India Policy Watch: To Stop A Juggernaut

Insights on current policy issues in India

—RSJ

The usual trope of election coverage in India is to refer to them as festivals of democracy. Anchors will momentarily tone down the cacophony in their studios to speak about the dance of democracy in exalted terms. That these are celebrations of participation, moments of collective will and periodic renewals of the social contract.

All that is true, but perhaps irrelevant. Elections might be festivals of a kind. But for the citizenry, they are primarily disciplining mechanisms. Their real function is not simply to produce governments, but to remind governments that they can be removed.

The fear of removal is one of the great invisible stabilisers of democratic systems. It disciplines arrogance, forces responsiveness, moderates excess, and occasionally compels probity in public life. Governments that believe they can lose behave differently from governments that believe defeat is improbable.

Since the surprising blip of the 2024 Lok Sabha elections, where the BJP lost its majority, the empire has struck back with vengeance. The BJP electoral machine has been relentless since. And this is a point to ruminate over after another round of state election results declared last week. Not whether the BJP wins or loses a particular state election in Assam, West Bengal, Tamil Nadu or Kerala, but whether India is entering a phase where electoral competition itself begins to lose its disciplining edge.

The BJP’s rise is often explained through ideology alone. Critics see only Hindutva, state capture and divisiveness. Admirers see nationalism, leadership and decisiveness. These are somewhat accurate though facile explanations. What India has witnessed over the last decade is the construction of the most sophisticated electoral machine in democratic history. The scale of this machine is still underestimated because Indian political commentary continues to operate with assumptions from an older age. The usual shibboleths dominate our discourse: that economic underperformance naturally produces anti-incumbency, unemployment translates into anger, inflation gets punished, and that, over time, voters simply get tired. But elections in India are no longer referendums on governance. They are contests over narratives, identity, organisational permanence, with a late dose of welfarism to sway voters.

The BJP has mastered the craft of bringing several things together that Indian parties historically struggled to combine simultaneously: ideological coherence, welfare politics, charismatic leadership, booth-level mobilisation, and a permanently active cadre ecosystem (anchored by the RSS). Most Indian parties awaken during elections. The BJP operates continuously. It is not merely a party fighting elections every five years; it is an ecosystem that remains politically alive between elections. Electoral politics for the BJP isn’t about episodic communication. It is an ambient presence in all its decisions.

And because it is so ambient and ever-present, it is changing the psychology of the electorate itself. Consider a voter born in 1992. That person would have been too young (under 18) to vote in the 2009 general election, the last election won by the Congress-led UPA. By 2029, that voter will be 37 years old. For their entire adult political life, for anyone below the age of 37 in 2028, the BJP would have occupied the political mindspace with continued narrative dominance. To such voters, the opposition begins appearing abnormal rather than an alternative.

There is a tendency among sections of the opposition, especially the Congress old guard, to assume that the BJP’s dominance is temporary, that eventually anti-incumbency will mechanically restore equilibrium. This is the underlying message you hear from Rahul Gandhi apologists. History offers little support for that assumption. Democracies across the world have repeatedly produced dominant-party systems that last for long. Post-independence India itself was effectively a one-party dominant state for almost three decades. Japan’s Liberal Democratic Party has been in power for most of the post-war era. Mexico’s PRI ruled for decades. Dominant-party systems emerge when political organisation, ideology, governance and institutional advantage converge in a manner that leaves the opposition without a plank.

But there is a crucial difference between the old Congress system and the current BJP system. The Congress system was inherently centrifugal, which eventually led to its decline from within.

Congress thrived over the years by absorbing contradictions. It was less a political party than a sprawling tent under which socialists, conservatives, industrialists, secularists, caste leaders and regional aspirants all coexisted uneasily. Every new social movement eventually found its way into the Congress tent.

But big tents carry within them the seeds of fragmentation. Prolonged power creates newer claimants. Not every claimant gets what it wants, and that creates factions. Factions eventually seek autonomy. Congress could not permanently satisfy its contradictions: the left and right, centralisers and federalists, socialist instincts and market-oriented impulses. Over time, these resentments accumulated. The Swatantra Party emerged from one side, socialist formations from another, and regional caste politics from yet another. By the time the Emergency arrived in 1975, the Congress system was already weakening internally. And then it started breaking. Almost the entire political class that’s non-BJP and non-Congress today owes its origins to Congress eventually.

The BJP operates differently. People do not enter the BJP expecting ideological negotiation. They enter accepting an ideological hierarchy that’s cast in stone. Nationalism, welfare delivery, centralised leadership, civilizational rhetoric and Hindutva form the party’s core grammar. Leaders from different backgrounds may join, but they are expected to align themselves with this existing ideological framework rather than reshape it. There is a syntax to learn, and that’s the only way to move ahead within it. The likes of Scindia, Sharma and Adhikari have all followed this. Congress expanded by diluting its ideological boundaries. The BJP expands by converting entrants to follow their ideological order.

This is why the usual theories of dominant-party decay may not fully apply here. The Congress weakened because its contradictions became unmanageable. The BJP’s contradictions are narrower and more controlled. That does not mean the BJP cannot fragment. All dominant parties eventually confront succession crises and personal ambition. But ideological centrifugal forces inside the BJP are weaker than they were inside Congress. The primary fault lines are likely to emerge not from doctrine but from ambition after Narendra Modi.

And even there, the BJP possesses something Congress did not (or frittered away): a durable organisational spine outside the political party itself. The RSS is not merely a support organisation; rather, it is the source of its ideology, the reserve of cadres, its arbitration mechanism and its institutional glue. In many instances, dominant parties weaken after charismatic leaders fade because there is no deeper coherence beneath them. The BJP may prove more resilient because its ecosystem extends beyond electoral politics.

The BJP has also occupied much of the traditional opposition space. Welfare politics, once the natural terrain of Congress and regional parties, has been appropriated and fused with nationalism. The BJP speaks the language of aspiration and subsidy simultaneously. It invokes markets when convenient and redistribution when necessary. Successful dominant parties are rarely ideologically pure. But they are emotionally coherent. And BJP is Exhibit A of this approach.

The other transformation is institutional and informational. Elections are now fought inside a surround-sound environment of television amplification, WhatsApp networks, micro-market mobilisation, constituency-level analytics and narrative saturation. Add to this campaign finance asymmetry, institutional takeover and administrative leverage, and the challenge before the opposition becomes enormous. The playing field has not disappeared entirely, but it has unquestionably tilted.

This is where the opposition’s problem becomes deeper. The German political theorist Carl Schmitt argued that politics ultimately rests upon the distinction between friend and enemy. Every durable political movement defines who belongs and who does not. The BJP has understood this distinction with remarkable sophistication. It has gradually positioned itself not merely as a party asking for votes, but as the authentic political expression of national belonging itself. Opposition to the BJP can therefore be reframed not as opposition to a government, but as opposition to the nation’s emotional consensus.

This creates the central dilemma for the opposition. To oppose the BJP frontally on nationalism or civilizational politics risks immediate delegitimisation because the opposition is then pushed too quickly into the category of “enemy” of the nation. The traditional anti-BJP vocabulary of secular restoration, anti-majoritarian rhetoric, and anti-Hindutva positioning struggles because large sections of society no longer experience those arguments as culturally persuasive. Hindutva isn’t merely an ideological position any more; it has become part of the accepted operating system for large sections of Indian society.

Which means the starting point for defeating the BJP may paradoxically require not appearing as an enemy at all.

A successful challenger may have to present itself as a dissatisfied friend rather than a hostile adversary. Someone operating within the broad emotional universe that the BJP has normalised, while arguing that the current regime has become complacent, arrogant or ineffective. Not a rejection of nationalism, but a claim that nationalism has become performative rather than productive. Not an assault on welfare politics, but an argument that welfare without broad-based prosperity perpetuates the mai-baap sarkar model, which the people wanted to exit. This kind of dominant political position can’t be defeated through direct negation. It will need to be challenged from within their own emotional framework. I don’t see anyone from the opposition space that has the political nous and the energy to mount such a challenge. The idea that everyone ganging up against the BJP will lead to its electoral defeat is an arithmetical chimaera. It will never become a reality.

Democracies do not get undermined simply because one party wins repeatedly. The greater danger emerges when permanence begins reshaping institutions, incentives and public imagination. Bureaucracies adapt to continuity. The judiciary seeks to please rather than challenge. Media ecosystems align themselves with power. Capital and business optimise around incumbency. In such an environment, voters are conditioned to blame everyone except the party in power for their problems. Over time, elections become routine exercises of continued dominance, and the disciplining mechanism weakens.

Of course, nothing is inevitable. History offers a final caution. Dominant systems often appear invincible until suddenly they are not. Congress once looked immovable. So did Mexico’s PRI and Japan’s LDP at various moments. Political permanence is rarely permanent. But the effects of prolonged dominance can endure long after electoral turnover eventually arrives.

The real question for Indian democracy, therefore, is not whether the BJP will someday lose. Every dominant party eventually does. The more important question is what happens to democratic competition, institutional neutrality and political imagination during long periods when defeat itself stops feeling plausible. Those scars are almost permanent.

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Matsyanyaaya: US-China De-Risking is a Euphemism

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

I spent the last week at an Indo-Pacific Roundtable organised by the University of Cambridge on US-China de-risking and its global fallout. It was coincidentally appropriate that this discussion took place in a week that also saw the US President’s much-discussed trip to China.

What follows is an annotated version of my comments.

1. De-risking is a Euphemism

“US-China de-risking” is a euphemism coined somewhere between Brussels and Washington. What really is happening is better described as the weaponisation of interdependence, a term coined by Henry Farrell and Abraham Newman in their influential 2019 article. While the US has weaponised export controls, entity lists, the dollar system, and technology access, China has weaponised supply chains, rare earths, and market access.

Neither of these is conventional trade policy. Conventional trade policy uses barriers to protect domestic producers or penalise imports. What both powers have done is more structural: they have turned the architecture of globalisation into an instrument of coercion, even as they continue to trade with each other in high volumes.

De-risking is what countries like India are trying to do in response to this weaponised interdependence. India faces this weaponisation from both directions simultaneously. Other countries have it bad in one direction. The EU faces Chinese overcapacity and American technology controls, but EU members are US allies with treaty relationships that act as a buffer. EU countries are biding time for the Trump administration to end. Japan has a deep alliance architecture with the US, and its METI subsidies are often coordinated with Washington. India’s position, not fully aligned with either power and dependent on both, is what makes its de-risking challenge distinct.

2. China as an international market failure

China’s overcapacity in manufacturing was the market failure of negative externalities. Subsidised production at scale, underwriting costs no commercial firm could match, drove out investment everywhere else and made the rest of the world structurally dependent. The steel and solar stories are the canonical ones, but the pattern extends to industrial chemicals, consumer electronics components, and now EVs. Individual governments responded with tariffs. Tariffs protected domestic producers temporarily and raised consumer prices permanently. None of it resolved the underlying problem, because the underlying problem was not a trade imbalance. It was a structural market failure that individual country responses cannot fix.

