  To be clear, this surge has not been driven by domestic oil consumption needs. Rather, what really drives this trade is profiteering by India’s Big Oil lobby. Refining companies have turned India into a massive refining hub for discounted Russian crude.  The refiners buy oil at a steep discount, process it, and then export refined fuels to Europe, Africa, and Asia — all the while shielding India from sanctions scrutiny under the pretence of neutrality. 

So, the objection is that India is not using cheaper Russian oil for the benefit of Indian consumers. Instead, oil companies (mostly one private company) are using cheap Russia oil to sell refined oil in the international market at huge margins and have reaped massive profits. India's oil imports from Russia are not about benefiting the Indian economy but about enriching India's oil refiners. 

Scott Bessent has reinforced the point made by Navarro by saying that China had increased Russia's share in its oil imports from 13 per cent to just 16 per cent whereas India had increased it from 1 per cent to 42 per cent. 

This is what I would call the Indian arbitrage – buying cheap Russian oil, reselling it as product.....They’ve made $16bn in excess profits – some of the richest families in India. 

Perhaps the controversy would not have arisen if India had used cheap Russian oil to lower the price for Indian consumers through lower duties. 

Indo-US bilateral trade talks: India caught between the US and China

I want to flag two excellent reports on the state of play in the ongoing Indo-US trade negotiations. One report is in the Economist and it's about India having to balance pressures from the US and China.

The US's key objective is to secure greater access to the Indian market. It has a second objective that is part of a larger global plan, namely, to deny China greater access to the Indian market. It certainly doesn't want to China to make India a manufacturing base from which to export to the US. It would like India's trade relationship with China to lessen. 

Keeping the Chinese out of manufacturing in India can be done and is being done. India runs a large trade deficit with China. A year ago, the thinking in some policy making circles was that one way to reduce the trade deficit would be to let Chinese firms into India so that they could make in India for the Indian market. Some suggested Chinese firms could be let into non-sensitive or non-strategic sectors- we could keep them out of defence and telecommunications, for instance, but they could come into renewable energy. But the suggestion hasn't travelled far. India's security experts are wary of dependence on Chinese firms entering into Indian market and with a large complement of Chinese nationals. 

Lessening the trade relationship with China, is harder to accomplish, as the Economist notes:

But the idea of expanding American trade with India, while also isolating China, runs into a giant problem. Many Indian exports to America (and elsewhere) depend on Chinese components. The pharmaceutical sector, one of the biggest exporters to America, relies on China for 70% of precursor chemicals. The smartphone industry, a rare success story in Mr Modi’s scheme to attract foreign manufacturers with generous subsidies, needs China too. Phones are assembled largely from imported components, including many from China......I don’t see any alternative to China emerging in at least a decade,” says Mr (Ajay) Srivastava (a trade expert). 

In short, India can find ways to increase America's access to the Indian market but will not be able to meet the American demand to curtail dependence on China.

The second report is from the FT and it's about American pressure in another area- giving America's e-commerce giants, Amazon and Walmart (which owns Flipkart), a bigger piece of the Indian market. The two giants are allowed to sell other producers' goods but not their own, unlike India's own e-commerce players. They are mounting pressure on the Trump administration to get India to change its rules for them. That would happen at the expense of players, such as Reliance, a group that doesn't lack political clout.

If the idea is simply to reduce India's trade surplus with the US, that can be arranged. India can buy more oil and defence equipment from the US and these two items alone could help reduce the trade surplus. But the US wants a great deal more- it wants more access for a range of American goods and it wants China to be denied access. Indian trade negotiators have their work cut out for them.

Middle East conflict and the global economy

It hasn't happened since the Ukraine conflict erupted in February 2022. It hasn't happened since the Gaza conflict erupted in October 2023?  Will events in the Middle East now derail the global economy? One obvious way they could is by causing oil prices to shoot past the $100 barrel a mark.