China’s restrictions now display a different kind of market failure, that of monopoly behaviour. The global controls on rare earth magnets, gallium, and germanium target every country. But India also faces something more targeted, and the targeted restrictions are more revealing.

Over the past year, China blocked speciality fertiliser exports to India even as it resumed them to other countries. Herrenknecht tunnel boring machines assembled in China, used in metro projects across Indian cities, were held back from Indian buyers. Foxconn’s Chinese engineers were recalled from Indian facilities. Specialised manufacturing equipment shipments were delayed without a formal explanation.

Each of these restrictions is individually substitutable. Herrenknecht now supplies from its Indian facility. Taiwanese and Vietnamese engineers replace the Chinese ones within weeks. Fertilisers get routed through third countries at a cost premium. The point is not that any single restriction is crippling. The point is that they function as attrition. They introduce friction, slowing the pace at which manufacturing capacity shifts out of China.

The strategic signal here is that China views supply chain diversification itself as a threat. The irony is that this outlook makes diversification a necessity for companies seeking policy consistency. Its own restrictions are accelerating the diversification it fears, i.e., China is making China+1 happen.

3. India has a long memory of tech denial and the confidence to build base-level capabilities in critical sectors

In January 2025, the Biden administration’s AI Diffusion Rule placed India in Tier 2, not alongside Japan, the UK, and Australia, but with most of the developing world, with caps on how many advanced AI chips India could import. The Trump administration rescinded it before it took effect but the fear looms that some controls on AI compute might be forthcoming.

These developments have a familiar narrative territory. India has a long institutional memory of technology denial. Cryogenic rocket engine technology was denied in the 1990s, which is why ISRO spent the next fifteen years building its own engine. Cray supercomputers were denied to Indian institutions in the 1980s, which is why the Centre for Development of Advanced Computing built PARAM. Nuclear fuel and dual-use technology were withheld for decades under NSG and MTCR restrictions, constraining not just the weapons programme but civilian nuclear power too.

Every time, the lesson was that India can build what it prioritises, even if that version is slower, more expensive, and takes more time. The AI Diffusion Rule triggered exactly that institutional memory. This is why India’s response to US-China ‘weaponised interdependence’ has been to invest in building base-level capabilities across semiconductors, AI, and rare earths.

4. India does trade defence alright. But it has no institution to deploy offensive economic statecraft.

India’s defensive architecture is largely in place. Press Note 3 screens Chinese investments. Huawei is excluded from 5G deployment. There is a Trusted Source, Trusted Product framework for telecom vendors and satellite services. The relationship with China is a one-dimensional buy-sell transaction. This is in sharp contrast to the web between China and the West, characterised by overlapping layers of talent, technology transfer, investment, and trade, making it difficult to untangle.

But what India lacks is offensive economic statecraft. China’s State Administration for Market Regulation has turned antitrust review into a geopolitical lever. It can threaten to block any cross-border merger where the parties have significant China revenue, which, for major technology and industrial companies, is nearly every deal. India is the only other market large enough to plausibly do something similar.

And India has a structural asset that almost never appears in de-risking discussions. It has over 1,800 Global Capability Centres, R&D hubs, product development facilities, and operational decision-making units for nearly every large global corporation. These are not call centres. They are where chip architectures get designed, where algorithms get built, and where product roadmap decisions get made. They are sticky in ways factories are not; the organisational dependency they create is deep and hard to reverse. In an era of weaponised interdependence, talent inside someone else’s company is leverage. But India has no institution to deploy it. That’s why we have written in these pages that India needs a SAMR equivalent to use market access as a bargaining chip.

5. The coordination problem remains underappreciated

If Chinese overcapacity is structural, individual country responses are insufficient by design. Domestic capacity built behind tariff walls gets destroyed the next time Chinese prices drop. We have seen it in steel, where Indian mills built behind high duties watched their margins collapse when Chinese export prices fell. We have seen it in solar, where module manufacturing capacity in the US and EU became unviable the moment Chinese panels got cheap again. The pattern is stable and repeating.

There are 91 semiconductor fabs under construction globally right now, some of them outside China, most incentivised by industrial policy responses to the chip shortage and the CHIPS Act. Without cross-country coordination on capacity, pricing, and market access, a significant portion of this investment will not survive the next deflationary wave from China, as the largest amount of mature-node capacity coming up is from China. We are setting up for a massive collective write-down unless some big markets can frame a collective response.

India’s challenge is whether the political economy can sustain de-risking, whether institutional imagination can move from defence to statecraft, and whether anyone will solve the collective action problem before the next ‘China Shock’ makes individual country responses moot.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Puliyabaazi] The next episode discusses the AI Divide(?), India’s Human Capital, Cognitive Autonomy in the AI age, and the Enshittification of Software.

   पुलियाबाज़ी Puliyabaazi

   सोच की स्वछंदता, सॉफ्टवेयर का 'कबाड़ा' और AI की दौड़ में भारत कहाँ? Cognitive Autonomy, Enshittification and AI Divide

   पुलियाबाज़ी के इस एपिसोड में, हम चर्चा करते हैं AI क्रांति और उभरते हुए “AI Divide” पर। क्या भारत AI के इस्तेमाल से अपनी विशाल मानव पूंजी (human capital) के लिए अवसर पैदा कर पायेगा? क्या AI क्रांति भारत की समस्याओं को सुलझाने में काम आएगी? इसके अलावा, हम AI के दौर में अपनी सोचने-समझने की आज़ादी (cognitive autonomy) कैसे बचा कर रखे? साथ ही, बातचीत सॉफ्…

   Listen now

   7 days ago · Puliyabaazi Hindi Podcast

2. [Article] Check this take by my senior colleague Nitin Pai, on the significance of the early findings of the Genome India project. Aside from the findings, I found it motivating that several organisations came together to work on this multidisciplinary study that’s vital for India.

3. [Book Bundle] Read Farrell and Newman’s The Underground Empire and Edward Fishman’s Chokepoints as a stack.

4. [Repo] What if you had access to the Takshashila Way of Research from anywhere in the world? What policy question would you ask and investigate? Well, here’s a beta version of ‘Takshashila in a Box’ for you to begin your policy research journey.

India Policy Watch #1: Gradually, Then Suddenly

Insights on current policy issues in India

—RSJ

As in previous quarters, I was looking at both the Q4 results announced by corporate India and the commentary they offered during analyst calls to get a sense of how well the economy was faring. While there is good evidence to suggest India’s energy security, or the lack of it, will play out during the course of this year on its fiscal math, the economic data so far doesn’t seem to suggest there is any real impact on the ground.

India’s story at the moment is caught between two competing instincts. One is the instinct to panic. Every new flare-up produces predictions of oil shocks, rising inflation, supply chain disruptions hurting the industry, and a return to the bad old days of external vulnerability. The other instinct is to back domestic resilience, fiscal space, and political stability to declare that India has structurally escaped these constraints and is insulated from global disorder. Neither view is particularly useful.

The current reality is that the Indian economy is proving more resilient than many expected, even as signs of fragility are emerging underneath. The resilience is visible in the numbers and high-frequency indicators. The fragility is visible in forecasts.

Going back to Q4 earnings data from large listed Indian companies (about 180 and counting at the moment), sales growth accelerated to roughly 16% year-on-year, while EBIT growth rebounded to about 11% after a weak preceding quarter. Around 42% of firms beat analyst expectations, while only about 12% missed. Metals, autos, real estate and discretionary consumption led the rebound. Even banks, despite weaker net interest margins, reported lower provisioning ratios, suggesting that the feared deterioration in asset quality has not yet materialised.

India’s banking system also looks structurally healthier than it did a decade ago. Corporate leverage is lower than during the previous investment cycle. Public sector bank balance sheets are cleaner. Credit growth has moderated but remains positive. The mood in the market feels recessionary; the underlying data does not.

That is not what an economy sliding toward crisis usually looks like.

At the same time, global trade flows are also behaving in an unexpectedly resilient fashion despite worsening geopolitical conditions. Global goods trade grew by around 12% year-on-year in Feb and March 2026, with volumes expanding strongly despite disruptions in freight routes and rising insurance costs. Asian export systems continue functioning at scale.

As we have seen on multiple occasions in the past few years, conflicts and tariffs don’t freeze global commerce. The information flow and the flexibility built in since COVID-19 have meant that alternatives are found quickly. Trade routes change, shipping corridors lengthen, and rising freight costs or insurance premiums are absorbed by the players. But the system continues moving.

The Strait of Hormuz disruptions illustrate this dynamic clearly. The Gulf region still accounts for roughly 28% of global crude supply and 20% of LNG exports. Around half of Asia’s crude demand and roughly 40% of its LNG demand remain tied to Gulf energy flows. India itself sources close to 60% of its seaborne crude imports through Hormuz-linked routes. The disruptions have been meaningful. Shipping transit through Hormuz reportedly fell more than 90% below normal levels during peak disruption periods. Freight rates for very large crude carriers have risen between three and six times from pre-crisis levels. Oil exports out of the Gulf are down by nearly 65%.

Yet the global economy has adjusted faster than many expected. Strategic petroleum reserves are activated. Saudi and UAE pipeline infrastructure partially rerouted exports. Sanctioned Russian oil and gas is back in the market. American suppliers are now accessing Asian markets, including India. There’s been demand destruction in energy-intensive sectors, but so far, things have held out in the wider economy.

India benefits from certain structural features in this environment. One of the least fashionable elements of the Indian economy is that coal still dominates its electricity generation mix. Gas exposure remains limited compared to East Asian economies. This is environmentally bad but strategically useful during LNG disruptions. Coal prices have gone up globally, and that will hurt the consumers or the government subsidies, but there isn’t a serious electricity supply disruption impacting households or industry.

But India’s vulnerabilities are elsewhere.

Agriculture remains a critical area. India imports roughly 50-60% of its DAP fertiliser requirements, and a meaningful share of these imports is linked to Gulf supply chains. More than 50% of sulphur demand is met through imports, with over 90% sourced from Gulf producers. Around 40% of urea imports also come from the region. A prolonged LNG disruption could reduce gas availability for domestic fertiliser producers by as much as 30%. There are buffers. Fertilisers exposed to Gulf-linked disruptions account for only around 6% of a paddy farmer’s production costs. Agrochemicals account for another 2%. Subsidies cushion farmers from immediate volatility in urea and several fertiliser categories. But subsidies do not eliminate costs. They transfer them to the State. The fertiliser subsidy bill is likely to come in excess of ₹1.5 trillion over budget, given our reluctance to pass on the costs to farmers. But the real issue is we might run out of supply after Kharif sowing, given the urea inventory levels. This matters for India’s food security and inflation, which will hurt the masses.

One reason there is relatively little visible anxiety within the Indian establishment about the electoral implications of economic disruption is that the current political machinery has repeatedly demonstrated an ability to transcend traditional economic voting behaviour. The BJP election apparatus, aided by welfare delivery systems, hyper-centralised political communication, and increasingly “sophisticated” electoral mobilisation, has shown across multiple elections that economic distress isn’t a political vulnerability. Many governments around the world today are constrained by political fragility. Inflation shocks rapidly translate into collapsing approval ratings, coalition instability or fiscal panic. India currently does not face that problem to the same degree. The government, therefore, has room either to support the economy through measured fiscal expansion or to hold the line and allow parts of the shock to pass through consumers and companies.

This flexibility is rarer among large economies than is commonly appreciated.

The COVID-19 experience offers a useful guide here. India did not pursue massive household income replacement on the scale of the United States or parts of Europe. The State intervened selectively with food transfers, targeted welfare, credit guarantees, infrastructure spending, and calibrated fiscal easing, rather than an outright abandonment of fiscal discipline. Much of the adjustment burden was ultimately borne directly by households, small businesses and informal workers.

A similar pattern is likely in the event of a prolonged energy or commodity shock. There will probably be some fiscal expansion. Fertiliser subsidies may rise. Food support through free rations may expand. Credit guarantee schemes will come into play (already announced last week). But the response is likely to remain measured rather than dramatic. The government will hope to absorb the disruption within a single fiscal cycle and then return to the familiar 6.5-7% growth trajectory that policymakers increasingly treat as India’s natural cruising speed.

Like always, I am somewhat sceptical of this scenario.

Not because India is fragile in the old sense. It clearly is not. Foreign exchange reserves remain strong. Banks are healthier, and corporate balance sheets are cleaner. Public infrastructure has improved logistics and formalisation. The concern is different.

The greater risk for India may not be a single oil shock but rather prolonged, medium-level instability. The global economy appears to be moving from a system built around efficiency toward one built around redundancy and resilience. That means structurally higher logistics costs, larger inventories, duplicate sourcing systems and more expensive trade finance. Economies will increasingly pay a premium simply to ensure continuity. Parts of this adjustment are already visible. Governments are accelerating renewable deployment not only for climate reasons but because energy security has re-entered economic strategy. Strategic reserve policies are expanding. Supply-chain redundancy is replacing just-in-time efficiency. India isn’t well placed for any of these. It will have to make significant investments fairly quickly to adjust to this new reality.

There is, of course, the other challenge of India’s labour advantage being eroded faster than previously imagined because of technology. Just look at the Q4 numbers of Indian IT services companies. The first stage of revenue deflation is on already, despite all the soothing words offered about how these companies are adapting to AI and getting more business. This matters for India because much of the urban middle-class confidence rests on the continued expansion of the IT and services economy. For nearly three decades, India benefited from a fortunate alignment. Globalisation expanded outsourcing, while technology spending created a rising demand for software services faster than automation reduced employment.

Generative AI is disrupting that balance.

The risk is not that Indian IT services will disappear. It will take time to morph and adjust to this new reality. But the days of it being the mass white-collar employment engine are coming to an end. Entry-level coding, testing, maintenance and documentation work are disappearing faster than these companies would like to admit. Even if technology spending remains healthy, the number of billable human hours required per project will decline steeply. This matters because India’s consumption story has been built less on wealth effects than on salaried employment expansion. If hiring growth slows in IT while manufacturing still struggles to absorb labour at scale, consumption growth could become narrower and more uneven.

There is an additional irony here for India. The AI boom itself depends heavily on energy-intensive infrastructure. Data centres consume enormous amounts of electricity. Electricity can account for 60-70% of operating expenses for large data centres. Semiconductor manufacturing depends on fragile supply chains involving helium, energy inputs and specialised industrial materials. Rising energy costs and supply vulnerabilities of India in these areas could therefore slow parts of the domestic AI infrastructure buildout that is being planned in the next few years.

And then there are some familiar unknowns that India still cannot fully hedge against.

A weak monsoon linked to El Niño, as is being predicted, could quickly turn things worse for the rural economy. India’s agriculture system remains heavily monsoon dependent than policymakers often acknowledge. Reservoir levels, crop yields and rural demand still depend heavily on rainfall patterns despite decades of irrigation investment.

None of these risks individually looks unmanageable. But it is possible that in the next 2-3 quarters, several moderate risks indicated above will interact simultaneously: inflation driven by global oil prices, weaker hiring, food-price shocks, slower global demand, and rising fiscal burdens.

The economy is neither collapsing nor transcending economic gravity, given Q4 data. It is looking more resilient than expected at this moment. But as Hemingway noted about bankruptcy, it happens gradually and then suddenly. That’s an important lesson to keep in mind over the next couple of quarters.

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India Policy Watch #2: One Year after Op Sindoor

Insights on current policy issues in India

—Pranay Kotasthane

It’s been a year since Operation Sindoor. Several “hard-lessons-for-India” articles came out earlier in the week assessing the state of play between India and Pakistan. Most began with a rather sobering tone and pointed out that, one year later, Pakistan is in a better position than it was before May 7, 2025. Geopolitical assessments often suffer from a recency bias, and Pakistan-US relations reaching a local maxima have weighed heavily on them.

Nevertheless, my senior colleague has an insightful assessment of three structural military changes fast-tracked in Pakistan over the last year, even as India hasn’t been able to action many of its military reforms. These are:

“The 27th constitutional amendment, passed in November 2025, abolished the post of Chairman of the Joint Chiefs of Staff Committee and established the post of Chief of Defence Forces. Multiple coordination layers were consolidated into a single decision channel. The amendment was procedurally clean and politically uncontested, which is itself an indicator of the institutional consensus behind Pakistan’s velocity reforms.

The Army Rocket Force Command now unifies long-range strike assets, including ballistic missiles, cruise missiles, and armed drone swarms, under one authority. Previously these assets were scattered across services. They can now be employed in coordinated, multi-domain strikes within hours of a crisis. The separation of conventional strike forces from nuclear command is the more consequential reform, because it enables rapid conventional employment within nuclear thresholds. The Indian planner who calculates a Pakistani response under the previous architecture is calculating against a system that has been replaced.

The Defence Forces Headquarters now unites operational planning, information operations, and strategic messaging. This institutionalises the narrative advantage Pakistan demonstrated during Sindoor. The empirical record from May 2025 is instructive. During the attribution window, Pakistan enabled over sixty engagements with American policymakers and media. India managed four. By the time Indian messaging reached Washington, perceptions had hardened. The new architecture is built specifically to widen that gap.” [Anil Raman’s Substack]

These changes have direct consequences for the next round of confrontation. Besides, reports suggest that China has finally owned up to providing direct on-ground support to Pakistan. I’m sure India’s military strategists must be following these two developments closely.

Since this newsletter covered Operation Sindoor extensively, let’s look at how we fared on those assessments. On 10th May 2025, I made three points:

One, India is better placed strategically. By hitting air bases all along Pakistan’s length, India has changed the payoffs for Pakistan. It has signalled that acts of terrorism against India will invite a response directly to Pakistani cities. By taking out air defence systems and runways in some air force stations, it has also exposed Pakistan’s vulnerability.

This assessment holds even if the reports of Pakistan downing Indian aircraft are partially accurate. There’s been a lot of chatter surrounding the implications of a J-10C possibly taking out a Rafale. The obsession with this question is partly because our mind slots it in the same category as the Balakot airstrikes, which ended up in the downing of an Indian Mig-21 in Pakistan-controlled territory. But the situation was quite different this time. Pakistan is claiming that its air defence system took out an Indian aircraft in the Indian airspace, while the Indian side has not accepted any such claims. If true, it is indeed a military gain for the Pakistani Air Force. But even that military win doesn’t change the strategic calculus. Despite this supposed loss, India was able to hit primary military and terrorist targets deep within Pakistan consistently, and that is the more significant development.

The second part of this assessment holds quite well one year later. Notice how the number of aircraft that went down on both sides is a non-issue in the strategic sense one year later. Moreover, the downing of US Air Force jets in the Iran war and the Ukrainian attacks on Russian aircraft have also made people realise that such things are not unusual during wartime. Larger powers have larger military surfaces that can be targeted through asymmetric warfare. But what matters is the overall strategic effect, not tactical losses.

The first part of this assessment has played out somewhat differently. On May 19th, in an episode of The Seen and the Unseen Podcast, I classified the war's effects into three levels. At the tactical level, which focuses on individual battles and engagements, Pakistan's shooting down of Indian aircraft was a tactical win, just as India could claim a tactical win for successfully striking its intended targets. Next, India was more successful at the operational level, winning campaigns, and achieving its goal of sending a clear signal that the entirety of Pakistan is vulnerable to retaliation if it continues sponsoring terrorism. At the strategic level, which focuses on the realisation of long-term national objectives, I was less sanguine. This level is an “infinite game” where results remain ambiguous. While India gained a strategic advantage by demonstrating that such attacks now incur high costs for Pakistan, I didn’t think it would effectively end future terrorist activity, as Pakistan maintains the free will to continue its path regardless of economic or military setbacks.

The Red Fort terrorist attack later in November shows that even if terrorist activity declines substantially, the marginal cost of reducing it to zero is infinite. And in any case, because terrorism is theatre, less-frequent acts can have equally harmful strategic effects. India’s response was equally interesting. Having publicly committed to a zero-tolerance policy, the Indian government tried to portray that this attack was below the threshold that deserved an Op Sindoor-like response. The credibility cost of that manoeuvre has not been fully priced in yet.

All these events over the past year show that the India-Pakistan conflict dyad is far more stable than people realise. Limited wars continue to happen, but both sides, operating under a nuclear overhang, prefer to de-escalate quickly. The last round, beginning with the April 22 terrorist attack in Pahalgam, lasted around 18 days; compare that with other ongoing wars between Ukraine-Russia and Iran-US-Israel, and you will immediately notice the difference.

Two, the events serve as a reminder that Pakistan is a capable military adversary despite its significant economic and social troubles. The military-jihadi complex (MJC) has the first claim on the resources of that country, and it can squeeze out the funds for its requirements, even if the rest of the country suffers. Thus, it would be foolish to discount the MJC’s military capabilities. The dreams of balkanising Pakistan are just as improbable as Pakistani dreams of taking over J&K.

I think this holds well one year later. We need a measured understanding of Pakistan’s capabilities, not some fantastical notions of its decline fed by social media narratives and cricketing failures. Pakistan’s moment under the sun, diplomatically, is all well, but the truth is that the US-Pakistan equation will neither be as bad as Indian hawks wish nor as strong as Indian strategists fear. Pakistan’s economic fragility and the terror infrastructure it has built limit how far any outside power is willing to go in treating it as a serious partner. The engagement will remain one-dimensional and transactional.

Third, it is fascinating that even in the Information Age, information ecosystems of two adversaries can be managed and partitioned to an extent that each side can claim victory. This is a major takeaway, and we will discuss it in subsequent editions.

Despite the Fog of War lifting, this bifurcation between the two information environments has persisted. The two governments are able to assuage domestic constituents and climb down from a confrontation reasonably quickly.