Let us see if we can list a few facts:

i. Israel is not interested in a cease-fire in Gaza, much less in a two state solution

ii. Israel thinks it has a good chance of eliminating Hezbollah, the Lebanon-based militia or at least reducing it to a point where it cannot interfere with events in Gaza

iii. Israel also thinks that in order to degrade Hezbollah, it has to deliver damaging blows to Iran

iv. Israel thinks it has the US behind it, wintess the latest US decision to deliver the THAD anti-missile system to Israel and have it manned by American technicians.

The four above mean an escalation in the conflict and a prolonged conflict. Will the oil market remain unscathed in such a scenario? It's not just a matter of enough oil supply being available outside Iran. If Iran's supplies are disrupted, Iran is not going to allow other oil supplies to go through. When Israel attacks Iran, it has to deliver a blow powerful enough to deter Iran from any sort of retaliation. I leave it to military experts to judge if that is possible.

The prospect of an escalation in the Middle East and higher oil prices has obvious implication for the Indian economy. That is the subject of my article in BS, India's economic growth faces two risks and two key challenges.

FINGER ON THE PULSE
T T RAM MOHAN

The finance ministry’s latest Review of the economy, which came out on September 26, exuded confidence about the Indian economy being able to meet the Economic Survey’s growth forecast of 6.5-7 per cent in FY 25. Some two weeks later, the prospect of the forecast being upended by global events is very real. 

Oil prices are hovering around $80 a barrel for Brent crude, an increase of 16 per cent from the September low.  The Indian economy can take the increase in its stride. However, if events in the world at large were to push the price of oil beyond $100, we will have to start worrying.

“Nothing new there,” optimists would argue. “The world has shrugged off worries about oil prices for over 30 months since February 2022, when Russia commenced its military operations in Ukraine.” In June 2022, the price of oil went up to around $120 a barrel. From July 2022 onwards, oil prices have stayed below $100, with prices staying below $80 for the most part.  

Two factors contributed to this remarkable outcome. One, the North Atlantic Treaty Organization (Nato) and the European Union (EU) imposed a price cap of $60 on oil purchased from Russia while also  reducing dependence on oil supplies from Russia. The cap turned out to be quite effective. 

Two, the doctrine of “managed escalation” has played out well. According to this doctrine, Nato would progressively equip Ukraine to effectively fight Russia. Each step on the escalatory ladder would be managed so that Nato itself was not drawn into a direct conflict with Russia. Escalation has been managed,   the war in Ukraine has not derailed the world economy.

The same doctrine has been applied to the conflict between Israel and the Axis of Resistance (comprising Iran and its proxies, such as Hezbollah, Hamas and the Houthis). For over a year now, Israel has been trading fire with Hezbollah on its northern border with Lebanon. These exchanges have been confined to a narrow strip on either side of the border, with casualties on both sides staying within limits. Iran and Israel have engaged in tit-for-tat missile exchanges, inflicting damage that both sides find acceptable. 

“Managed escalation” always carries the risk of miscalculation or error- at some point, one party or both parties can cross tolerable limits. The issue now – and this is where optimists would be mistaken- is not so much miscalculation as cold calculation on Israel’s part. With the successes Israel has had against Hezbollah in recent weeks, Prime Minister Benjamin  Netanyahu believes the time has come to “change the Middle East.” There is the  (prospect?- ok) not only of escalation but of a prolonged campaign.  

A probable Trump victory in November heightens the implied risk. Following Iran’s missile attack on Israel, Mr Trump wants Israel to go after Iran’s nuclear facilities.  While Mr Trump may well be posturing in the run-up to the polls in early November, his known hawkishness on Iran poses clear risks for West Asia and the world economy.

There is another risk that a Trump victory poses, one about which there seems to be less ambiguity. Mr Trump promises sweeping cuts in taxes for corporations as well as individuals, higher tariffs and substantial deregulation. He sees the tax cuts as paying for themselves by boosting growth, but many economists are sceptical. They think the tax cuts will result in wider deficits, an increase in public debt, and slower US growth down the road.  