The net assessment then is that the dyad’s basic stability-instability logic has not changed. Asking who won and who lost is futile because this is an infinite game.

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Reading and listening recommendations on public policy matters

1. [Article/Paper] Anupam Manur decodes the policyWTF that is India’s taxation of Aviation Turbine Fuel (ATF). We are no strangers to cross-subsidisation but Indian governments have taken ATF taxation to absurd levels. Don’t miss this opinion piece and paper.

2. [Article] An opinion piece which casts a doubt on the US-Pakistan bonhomie.

3. [Podcast] There are many opinions about India’s legislators but little empirical research on it. So this Puliyabaazi with Ajit Phadnis discusses his extensive research on the incentives of legislators.

4. [Frameworks Compilation] We've been discussing public policy frameworks here for 6+ years. 99 frameworks later, they now have a home in a searchable, cross-referenced form. Thanks to Claude Code. Now you can describe a policy problem and find the most relevant framework. Check it out.

Global issues and their impact on India

—RSJ

It’s good to be back after a two-week break. Much has moved in the interim, but the underlying picture remains familiar. West Asia sits in a tense ceasefire, with the U.S. and Iran settling into a holding pattern that neither side seems inclined to disturb. The former is relying on the slow grind of economic pressure, while the latter works around it through land routes, informal channels, and partial flows that keep the system from tightening fully.

For countries like India, much of Southeast Asia, and parts of Europe, the effects are beginning to register in ways that are more immediate than strategic, as oil prices firm up and supply becomes less predictable, setting the stage for second-order effects. If this persists into May without resolution, shortages will begin to move from the abstract to the tangible. By then, the domestic political calendar will have shifted as well, with election results behind the government and us in a position to act through price pass-through, tighter distribution, or some form of rationing in the more sensitive segments of the economy.

The inflationary impulse from such a shock rarely stays contained within fuel; instead, it moves through transport, packaging, and any sector where petroleum derivatives sit within the cost structure. Add the risk of an El Niño year and the possibility of a weaker monsoon, things tighten further, as fertiliser prices continue to rise globally, and urea shortage risks look real for the Rabi season (we have enough for Kharif sowing). There is bound to be fiscal policy action by the end of this quarter.

High-frequency indicators for April suggest some moderation in the economy, though nothing sharp enough to force a reassessment. The next few weeks will begin to shape the policy response, and once the election cycle clears, both fiscal and monetary choices and actions will offer a clearer signal of how seriously these risks are being taken. We will have a lot to chew on in the future editions on this.

For this edition, let me start with a minor gloating point.

At the beginning of the year, I had made my usual set of predictions (edition #329), one of which was this:

“Surprisingly, in 2026, Europe will buck the trend of right-wing parties gaining ground in elections. I think the overt support from the MAGA crowd plus the US national security strategy document published last month that openly seeks to support “patriotic European parties” and “to help Europe correct its current trajectory” will backfire. The firm stand by the current leaders to Trump’s bullying, to China’s dumping and promised manufacturing stimulus will steal some of the thunder of the right. The result of this will be seen in their underperformance across the board: of Farage’s Reform UK in the midyear local elections, AfD losing what seems like a slam dunk now in state elections in Germany and similar setbacks in France and the Netherlands for right-wing parties. And, in perhaps the most visible sign of this, Orban will lose in Hungary this April.”

Yeah, I had called it at the start of the year.

Of course, like all such forecasts, this is just good fortune. A fluke. But I hadn’t provided one vital piece of information in that post.

The basis for that call was not a model or a decisive piece of information, but a sense that something in the prevailing narrative did not quite hold, shaped in part by the week I spent in Budapest last year. Over the following months, I returned to Hungary in fragments, reading more closely and tracking developments while trying to reconcile the dominant story of political stability with the less tangible signals I had observed both while I was there and in my conversations with people. I planned on writing about Hungary more than once over the last year, only to leave the piece unfinished each time because something else, more pressing, came up.

Now that the result is known, it is tempting to impose clarity on what were in reality scattered impressions. But I thought it was best to finish that long-pending post on Hungary in this edition. We are all wiser after the event, of course. But in my defence, I had made this prediction four months back.

In January, when I made the prediction, there wasn’t much in the public domain to support that view. Most commentary assumed continuity. Orbán had been in power long enough to have reshaped institutions, aligned the media, and built a durable political base. I didn’t have a specific trigger for my prediction. A week is not enough to understand a country, but it is enough to notice when things don’t quite line up.

Budapest itself presents well. The central parts are efficient and in line with what you would expect from a European capital. Move out of that zone, and the picture changes. Infrastructure weakens, maintenance slips, and in the countryside, the general state of disrepair becomes clearer.

Alongside this was a second layer of economic ambiguity. Hungary had drawn in European manufacturing investment about a decade back, and it was also seeing increasing Chinese interest, which was working to undercut the EU by setting up a base there. On paper, that diversification looks sensible. But the idea that Orban could take EU funds, use its membership as a lever to draw in investments from Europe and then become the first port of call for China to set up their assault on European manufacturers seemed too precious. I could sense the EU tap would run dry soon. And it did.

Politically, the surface looked stable. Orbán’s version of nationalism had not lost support in any obvious way. Positions on immigration, culture, religion, and family still had broad acceptance. There was no strong ideological pushback in everyday conversations. If anything, those ideas had become part of the baseline. That is where the shift had begun. After more than a decade of dominance, the ideology had done its work. It had defined boundaries and built a narrative. There are only so many times you can return to the same themes before they stop adding energy. At some point, the question changes from whether people agree to whether the ideology is still doing anything for them.

That change was visible in how discussions moved from identity to utility. People were not arguing against nationalism; they were asking what it was delivering at this stage. Hungary’s relationship with the European Union, the steady friction with it, and the position taken on the war in Ukraine had started to feel less like a clear strategy and more like a set of positions without an obvious payoff. The proximity to Vladimir Putin added to that. EU funds had been an important part of the economy, and questions around their use and future availability were part of the conversation. None of this led to open opposition, but it introduced doubt.

There was another strand that came up in a few conversations, which helped make sense of the broader picture. Some people described Hungary under Orbán as a kind of model for the global right, a place that had shown how to build what he had called an “illiberal democracy.” The comparison that came to mind for them was Fidel Castro, not in terms of ideology but in terms of role. A country that becomes a reference point, a leader who stands for something larger than his own electorate. A system that sees itself as a model begins to behave like one. It leans into its narrative and becomes less flexible. That works when a system is set up in opposition to the outside world. It is harder when it is embedded within it. Hungary is part of the European economic and political structures. It cannot operate as a permanent outlier without incurring costs. The more the narrative moved in that direction, the more the gap between posture and reality widened.

That gap became more visible as Orbán’s international profile grew. Alignment with figures like Donald Trump and attention from right-wing movements across Europe increased his standing outside Hungary. Inside the country, it created a different reaction. Nationalism is built on the idea of sovereignty and independence. It does not sit comfortably with visible external influence, even when that influence comes from ideological allies. When politicians from other countries begin to engage with domestic politics, it raises questions. The idea that nationalist movements across countries would operate in alignment carries its own contradiction. It suggests coordination that runs against the premise of autonomy. What can a global group of bigots rally together for? Demonising the global Left? Yes, perhaps. But beyond that, if all right-wing, populist movements want to make their nations great again, how will any bilateral discussions among them be a mutual win-win?

All of this played out in an environment where public debate was limited. The media was co-opted, dissent was not visible, and there was little space for open disagreement. In private conversations, there was more questioning than the public discourse suggested. That is the setting in which what is described as a preference cascade can take shape. People hold back their views because they assume they are in the minority. The absence of visible dissent reinforces that assumption. When someone credible breaks that pattern, opinions that were already present begin to surface quickly.

The emergence of Péter Magyar needs to be seen in that context. He did not build a campaign on ideological opposition to Orbán. He stayed within a similar broad frame on nationalism and conservative positions and shifted the focus to governance, corruption, and the sense that the system had become self-serving. That mattered. It meant that voters did not have to change their beliefs to consider an alternative. They only had to reconsider who was best placed to act on those beliefs. Magyar did not create dissatisfaction; he made it visible and usable in a political sense.

Over the months after that visit, I kept coming back to these threads to see if they held. Economic divergence remained. The strategic ambiguity in foreign policy continued. The nationalist narrative did not change in substance. The gap between global positioning and domestic concerns widened. None of these on their own was decisive. Taken together, they pointed to a system that was no longer adjusting. It was maintaining itself, but without resolving the tensions within it. Systems can run like that for a while. They tend not to do so indefinitely.

Hungary is not a template that can be applied elsewhere without adjustment. It is smaller, more tightly connected, and shifts in sentiment can move through it faster. It is also a case where the challenge to the incumbent came from within the same ideological space rather than from a clear opposite. That is a specific configuration. In larger countries, with more complex social and political structures, similar outcomes are harder to produce.

What that week in Hungary provided me was a set of inconsistencies that did not resolve over time. Political outcomes often look sudden when they arrive, but the conditions for them build gradually. If you pay attention to where narratives stop aligning with lived experience, you can see that build-up before it shows up in polls or results. That was the basis of the January prediction. It was about recognising that the system was no longer fully coherent on its own terms.

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Matsyanyaaya: India Has a Stake in the US-China Fight on Advanced GPUs

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

Jensen Huang has long wanted to sell advanced AI chips to China. Dario Amodei, on the other hand, has compared doing so to selling nuclear weapons to North Korea and then bragging that the missile casings are made by Boeing. For most of 2025, this was a debate about American interests.

But the outcome of this debate will determine whether India has just one or many sources of advanced computing infrastructure. It will also determine whether Chinese AI labs continue to release open-source models that Indian companies use to build applications. This is not a US-China question alone.

The Biden administration’s October 2022 export controls on advanced chips to China rested on a clear causal chain: deny chips, deny compute, deny AI capability. The controls succeeded at the first link. China cannot manufacture leading-edge chips at scale; its SMIC foundry remains stuck at around 7nm, while TSMC has moved to 3nm and below. On this narrow measure, the denial worked.

But the wider chain is broken. DeepSeek, Moonshot, and Qwen emerged as frontier AI labs despite the curtailed access to chips. Huawei reported revenue of CNY 880.9 billion in 2025 and invested a record CNY 192.3 billion in R&D in the same year. Chinese AI researchers still constitute roughly half the global talent pool. The controls bought time on the manufacturing side, perhaps two to three years on leading-edge nodes. But they did not buy any meaningful time on the AI capability side, at least not in the sense that the US got to this Brahmastra first and then used it to deny others access to it.

Jensen Huang made this point in the much-discussed interview with Dwarkesh Patel. As he likes to put it, AI is a five-layer stack: energy, chips, infrastructure, models, and applications. American policy sacrificed the chips layer to protect the models layer, while China adapted across the other four layers with abundant energy, algorithmic innovation, and a large engineering workforce. The chips layer matters, but it is not the only layer that matters.

India’s position in this five-layer stack is distinct from both the US and China. At the applications layer, India has the right ingredients. Its IT services sector could become the global delivery platform for enterprise AI deployment. At the chip design layer, every major fabless semiconductor company, including those driving the current Nvidia debate, runs large Global Capability Centres in India. Indian engineers are central to the chip architectures being contested.

But below those two layers, India is dependent. India’s data centre capacity is an order of magnitude smaller than that of the US or China. Energy constraints limit the ability to compensate for chip quality with raw compute volume. India imports advanced chips and, despite Sarvam AI’s 105B-parameter multilingual model in March 2026, will continue to import frontier models too.

This consumer-integrator position creates a strategic calculus that neither Jensen Huang nor Dario Amodei represents. India does not want China to dominate all five layers of AI infrastructure. India also won’t prefer to use China’s AI chips. But India also does not benefit from a world in which access to advanced chips is contingent on the policy preferences of the US administration, which reversed its own H20 policy four times in three years. India definitely benefits from China’s open-source AI ecosystem. DeepSeek and Qwen are not threats to Indian AI ambitions; they are inputs. Indian companies use these open-source models to build products and services. The more competitive the global model ecosystem, the less leverage any single country holds over India’s access to frontier AI capability.

Open-source models are separable from Chinese hardware. Indian firms can optimise Qwen’s weights without deploying Huawei Ascend chips. The security concern India legitimately has is about hardware, not about models. A Chinese chip with undisclosed firmware in critical infrastructure is a genuine risk. An open-source model that has been fine-tuned is not as big a threat.

India should therefore want Chinese AI labs to keep releasing open-source models. It should want that ecosystem to remain competitive with American proprietary models. It should not want Huawei hardware anywhere near sensitive Indian infrastructure. The current American debate collapses this distinction, treating Chinese chips and Chinese models as the same threat. For India, they are not.

India has three tasks at hand. Through its engagement in Pax Silica, the US-led technology initiative that India joined in early 2026, it has an opportunity to articulate a specific position rather than defer to Washington’s framing. Second, funding for GPU-agnostic middleware is vital. Public investment in open alternatives to reduce the CUDA lock-in should become a priority for the India AI Mission. Third, India should maintain model pluralism as a deliberate strategy. Use American proprietary models where they are best. Use Chinese open-source models where they are useful. Build sovereign models like Sarvam for applications where dependency on foreign providers is unacceptable. A pluralist global model ecosystem is structurally safer for a country in India’s position.

The causal loop analysis below captures this logic.

For more, check my paper on this topic.

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Global Policy Watch: Tech Geopolitics ICYMI

Global issues and their impact on India

—Pranay Kotasthane

(This section was first posted on Technopolitik — our technology geopolitics newsletter. Subscribe to it here.)

1. NDRC, not SAMR, blocked the Manus-Meta deal

The proposed acquisition of Manus by Meta was stopped by China’s National Development and Reform Commission (NDRC), not by the State Administration for Market Regulation (SAMR). This distinction is significant.

SAMR is the antitrust regulator. It blocks deals on competition grounds. China is known to use this instrument for national security reasons, but it often does so under the guise of anti-monopoly or consumer harm. You’ll find more about SAMR’s actions in this post.

Anticipating the Unintended

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6 months ago · 25 likes · 3 comments · Pranay Kotasthane

NDRC, by contrast, is the macroeconomic planning body. Its intervention signals that China views this deal not as a competition problem but as a security problem. If NDRC is now the effective gatekeeper for tech mergers & acquisitions, that suggests Chinese AI firms are no longer commercial assets subject to normal market rules. They are national assets, and their disposition is a matter for economic planners, not antitrust lawyers.

Meanwhile, the NDRC had banned two co-founders of Manus from travelling abroad since March this year, citing this regulatory review. Tough times for a Chinese technology firm—foreign companies see you surreptitiously, and even if you manage to convince them, the CPC blocks the sale. This is exactly the problem that rare-earth refiners in China have been facing due to stringent controls over the past 12 months.

2. The wrong lessons from Mythos

The Anthropic Mythos model, whose cyber-offensive capabilities led Anthropic to delay its public release while American companies patched their software, has become the centrepiece of the case for chip export controls. The argument, most prominently made in the Dwarkesh-Huang exchange, runs like this: if China had more compute, it could have trained Mythos first. And that would be unacceptable to the US and the world because of the harm it would cause.

This framing has three problems.

The first is the frame itself. Mythos-type capabilities do not structurally change national power the way nuclear weapons did. Thinking of AI through the nuclear lens, where getting there first and then denying others is the only viable strategy, leads to bad policy. For countries like India, AI is better understood as a vital, general-purpose technology: something you want widely available, not concentrated in one place.

The second problem is the assumption of asymmetry. The argument treats Chinese offensive cyber use as a given while treating American use as defensive. Both countries have offensive cyber capabilities, and both have used them. The real problem is not Chinese malice in particular; it is the absence of credible governance mechanisms for AI deployment, a problem neither Washington nor Beijing has solved.

The third problem is the most important for India. The Mythos episode shows that if AI models can find thousands of unpatched vulnerabilities in major software systems, then every country running those systems is exposed, including India, regardless of who trained the model. The lesson is about defensive readiness and software hygiene, not about chip exports.

3. What made Taiwan think ITRI’s spinoffs should be private?

Karthik Tadepalli has a lovely essay on ITRI, the Industrial Technology Research Institute that seeded Taiwan’s semiconductor industry, in the Asterisk magazine. He finds that ITRI demonstrates how a focused, applied R&D institute can build a world-class chip industry by starting small, training people, and serving firms rather than competing with them.

One question worth thinking over: what led Taiwan’s planners to assume that ITRI’s spin-offs should be private firms? The default in most developing countries, and certainly in India, was the opposite. C-DOT had genuinely good technology, including telephone switches that were competitive by any standard. BEL had developed strategic IP. But neither institution could imagine letting go of the downstream functions. They did engage private players, but merely as “vendors” rather than partners. The IP stayed inside the public sector and did not compound.

Taiwan’s answer to this question is the crucial variable in the ITRI story. It was not just industrial policy; it was industrial policy with a particular theory of ownership and incentives. Getting that theory right is what allowed TSMC to become TSMC rather than a government procurement vehicle.

[Do not miss the essay]

4. Heavy rare earths outside China, for the first time in two decades

Lynas has begun heavy rare earth production at its refinery in Malaysia, reports the Wall Street Journal. Apparently, this is the first time in twenty years that a heavy rare earth refinement on a commercial scale has happened outside China.

This is a direct consequence of Chinese coercion. Beijing’s export restrictions on rare earth processing, imposed as leverage in the broader technology dispute with the US, accelerated the diversification it was meant to deter. China+1 is happening, not because of Western industrial policy alone, but because China’s own actions have raised the cost of dependence.

The Lynas development will not resolve the structural imbalance overnight. China still dominates processing capacity. But the direction of travel is now clear, and it is being driven as much by China’s behaviour as by any Western strategy.

5. Tech companies as military targets

My colleague Nitin Pai makes an uncomfortable argument in a recent essay that tech companies, which have become entangled in military operations, are now legitimate targets under international humanitarian law.

The legal standard is whether an entity makes “an effective contribution to military action.” Palantir’s AI targeting tools, Microsoft’s communications infrastructure for US-Israeli operations, and the sanctions imposed on Russia at Washington’s behest are not incidental. Palantir CEO Alex Karp has said explicitly that tech firms owe the US government their support, given the historical conditions that allowed them to grow. That is a coherent position, but it has consequences. You cannot claim both the returns of geopolitical alignment and the protections of civilian status.

The Indian implication is that the more India’s critical systems depend on foreign tech infrastructure whose owners have chosen sides, the more India’s infrastructure is exposed to the targeting logic of conflicts it has no role in. This is not a hypothetical. It is the architecture of the current moment. Nitin’s conclusion is to reduce dependence on foreign tech for critical systems and increase defence spending to protect what cannot be reduced.

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1. [Puliyabaazi] Since geopolitics is the flavour of the decade, we got the brilliant to decipher international relations from first principles.

   पुलियाबाज़ी Puliyabaazi

   क्या अंतरराष्ट्रीय राजनीति सिर्फ ताक़त का खेल है? Geopolitics, Diplomacy and IR Framework with Prof. Atul Mishra

   क्या अंतरराष्ट्रीय राजनीति सिर्फ ‘स्ट्रांगमेन’ यानी ताक़तवर नेताओं के अहंकार से चलती है, या इसके पीछे कोई गहरी प्रक्रिया काम करती है? दुनिया की व्यवस्था पर आज जो प्रहार हो रहा है, इसका दुनिया और भारत पर क्या असर पड़ेगा? आज की पुलियाबाज़ी में हमारे साथ हैं आईआर (IR) एक्सपर्ट प्रोफेसर अतुल मिश्रा, जिनके साथ हम इन पेचीदा सवालों के जवाब तलाशेंगे। तो आप भी इयर…

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   21 days ago · 4 likes · Puliyabaazi Hindi Podcast and Atul Mishra

2. [Puliyabaazi] We had another terrific masterclass by MR Madhavan on what exactly transpired in the Parliament in the special session a couple of weeks back.

   पुलियाबाज़ी Puliyabaazi

   संसद में आख़िर हुआ क्या? संवैधानिक संशोधन की गुत्थी। Parliament, Delimitation & Women's Reservation ft. M. R. Madhavan

   पिछले हफ़्ते हमारी संसद में एक ख़ास सत्र बुलाया गया था। इस सत्र के बाद जो रिपोर्टिंग हुई उसके चलते लोग और भी कन्फ्यूज़ हो गए। तो हमें लगा कि हमें भी पुलियाबाज़ी का एक अर्जेंट सत्र बुलाना चाहिए ताकि संवैधानिक संशोधनों की इस गुत्थी को सुलझाया जाए। इस चर्चा पर हमारे मेहमान है PRS Legislative के एम. आर. माधवन जी जो हमारे विधायकों को भी सलाह देते हैं। आज की चर्च…

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   a month ago · 1 like · Puliyabaazi Hindi Podcast

3. [Audio] Check out this wonderful little Radio Netherlands audio piece from 1994 on what had changed in India since the economic liberalisation. The title (Microchips yes, Potato chips no) refers to a quote by Murli Manohar Joshi that encapsulates Indian policymakers’ confused approach to imports.

4. [Repo] Turn a non-fiction epub or PDF into a 35–45 minute podcast episode and publish it to a private RSS feed you can subscribe to from any podcast app.

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Table of Contents

1. India Policy Watch: What to Expect from the Islamabad Talks?

2. Matsyanyaaya: Pakistan’s Moment Under the Sun

3. Global Policy Watch: Geography Comes Back to Bite

4. HomeWork

India Policy Watch: Talking Good In Islamabad

Insights on current policy issues in India

—RSJ

Some kind of ceasefire discussion will be going on in Islamabad by the time you read this. Going by what Iran has put as its 10-point demand charter and what might be the views of the US, Israel and its Gulf allies on them, I remain sceptical of any long-term peace settlement emerging from this. It took a couple of years for the Obama administration and a more ‘settled’ Iran to agree on a smaller list of issues (uranium enrichment, inspections, and lifting sanctions) to arrive at the JCPOA, which went through multiple iterations with experts and political interests from both sides weighing in. More importantly, there was no Israel to queer the pitch at that time.