Mr Trump has promised a tariff of 20 per cent on all imports and a tariff of 60 per cent on Chinese goods. Mr Trump sees higher tariffs not just as protecting US manufacturing but as paying for the tax cuts he has in mind. Economists have raised a howl but many American business leaders think Mr Trump has got it right. Whatever the long-term impact, there is little doubt that Mr Trump’s policies will be disruptive for the world economy in the short term. 

The two risks apply to the world economy as a whole. Apart from these, there are two challenges that are specific to India.

One relates to foreign direct investment (FDI). Net FDI (item 1 in the accompanying table), which is the FDI inflows minus FDI outflows, fell by over $28 billion in 2023-24 compared to 2021-22. The Review says that this is because repatriation of profits (item 4) surged considerably in 2023-24. It says this is not a bad thing because it assures foreign investors of an exit route for profits made in the country. 

However, repatriation of profits is not the only factor dragging down net FDI flows. Gross inflows of FDI (item 3) have fallen steeply from $85 billion in 2021-22 to $71 billion in 2023-24.  The Review argues that FDI flows to emerging markets as a whole have fallen by 15 per cent in 2023 and India is likewise affected. But if India is positioning itself as an alternative to China for FDI, this should not be happening. 

Some analysts contend that the fall in gross FDI has to do with India’s scrapping of bilateral investment treaties that allowed for third-party arbitration of disputes. The change, they say, has made foreign investors nervous. Maybe. Or it may well be that FDI has fallen for the same reasons that private domestic investment has not picked up in recent years. If gross FDI does not rebound strongly in FY25, we would need to be concerned.   

The second challenge, which is relatively short-term in nature, is with respect to foreign institutional investment (FII) flows. FIIs invested $44 billion in India in 2023-24. FII inflows in the April- July quarter of FY25 have fallen to $6.3 billion, from $20.5 billion in the same period of FY24.  Analysts say this is to be expected as Indian stocks are overvalued. There has also been a huge switch of funds to Chinese stocks, given the low valuations in that market. This shift is said to have increased in recent weeks following the stimulus to the Chinese economy. 

A fall in capital flows, combined with oil prices exceeding over $100, is not the best place for the Indian economy to be in. Happily, India’s external position today is strong enough to cope with such a scenario. However, higher oil prices and disruptions in the world economy could   undermine growth projections.  

India has had considerable success over the years in dealing with the sources of instability within the economy. The threats to growth and stability now emanate from outside- geopolitical risks, rising protectionism, and banking instability in the West. 

Who will regulate the regulators?

Regulators set standards for others. What about the standards at the  Statutory Regulatory Authorities (SRAs) themselves? 

This is one issue that has come to the fore following the current controversy involving the Chairman of SEBI. What are the disclosure standards for the SEBI Chairman? How well are potential conflicts of interest handled? We had news today that SEBI refused to provide the Chairman's list of recusals in response to an RTI query- the news occasioned much outrage in the social media.

K P Krishnan, a former secretary in the finance ministry, has raised the issue of accountability of SRA such as RBI and SEBI in a recent article. 

The legislative actions of the SRAs are supposed to be subject to legislative scrutiny. The record on this point is disappointing:

Over a 23-year period, between 1999 and 2022, the Lok Sabha parliamentary committee reviewed 13 regulations issued by all SRAs, and the Rajya Sabha parliamentary committee reviewed four such regulations. Sebi alone has issued more than 650 regulations since it came into being. There are more than 20 SRAs at the level of the Union of India, and most of their legislative activity is not being subject to parliamentary scrutiny

There are limits to what parliament can scrutinise. Much responsibility must devolve on the boards of directors of these institutions. Here again, the record is pathetic:

The composition and functioning of the governing boards of all SRAs in India leave much to be desired. They are almost entirely composed of internal persons and serving government functionaries. In practice, the board delegates most of the powers to the chairperson and provides very little oversight. There is a striking gap between the governance standards that Sebi demands of listed companies or the Reserve Bank of India (RBI) demands of banks and  how Sebi and  the RBI themselves are governed.