What we have now are Vance, Kushner and Witkoff talking to a battered and more hardline Iran that’s holding the global economy at ransom. This doesn’t inspire any confidence for arriving at a long-term accord in under two weeks. But I remain hopeful of a short-term solution. The consequences of a continued war or blockade of Hormuz beyond April are terrible for the world, especially for India. If saner minds were at work than visible at this moment, then these negotiations in Islamabad could be viewed as round 1 of a series of talks to arrive at long-term peace in West Asia. But these aren’t sane people, so any kind of prognosis is risky. But one can still theorise and hope for some method from both parties.

In this round, the biggest (and possibly the only) goal of the US is to get Iran to open the Strait of Hormuz without it having to send its navy or have boots on the ground in Iran to prise it open forcibly. This is clear based on the reading of the unhinged TruthSocial posts of Trump leading up to Tuesday’s 8 PM deadline that he had set for Iran and the past evidence that the only real Trump disciplining tools are bond markets and crude oil futures. So, for Trump, the best outcome from the talks is to get Iran to open up the Strait of Hormuz without the US conceding much, so he can spin it as some kind of win for his base and move on to other things. The inconvenient fact that the Strait of Hormuz was open prior to the Feb 28 attacks, and this will only take us back there, isn’t going to bother Trump or most of his MAGA base. For them, he’d have played 3D chess again and won.

For Iran, conceding to open the straits of Hormuz and revert to the pre-February 28 scenario shouldn’t be as big a deal as analysts reading Iran are making it out to be. For one, Iran has already shown that it can choke it for six weeks and counting, and the rest of the world can do precious little about it. Something that was once in the realm of war-game scenarios has now been made real by Iran. Therefore, it can concede to open it fully aware that it can choke it at any point in future. Everyone has to learn to live with this risk. In fact, now that some kind of ceasefire is on, the longer it blocks Hormuz from here on, the more it hurts Europe, China, India and Southeast Asia. Why would it want to have practically the entire world as its enemy?

Also, the more it overplays its chokehold, the greater the motivation for the rest of the world to find a long-term solution to derisk itself from the Strait of Hormuz. It will only hurt its leverage. We discussed this in the last edition. It is best for Iran to position these six weeks of global economic blackmail as a one-off that it was forced to deploy because of the existential risk it was pushed into by the actions of the US and Israel. Iran would prefer to be seen as a long-term rational actor pitted against an irrational Trump in this game. So, from a game theory perspective, Iran also should be as eager to open the passage as the US.

However, Iran would pretend to show this as a huge concession and would like to get as many of its 10-point demands accepted by the US in exchange. In reality, it will open the Strait even if not a single one of its demands is met, except for a long-term ceasefire, even if it is without any guarantee. But it has a stronger hand, so it will push for more. This is where it will have to be careful and not be too greedy. My view is that it will prioritise among its 10 points and, in this round of negotiations, satisfy itself with only those that build on its image of being a rational actor.

What could they be? Here’s the list of Iran’s ten demands (not acknowledged explicitly by the US yet):

1 - Commitment to non-aggression

2 - Continuation of Iran’s control over the Strait of Hormuz

3 - Acceptance of uranium enrichment

4 - Lifting of all primary sanctions

5 - Lifting of all secondary sanctions

6 - Termination of all United Nations Security Council resolutions

7 - Termination of all Board of Governors resolutions

8 - Payment of compensation to Iran

9 - Withdrawal of US combat forces from the region

10 - Cessation of the war on all fronts, including against Hezbollah in Lebanon

In my view, after a lot of posturing, Iran will concede on #2 and, in return, will be happy to get #4, #5, #6 and #7. Point #10 is already in the mix as part of the ceasefire, except for attacks on Lebanon. That will get resolved after Israel has bombed Beirut to its heart's content over the weekend.

So, will it get these? I suspect it will get #5, #6 and #7, and on #4, it will ask for the continuation of the suspension of the sanctions on its oil exports as has happened in the last month. Everything else is a bridge too far for the US and its allies, and actually makes no difference to Iran. If the US and Israel start bombing them again (small chance of the US getting involved any time soon), Iran can go back to blocking Hormuz. So, it really doesn’t need #1, #9 and #10. And #3 and #8 have been added as part of the negotiating strategy, only to drop them at the first instance of a deadlock. Even Iran knows they are non-starters.

Those would be the outcomes if, as I said earlier, sane minds were at work. This should mean a fairly quick agreement on this core issue and a successful press conference by next Friday. Trump declares it the best deal in the entire history and is relieved to get out of this Netanyahu mess. He won’t have anything more to do with Iran for some time now, and he will let the Gulf states and the rest of the world deal with Iran with their own bilateral agreements. That’s an endgame I have mentioned in more than one previous edition.

Iran will also show this as a win because, quite frankly, given its battered state, to have the Islamic state survive, have the sanctions lifted and get legitimate oil revenues to flow in, is the best possible deal for it. And for any other eventuality in future, it has the trump card of blocking the Strait of Hormuz up its sleeve. That is a low-risk, high-gain, and less messy option that beats having a nuclear bomb any day. That’s the best-case scenario for the world and India, and it is the only rational choice for Iran. It will be able to sell it internally to the regime and the people.

This should mean a return to full normalisation of traffic through Hormuz by the end of the month. Is that good enough for the world to avoid an oil shock of the kind seen in the past? Or have we crossed that date already, and it is only about damage containment now?

Here’s the simple math on total production loss of crude if we return to normalcy by the end of the month (62 days post Feb 28). The daily flow of crude through Hormuz before the war was about 20 MN barrels a day. The lifting of the sanctions on Iran has meant that it has continued to send its 2 MN barrels a day. The east-west pipeline of Saudi Arabia—which obviates the need to use Hormuz—transports crude from oil-producing eastern wells to the port on western Saudi Arabia on the Red Sea, and is now working at full capacity. That takes care of about 4-5 MN barrels a day. So, the daily production loss right now is about 14 MN barrels a day and total production loss over the 62 days will be about 850 MN barrels. The International Energy Agency (IEA) released about 400 Mn barrels of strategic emergency reserves in March to take care of the supply shortage. So the net production loss would be about 450 MN barrels after netting this off.

Clearly, there’s no such storage capacity among oil-producing Gulf countries, so one has to assume that they have cut back on production dramatically and shut down oil wells in the past two months. For them to revive those wells and get back to full capacity could take about 2-3 months. So, it will take the world until July to reach the regular average daily oil supply as before, at the earliest. Then they will have to deal with 450 MN barrels of production loss seen during the war. This will mean elevated oil prices for most of 2026 and a foregoing about six months of global GDP growth, amounting to about 1.2-1.5 per cent of total global GDP loss. This will require fiscal support in most countries, and it will be a drag on growth for at least 2 years. But that’s a much better outcome than a failed ceasefire and the Strait of Hormuz remaining closed beyond April. We will then be at real risk of a global stagflation.

But given the cards with Iran and the corner that the US has painted itself into, I would like to believe we will have that successful press conference no later than Friday next week, followed by a few insufferable Trump posts on TruthSocial. It will be a small price to pay for our future.

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Matsyanyaaya: Pakistan’s Moment Under the Sun

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

Our previous office premises had a round table that stood precariously on its three legs. This rickety table often shook but never collapsed. We christened it Pakistan because of its ability to resist collapsing under its own weight, and prove detractors wrong. The other parallel was that just as the table had three legs, Husain Haqqani, in his iconic book Pakistan: Between Mosque and Military, had argued that Pakistan's state security model also relied on a "tripod": a reliance on religious nationalism, an anti-India sentiment, and dependence on the West (or foreign aid).

Well, April 2026 has thus far been Pakistan’s. Whether it was a postmaster or the architect of the ongoing talks is beside the point. The fact is that it was the only player with the credibility and willingness to play the mediator, and it positioned itself well and early in that role. On April 1, I had written that this was a good strategic move by Pakistan, and this war is one of the rare superordinate threats where our interests align with Pakistan. Within ten days, Islamabad is now the centrestage of the ceasefire negotiations.

There are a few lessons from this turn of events for us in India, and yes, we should have done what Pakistan’s doing, is not one of them.

First, we too often mistake macroeconomic failure with state failure. Macroeconomic failure has disastrous consequences for people, but nation-states are resilient entities that are often able to absorb economic shocks more than we realise. Only a few years ago, Sri Lanka was on the brink of an economic crisis; Pakistan continues to be in one forever, but that doesn’t imply a proportional decline in the country’s military or diplomatic power. Yes, economic power is the most fungible of all powers, but all dimensions of power operate at varying time horizons. Economic power cannot be converted into military and diplomatic power instantaneously, just as military might is the only dimension that can pose an existential threat within a lifetime.

Those who believed in the caricature that Pakistan’s flailing economy implies imminent state failure and incapability have egg on their faces now. Some Indians genuinely believed that Pakistan’s poor economy would have meant a sudden decline in its warfighting and diplomatic capabilities. Or that the only reason why India couldn’t take PoJK in the past was because previous Indian governments were pusillanimous. Or that Balochistan will break away from Pakistan easily. It’s a good lesson to keep in mind: big nation-states are resourceful and resilient. They can spring back in ways you don’t expect. Don’t write them off in all dimensions even if they are tottering on some of them.

Two, not everything has to be a zero-sum game between India and Pakistan. Surely, stopping this insane war benefits India, Pakistan, indeed the whole of Asia and Europe. Just because India didn’t play the role of the mediator doesn’t mean we need to pooh-pooh Pakistan’s role. Similarly, Pakistan punching above its weight on this occasion doesn’t mean the doors are closed for India. All countries involved will still want Indian markets and Indian talent once things settle. We have many more cards at out disposal. Foreign policy is not a finite game, and no player wins all the plays.

Interestingly, those who treat Pakistan’s mediator role with outright contempt actually are making this same “zero-sum” mistake as those who argue that India should have mediated instead of Pakistan. A ceasefire doesn’t even mean an end to the ongoing war. There will be much to do later, so we should keep calm and not see every event through the India-Pakistan equation.

Three, the events during the past year have shown that Pakistan remains a capable military adversary despite its significant economic and social troubles. The military-jihadi complex (MJC) has the first claim on the resources of that country, and it can squeeze out the funds for its requirements, even if the rest of the country suffers. Thus, it would be foolish to discount the MJC’s military capabilities. The dreams of balkanising Pakistan are just as improbable as Pakistani dreams of taking over Kashmir. We need a measured understanding of Pakistan’s capabilities, not some fantastical notions of its decline fed by social media narratives and cricketing failures.

Four, Khawaja Asif’s threat earlier this week that Pakistan will take the fight to Kolkata, and Gen Munir’s earlier comment comparing Pakistan to a dumper truck to India’s Ferrarri, are a good indication of the stakes at play—as the bigger and more prosperous country, we have more to lose in a confrontation with that army-owned State. We need a stance grounded in reality rather than one that’s derived from slickly made movies.

PS: Pakistanis are obsessed with validation from India, and Indians are obsessed with the inadequacies of Pakistan. It’s a toxic relationship.

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Global Policy Watch: Geography Comes Back to Bite

Global issues and their impact on India

—Pranay Kotasthane

For most of the past two decades, the word “geopolitics” has been bastardised beyond recognition. We have techno-geopolitics, talent geopolitics, climate geopolitics, data geopolitics, and now, AI geopolitics. I’ve used many of these terms in these pages too. Each prefix promises that the “new” strategic competition would be about new and fancy artefacts. Territory—the actual root of the word, from the Greek geo, meaning earth—was relegated to a twentieth-century concern, something that Cold War generals worried about but that policy wonks had moved beyond.

But this is a decade when we are coming to terms with geography as leverage, all over again. Hormuz is one reminder that the earth never left. Helium is another.

The Economist recently made a point that amongst all searoute chokepoints, the Strait of Hormuz is exceptional in the sense that while disruption to others only leads to costly rerouting, a blockage of Hormuz has the potential to outright block most of the trade passing through it. Geography is sometimes destiny.

Similarly, think about helium for a moment. It is the coolant that keeps wafers at tightly controlled temperatures inside lithography and etch tools. It is pumped through EUV scanners because, unlike air or nitrogen, it does not absorb extreme ultraviolet photons.

As a liquid, helium boils at about 4.2 K, far colder than almost anything else, and at normal pressure it doesn’t freeze at all, i.e., it stays liquid all the way to absolute zero. This means boiling liquid helium can be used as a refrigerant to cool things to just a few degrees above absolute zero. When it boils, it absorbs heat from its surroundings, just like sweat evaporating from our skin, but at absurdly low temperatures. This imakes Helium a must-have in all MRI machines because they use superconducting magnets that need to be kept at ~4K to operate.

But the inconvenient fact is that helium is found on earth only where it has been trapped, over geological time, alongside natural gas deposits with unusually high helium concentrations. Those deposits exist in a handful of places. Qatar alone accounts for roughly a third of global helium supply. Russia was supposed to bring its enormous Amur plant online to diversify supply but sanctions and accidents have made that source unreliable. The US, which once held enough helium in its Federal Helium Reserve to smother any shortage, sold the reserve off last year.

Thus, sometimes the constraints are geographic. Geopolitics is really about the geo. Atmanirbharta cannot solve this. For some dependencies, interdependence is not a problem to be eliminated but a condition to be managed. Diversifying suppliers, building buffers, and investing in substitutes and recycling, are the only real options.

This story has just begun. The world is about to discover many more helium-like chokepoints, and in every one of them the answer will involve trusted partners, layered supply chains, and a full accounting of what the earth will and will not yield. The countries that do this well will quietly thrive. The ones that insist on a cartoon version of self-reliance will pay a premium and then, eventually, pay a much higher one when a single supplier decides to turn the tap.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Podcast] A masterclass in the latest Puliyabaazi on what would it take for modern renewables to make a breakthrough in India, ft. Ajay Shah.

2. [Post] Check out Brian Potter’s take on Helium on Construction Physics.

   Construction Physics

   Helium Is Hard to Replace

   The war in Iran, and the subsequent closure of the Strait of Hormuz, has unfortunately made us all familiar with details of the petroleum supply chain that we could formerly happily ignore. Every day we get some new story about some good or service that depends on Middle East petroleum and the production of which has been disrupted by the war. Fertilize…

   Read more

   a month ago · 216 likes · 28 comments · Brian Potter

3. [Book] Underground Empire: How America Weaponised the World’s Economy, by Henry Farrell and Abraham Newman, is worth your time.

Insights on current policy issues in India

—RSJ

Bit of a ramble in this edition. I had a couple of interesting conversations in the past few weeks.

A few days back, I caught up with the owner of a mid-sized catering business (annual topline of ₹40-60 crore) in Mumbai. He’s not seen any real impact on demand yet arising from the Iran war. In fact, March was among the best months he has had in the past year.

The problems right now are all on the supply side. The government has deprioritised commercial LPG cylinders over supplies to households, and that has meant the waiting time for cylinder replenishment is now stretching over ten days. His supplier tells him that LPG is now coming from the US at a higher price, which was news to me. The cylinders are available in the black market at more than 50 per cent premium, which he’s being forced to buy. His cooking and catering staff are finding it difficult to get LPG cylinders for their households. There is already a sense of anxiety among them about not having cylinders to cook for their families, and a slowdown in demand in the near future that will hurt their salaries. The temporary staff that he would call upon for events to help are beginning to leave the city. This move back home among immigrants is further aggravated by the assembly elections in four states scheduled for this month.

The result of all of this is that his working capital is absolutely stretched, the banks have gone cautious on his business, and he’s struggling to extend his working capital loan despite his good track record over the years. He’s not the only one. Most SMEs are facing the first-order impact of an energy supply shock because of Iran’s chokehold on the Strait of Hormuz.

India has managed to hold off a larger supply shock by finding alternative sources of natural gas and LPG and by rationing the supply for commercial use. But another 2-3 weeks of the ongoing war will make things difficult. The cushion of a large forex reserve and the upcoming state elections have meant the government has so far absorbed the spike in crude oil prices without passing it on to consumers. But this can only last for another month. Once that happens and the price of oil goes up, we will have a demand shock to contend with, along with the supply shock. At this time, I estimate a 1-1.5 per cent haircut on H1 (Apr-Sep) GDP growth estimate of 7 per cent, even if things were to normalise by the end of this month. If it were to stretch further, this would get worse. For the Indian subcontinent, this war can’t end any sooner.

Also, a few weeks back, I happened to sit through a discussion on cross-border payments that included established banks, global and domestic payment fintechs focused on remittances, and, of course, SWIFT, the global secure messaging network that has a near-monopoly on sending transaction instructions between banks. A large part of the discussion focused on inefficiencies of cross-border payments and how the friction built into the process helps the intermediaries (largely banks and old-fashioned money exchanges) make a lot of money.

The other discussion which interested me more was on SWIFT itself. SWIFT, as many of you will know, is a member-owned not-for-profit cooperative whose shareholders represent around 11,000 member organisations (financial institutions mostly) and which is governed by the central banks of G10 countries and the European Central Bank. SWIFT is the default global financial communication system used across more than 200 countries, with over 50 million transactions processed daily. Till a few years ago, no one thought about SWIFT for more than a moment beyond those who worked in the treasury department of banks, brokerages and clearing houses. It was a secure, efficient and scalable system that greased international finance. It had a board of 25 members that represented what used to be called the Washington Consensus (mostly US and NATO allies), and they took care that it ran like clockwork.

That was until Russia invaded Ukraine. For the first time in its history, the connectivity to SWIFT was weaponised when all the major Russian banks were removed from the network. This meant Russian firms could barely trade with the rest of the world because they could no longer communicate between their banks. Russia had developed an alternative system back in 2014 (when it annexed Crimea) called SPFS, anticipating such a scenario. But it was barely functional. It had to accelerate its adoption among its key trading partners after the SWIFT sanctions, and it took a couple of years for it to recover. Meanwhile, China, taking a cue from Russia, also built its own messaging network to counter SWIFT called the CIPS, which is now the default for any trade transaction with China. SWIFT was no longer just a neutral platform in the eyes of nations not controlling it. It was a strategic chokepoint that could be used against you.

Anyway, in the discussion I attended, SWIFT was keen on defending itself as a cooperative that’s overhauling its governance to assure member countries that it won’t arbitrarily unplug them from its network. It was a tough sell considering the Russia example on hand and the increasingly irrational ways of the Trump administration. The underlying apprehension among participants was about what safeguards the SWIFT board has to resist if the US pushes it to sanction a country that falls out of its favour. While SWIFT has decided to reconstitute its board and add more members from countries that have a larger share of the global population, and that soon India will also be represented on it, the general perception was that this was another one of those chokepoints vital for global commerce, which is held by a few players who could abuse it at their will. That it hasn’t been done so far, barring the Russia exception, doesn’t mean it won’t be weaponised in future.

The two conversations were both about chokepoints - one geographical (Hormuz) and the other financial (SWIFT). The difference was in timelines. SWIFT was a chokepoint weaponised a few years back, while Hormuz is an ongoing risk. In that sense, it is instructive to see how the sanctions on Russia over SWIFT were a moment of reckoning for most big economies of being vulnerable to such a chokepoint. The actions taken by them to derisk away from SWIFT and free themselves of the chokepoint will be the playbook used for others, too. Chokepoint is clearly the flavour of the season and an early frontrunner for the word of the year.

There’s a timely book on it too, Chokepoints: How the Global Economy Became a Weapon of War, by Edward Fishman, which talks about how the control of global nodes of finance, hi-tech and information, through which global trade and supply chain operates, has become the primary source of power beyond conventional military strength. The book argues that over time, the global supply chains have created hubs of concentration of a specific material or capital, which allows the entity or country that controls it to wield structural power over the entire chain. SWIFT is an example of it. China’s threat last year to stop exports of rare earth metals was another.

As I see it, there are a few things to consider as policymakers think about chokepoints.

First, if you look closely, almost every supply chain will have a chokepoint where you will find a significant concentration of structural power with an entity or country. The nature and extent of globalisation and the maximisation of comparative advantage have meant that there is barely a single item that you might use on a daily basis that won’t have a chokepoint in its supply chain. How many such chokepoints will you derisk and find alternatives for? It will be a Sisyphean ordeal. No sooner you derisk one chokepoint, another will appear. Also, resilience will mean building redundancy all over, but then the costs will pile up. The best course of action isn’t to revert to some kind of autarky and try to make everything domestically. Impossible because you can’t have all the minerals and elements in your country in any case. Instead, it is best to have a limited list of strategic items that can be derisked from chokepoints through a multi-country reciprocal collaboration model or through domestic self-sufficiency. Beyond the limited set, you let your diplomatic efforts ensure you don’t get on the wrong side of a chokehold.

Second, the ability of global supply chains to find alternatives, auto-adjust themselves and get the trade flowing again is underestimated. As the Russia sanctions have shown, countries will trade, if they want to, between themselves, regardless of constraints. It will take some time and effort to get around the chokepoints, but it is far less onerous than is being imagined. Russia and China launched a rival to SWIFT and got it running at scale within a year. Even Iran’s hold over Hormuz will become redundant in a few years, once the Gulf countries start putting pipelines across east to west to use the Red Sea for their exports. There are no permanent chokepoints.