Krishnan makes two excellent suggestions. One, there must be a separate parliamentary committee to monitor SRAs. Two, the Comptroller and Auditor General (CAG) must undertake performance audits of the SRAs instead of confining itself to financial audits. 

These reforms are necessary. What is missing in SRAs today is democratic accountability, an imperative for any public institution. 

India's growth prospects: RBI Governor's upbeat assessment

 

The RBI Governor has given a pretty upbeat assessment of India's growth prospects:

India can achieve sustainable economic growth of up to 8% over the medium term, according to the country’s central bank governor.

His comments come shortly after data showed India’s gross domestic product slowed to 6.7% in the second quarter, down from 8.2% when compared to the same period last year. The figures have  ratcheted up pressure on the central bank to launch its own rate-cutting cycle sooner rather than later.

Speaking to CNBC’s Tanvir Gill Friday in an exclusive interview, Reserve Bank of India (RBI) Governor Shaktikanta Das said he expects a growth rate over the next few years of 7.5% for India, “with upside possibilities.”

The Chief Economic Advisor has indicated that a medium-term growth rate of 6.5-7 per cent. Most people make a higher growth rate than that conditional on a slew of reforms. 

If, however, the Indian economy can grow at 7.5 per cent in the coming years on present steam, that would be most reassuring to the government. It certainly changes the fiscal outlook quite a bit. 

Monetary policy: Is the status quo justified?

The RBI decided to maintain the policy rate at 6.5 per cent in its Monetary Policy Statement of August 2024.

The growth forecast for FY 24-25 remains 7.2 per cent. The inflation forecast remains 4.5 per cent. What is the case for cutting the policy rate and for not cutting the rate?

i. The case for cutting the policy rate

• With inflation projected at 4.5 per cent, the real rate is 2 per cent. This is too high. A real rate of 1.0 per cent is the "neutral rate", that is, where inflation is stable and growth is maximised. So, there is adequate scope for cutting the policy rate. The problem is that the RBI's estimate of the neutral rate has changed. In FY 22, the neutral rate was estimated at 08-1 per cent. More recently, it estimates the neutral rate at 1.4-1.9 per cent. If you accept the upper end as the estimate, the present neutral rate of 2 per cent seems okay

ii. The case against cutting the policy rate:

• The neutral rate argument apart, the RBI governor has said repeatedly that the RBI wishes to move the inflation rate down to 4 per cent. Food inflation remains elevated. Cutting the policy rate at this point would thus not serve the objective of meeting the inflation target of 4 per cent.
• India's growth rate of 7.2 per cent is pretty impressive in what is the bleakest world economic environment in the past two decades. Even if growth falls to 7 per cent, that would be good enough. It is incorrect to suppose that cutting the policy rate can enhance the growth rate. Why risk higher inflation when the growth rate does not have much chance of accelerating?
• The rupee is pushing close to Rs 84 to the dollar. A cut in the rate would make it difficult for the RBI to contain the rupee below Rs 84, beyond which it does not wish to see the rupee depreciate. The stance could change if the Fed and European banks cut their rates down the road. But a rate cut at this point would be imprudent in relation to maintain stability in the rupee exchange rate.

I would add one more point to the case against cutting the policy rate: geopolitical tensions. There has been an escalation in the situation in both Ukraine and Gaza. Neither conflict has thus far affected the global economy significantly. But we don't quite know when "managed escalation"- the game that NATO and Russia and Israel and Iran and its proxies have been playing- will get out of hand. 

As I write, Israel is bracing for a massive retalisation from Iran and its Lebanese ally, Hezbollah. If a regional war breaks out, oil prices could shoot up and render all macroeconomic estimates meaningless. Better to err on the side of caution in these troubled times- especially when gdp growth is over 7 per cent.

Budget 2024-25- Job creation thrust

The budget is seen as having an almost unprecented focus on job creation through subsidies and incentives. Will these work? Here are a few thoughts.

A few weeks before the budget, the RBI put out data that showed that the economy had created about 9 crore jobs in 9 years or about a crore a year in industry and services. The Economic Survey for 2023-24 says the economy needs to create about 8 million jobs every year. So where is the problem? Are industry and services generating jobs more of the unskilled variety so that educated unemployment is the issue? What explains the budget's almost unprecedented focus on job creation through subsidies and incentives?

There are three schemes in the budget for boosting job creation. The first is a payment of up to Rs 15,000 for those entering the workforce in the formal sector. This is a sort of top-up to the wages they will be paid. It can't lead to job creation, it only rewards those who manage to get jobs. 

The second is employment-linked incentives to the employer as well as the first-time employee in manufacturing. It will be by way of a payment towards the EPFO contributions of the two parties. To the extent that it reduces the burden on the employer, it will help job creation. It is expected to benefit 3 million youth.

The third is for all sectors and will reimburse to employers up to Rs 3000 per month for two years towards their EPFO contribution to employees. This is expected to create 5 million new jobs.

At the margin, the second and third schemes lower the cost of an employee in all sectors. They may, perhaps, help in businesses where the labour cost as a proportion of sales is relatively high. 

Then we have the Internship scheme for 1 crore youth at 500 top companies over five years. The government will provide Rs 5000 as stipend and the companies will have to bear 10% of the internship cost and the cost of training. As many have pointed out, this means each company will have to give internships to 4000 youths. What happens if they don't oblige? 

Monitoring and enforcement at private companies is a huge challenge. The government has a number of schemes that it implements through banks- Jan Dhan Yojana, Jan Awas etc. It is the public sector banks that bear the brunt. Private companies get away with doing very little. The same is likely to happen with the job creation schemes. We need to track exactly how many additional jobs are created through these schemes. The finance ministry has said that all these schemes are not mandatory, they are only intended to nudge companies, so we mustn't expect a great deal from the private sector.

If the idea is create jobs on a crash basis, filling vancies in government is a better idea. If unemployed youth are to be provided help until they can find a job, a direct transfer seems more sensible- give every educated unemployed youth a monthly allowance. 

What exactly is the government spending on employment generation? The budget speech mentions expenditure of Rs 2 lakh crore over five years or about Rs 40,000 crore in each year. For FY 24-25, the specific increase in expenditure on account of employment generation is a little less than Rs 10,000 crore. 

Pre budget musings

 Outlook Business carries an interview with me on the coming budget.

RBI's growth optimism

Here is a telling quote from the RBI's Monthly Review of the economy which is in line with the upbeat assessment given by the RBI Governor recently. (Please see my previous post):V

There is increasing evidence that in the post-pandemic years, a trend upshift is taking shape, which is shifting India’s growth trajectory from the 2003-19 average of 7 per cent to the 2021-24 average of 8 per cent or even more, powered by domestic drivers.

The growth forecasts for the global economy are downbeat: global economic growth in the next five years will be below the average of the last two decades. Nevertheless, the RBI seems to suggest India can grow at 8 per cent plus on the strength of "domestic drivers". Does the RBI think the Indian economy can grow at 8 per cent even under conditions of weak global growth? Will that be on account of services exports? 

This does seem to be an altogether new appraisal of India's economic prospects. Economists have been telling us for long that an 8 per cent growth rate is out of the question without robust export growth, say, 15 per cent per annum.

There's one thing, though, that puzzles me. The Monthly Review projects growth of 7.6 per cent in 2024-25 but only 6.4 per cent in 2025-26. Will India move towards an 8 per cent trajectory thereafter or have we already move on to such a trajectory? The RBI may clarify.

 

 

A very important statement from the RBI Governor

The RBI Governor, Mr Shaktikanta Das, recently made a statement that hasn't got the attention it deserved. 

The Governor is quoted as saying:

India is at the threshold of a major structural shift in its growth trajectory, moving towards 8 per cent GDP growth in a sustained manner. We are moving towards an annual growth rate of 8 per cent.

This is by far the most optimistic official statement on the Indian economy in a long time. It is not clear what time frame the Governor has in mind for the growth rate of 8 per cent, whether it is a mediium-term forecast or a long-term forecast- the issue of the word "sustained" does suggest a fairly long time horizon.

The Chief Economic Advisor in the finance ministry has been talking of a sustained growth rate of 6.5 per cent. Many analysts have been talking of the potential for the Indian economy to grow at 8 per cent- provided various "big bang" reforms are carried out. What the RBI Governor is saying- if he has been quoted correctly in the media- is that, on present steam, the Indian economy is moving towards an 8 per cent trajectory. 

Any thoughts on this, anybody?

Can India grow faster? The Economist's perspective

The Economist had a special report on the Indian economy recently. It has all sorts of interesting facts and it's written in the easy, readable style one associates with the Economist. At the end of the day, there are only a couple of things one wants to know. What rate of growth can one expect of the Indian economyin the years ahead? What do we do to sustain growth at a brisk pace?

The Economist notes that growth in the decade of NDA rule has been 5.6 per cent, below the overall rate of 6 per cent during the three decades of reforms. It is, of course, true that the slowing down of the Indian economy had to do with the overall slowing down of the global economy during this period, notably during the pandemic. The journal doesn't give a precise projection but it seems to think that sustained growth of 6 per cent should be okay- and even that could prove a challenge. We in India now hope for something closer to 7 per cent.

As to what is to be done to sustain a growth rate of 6 per cent or so, I picked up the following, none of which is novel. I give my comments alongside the idea:

• Boost tax to gdp ratio.: How do we do this when we have been narrowing, instead of broadening the tax base, by raising the threshold for income tax and cutting corporate tax steeply?
• More divestment: Rarely in the past several decades has the divestment target been met. The present government had a huge parliamentary majority, yet found it difficult to accelerate divestment. That is the political reality which cannot be changed easily.
• Cut agricultural subsidies: The Economist grants this is a political minefield. So it is. Even keeping subsidies from growing from the present level would be an achievement
• Better centre-state relations to push through reforms in education, labour, etc. Perhaps, the only answer is to have the same government at the centre and the states. That is, perhaps, part of the motivation for the one nation-one election idea but this is not going to happen quickly. 
• Devolve more powers to the local administration: Political decentralisation, brought about by the forces of democracy, is sought to be countered by growing economic centralisation. Ceding more powers to the local level or to the states is at odds with the perceived need for a strong centre to hold the country together. India, unlike the US, is not a union of states with the states relinquishing powers in favour of the centre. It is a union that has allowed powers to flow to the states but with a distinct tilt in favour of the centre.

That's about it- and there's nothing in the list that lends itself to ready accomplishment. The only possible inference is that we should be happy to grow at 6-7 per cent instead of seeking hard to accelerate it to 8 per cent or more. There is, perhaps, a greater need now to address the question of equity or growing inequalities within the country and to focus more on human development indicators such as life expectancy, infant mortality, literacy rates, etc. 

Rising inequality is not just an ethical issue or an issue of containing tensions within our society, it is also about recognising that inquality is limiting the possibilities for consumption growth and hence the overall growth rate. As for human development indicators, we need to worry that our indicators are worse than those of many in South Asia including Bangladesh, Sri Lanka and Nepal.

Let the overall growth rate be. It's time to focus on the quality of life of Aam Aadmi.

 

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