Third, since there are no permanent chokepoints, any entity or country using the chokepoint to hold counterparties and global trade to ransom should know that their act of doing so takes away their future leverage. Because once they have pulled the trigger on abusing the chokepoint, the search for alternatives will begin in earnest, and the salience of the chokepoint will erode faster than they can imagine. The idea of control over a chokepoint is more powerful than actually using it to stop global flows. The idea gives you leverage. Using it takes it away in the medium run.

Lastly, there is one question that I have thought about quite often over the past few months as I have seen countries use their control over chokepoints to their advantage. What is that one thing on the back of which India can hold the world to ransom? Supply of a world-class technical or management resource pool is often an answer that I receive. But that’s not really a chokepoint. And even if it is, it can’t be exercised at speed to bring others to their knees. Maybe it is the global capability centres (GCCs) of large multinationals that run out of India and provide a host of “keeping the lights on” kind of services to them. If that’s partly true, India should make an inventory of such services done from India that, if switched off, can bring a large part of global commerce to a halt. At least for a few weeks before alternatives are found. Maybe it should push to have more such services done out of India for global banks, hi-tech firms and communication companies. India shouldn’t be seen as keen to ever use this power, but it should work to let the idea that such power exists and the extent of damage it can do be known to the world. That the global back office can shut down the front offices all over the world is an idea whose time has come.

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A Framework A Week: What is a Nation?

Tools for thinking about public policy

— Pranay Kotasthane

This week, I went back to reading an old classic, historian KK Aziz’s 1967 book, The Making of Pakistan: A Study in Nationalism. In its introduction, the author does a stellar job of structurally defining the slippery concept of a ‘nation.’

I thought it was worth discussing Aziz’s framing at length. He begins by defining the nation as a mental construct, an act of collective imagination. This is similar to the views of other prominent scholars of nations, such as Ernest Gellner in Nations and Nationalism and Benedict Anderson in Imagined Communities. Only that Aziz did this a good 16 years before the other two, and in far more evocative prose. Sample this:

… nationalism, like so many other human experiences, is a state of mind. We know that we are a nation, therefore we are a nation. It is not logic, it is intuition. It is not dialectics, it is instinct. It is not a thought process approved by the laws of reasoning. It is a conviction born of insight. It is a vision, an awareness, which comes to us in a flash of a moment. That is what makes it irresistible. People die for their faith; they rarely die in defence of reason.

He then goes on to define the four stages in a nation's evolution, comprising a total of thirteen conditions.

Stage 1: Emotional Basis

1. A sense of comradeship with each other

2. The “love for fellow nationals” as indicated by the fact that in a foreign country, people who consider themselves of the same nation tend to get together

3. common hostility to other groups, with this hostility being proportional to ‘the threat which one national group poses to the existence of the other’

Stage 2: Political and Social Apparatus

4. A common territory possessed or coveted by a nation

5. The existence of a common sovereign government or the desire for it

6. existence of common moral, social or economic institutions or ideas. For example, Reformism, Communism, Capitalism, or Fascism

Stage 3: Spiritual Equipment: Myths

7. Common cultural characteristics, such as language, customs, manners, literature, art, music and folklore

8. Common religion. The author acknowledges that in the age of secularism, this factor has become much weaker. But it still continues to produce nations on a few rare occasions, like Israel and Pakistan

9. Common history or common origin. It can be real or manufactured. As the author writes, “it is unwise to underestimate the role of myths… they are liable to obsess the minds of their creators and thus to become not true but real. And a real myth is a sword which few know how to sheath.”

10. a common national character, circumscribed by geography, history, religion, and culture

Stage 4: A Doctrine for the Nation’s Past, Present, and Future

11. pride in national achievements and a common sorrow in national tragedies

12. devotion to a national cause in the present

13. The hope that the nation will one day be the greatest in the world.

The author goes on to clarify that these are aspects of nationalism, not its definitions. Every nationalism is sui generis, emanating from a particular context and environment. It is a linear combination of these thirteen ingredients, but the recipe is never the same. Some nationalisms place greater weight on emotional aspects, while others rely more on myths or on a desire for prestige, security, and sovereignty.

I thought this was a wonderful structural definition of a nation, as it allows us to interpret the different strands of nationalism not just across nation-states, but within them. For instance, the dominant strand of India’s freedom movement nationalism emphasised a common syncretic history, a pride in national achievements, and a desire for self-government, while de-emphasising the need for a common religion and suppressing the hostility towards others, including the British. But there were many other strands—such as Hindutva or Muslim nationalism—that emphasised other aspects of the thirteen listed above.

Luckily, the strand that won in India was the one which emphasised the liberal variant of nationalism, one that stressed on a common character without religion, and wanted to get the British out without mobilising violence towards all Britishers. The dominant strand that shaped Pakistan, on the other hand, was overindexed on a common religion and a hatred towards other groups in India. And we know how that turned out.

We just got lucky that the political leaders chose a different recipe for India’s nationalism. And it is a pity that today, many Indians would opt for the ingredients that make our nationalism look structurally closer to the Pakistani nationalism than ever before.

Nevertheless, the lesson is that shaping the dominant nationalism is a grand project. One cannot castigate “nationalism” and brush it under the carpet because that will only mean the worst ideas of nationalism will displace the better ones. Think of it as a Defence Against the Dark Arts (DADA).

On that note, here’s an episode of Deepak Disagrees in which we discuss nationalism at length.

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PolicyWTF: Loan Waiver, Bengaluru Edition

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

The Greater Bengaluru Authority has proposed amending building bye-laws to allow regularisation of deviations up to 15% from sanctioned plans, tripling the existing 5% limit. Apparently, 3–3.5 lakh properties that currently cannot obtain Occupancy Certificates stand to benefit from this change. On the surface, this looks like pragmatic governance, as it brings illegal structures into compliance, collects fees, and issues documents. But the problem is the incentive structure it creates.

For instance, when governments announce loan waivers, two things happen simultaneously. Existing defaulters get relief. And future borrowers revise their calculations. Why repay diligently when strategic default might eventually be rewarded? The GBA’s regularisation proposal works the same way. For every builder who violated setback norms by 14% and now gets a legal path to an OC, there are ten future builders who will treat that 15% band as the base case, not the deviation limit.

This is a classic moral hazard, Bengaluru edition.

The counterargument is that these families didn’t break rules maliciously. They built what the market demanded. The rules were unrealistic. Probably, some of them are households that extended a room for a growing family or added a floor when children got married. Without OCs, they can’t get water connections, bank loans, or sell their properties. This is a problem that deserves a strategic answer. Here’s one: rule-breakers must either pay a penalty heavy enough to eliminate the economic advantage of the violation, or modify the structure to comply with existing norms. The penalty should not be a facilitation fee that makes violation-plus-regularisation cheaper than compliance. It should sting. Set it high enough that no future builder concludes that violating is the dominant strategy.

That’s the difference between a regularisation scheme that functions as an amnesty and one that functions as a deterrent with a compliance pathway. The GBA’s proposal leans toward the former.

The 5% Limit Was Already a Dead Letter

Consider what the 3.5 lakh backlog tells us. The existing 5% tolerance was already being massively violated. Builders weren’t calibrating to a 5% band but were blowing past it entirely. If the old tolerance couldn’t hold the line, nor will the 15% one. In electronics engineering for non-critical applications, we consider a 10% error rate as acceptable. The 15% error rate here is, in fact, signalling the acceptance of a much broader violation of upwards of 20%.

The high number of violations strengthens the case that Bengaluru’s building norms are fundamentally disconnected from what people actually need to build. The question to address is why the norms are so restrictive that widespread non-compliance is the equilibrium.

The answer lies in Bengaluru’s low Floor Space Index and its high setback rules. Bengaluru has been notoriously restrictive on FSI compared to peer cities. Mumbai allows FSI of 3 or more in transit corridors. Tokyo’s land-use flexibility is legendary in urban economics. This low FSI is a core reason that people violate building norms.

If the underlying problem is that sanctioned building norms are too restrictive, then the solution is to increase the Floor Space Index. That addresses the same housing supply crisis without constructing an incentive structure that rewards violations. Otherwise, we reward rule-breaking and reduce the legitimacy of the State.

Regularisation Without FSI Reform Is Pointless

Regularisation is politically easy. It has immediate, visible, grateful beneficiaries. FSI reform is politically hard, and it faces resistance from existing property owners who don’t want densification near them and from a real estate lobby that profits from artificial scarcity. If the GBA regularises violations now with a vague promise that FSI reform will follow, the political pressure for FSI reform evaporates the moment the backlog clears. The symptom has been treated, but the disease remains. Every few years, the backlog will rebuild, and another round of regularisation will become necessary.

Here are some ways to tackle this problem.

One, raise FSI substantially and immediately. Make it the headline reform. Signal to every future builder: build legally, build more. Without this, regularisation will become a recurring amnesty scheme.

Two, regularise existing violations, but price the penalty punitively. The penalty must exceed the economic benefit of the violation. If violating and paying the fine is cheaper than building legally, we haven’t created a deterrent; we've only created a fee schedule for rule-breaking.

Three, frame this explicitly as a one-time measure tied to the FSI reform. The regularisation window should open and close. Future violations beyond the new, more generous FSI norms should get no amnesty pathway.

The political logic of standalone regularisation is understandable. But the road to Bengaluru’s current housing situation was paved with administratively convenient decisions that made the incentive structure a little worse each time. This time, convenience should not be allowed to travel alone.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Show&Tell] Details of India's semiconductor manufacturing projects are scattered across hundreds of press releases, news reports, and government announcements. There's also a lot of hype and misreporting. So I built a tracker using Claude Code to fix this. It scores each project on technical complexity (benchmarked against a 3nm fab), tracks slippage from original announced dates, and links every data point to its source.

2. [Book] Henry Farrell and Abraham Newman’s Underground Empire: How America Weaponized the World Economy is worth reading.

3. [Podcast] A terrific Ideas of India episode on All Things Macroeconomy ft. Profs VAN & .

India Policy Watch: Gandhi-Ambedkar Debate & Finding D.R. Nagaraj

Insights on current policy issues in India

—RSJ

I am taking a break from writing about war in this edition. Why? Because Trump also seems to be taking one. In an apparent move that suggests Trump coming to terms with the permanence of the Islamic state in Iran, he extended the deadline for some kind of negotiated end to the conflict with Tehran to ten days.

I continue with my view that this war will have a longer tail than expected. Trump will arbitrarily declare victory and withdraw, leaving his allies to figure out their terms of engagement with Iran. Netanyahu will follow Trump’s lead while keeping the operations in simmer mode both in Iran and Lebanon till the elections are done. The conflict will continue in a sporadic fashion until July or August, before normalcy is restored in West Asia and the Strait of Hormuz is back in business as before.

Iran has seen the benefits of its war on the global economy through this blockade succeed beyond its expectations. They will use this playbook again in future. This will have long-term ramifications on nations rethinking their energy security policy and it will further exacerbate protectionist trade tendencies. All negative for global trade in the medium run. Who knows what next week shall bring to us? Right now, all I can say is that Q1 of FY27 for the Indian economy will take a 2-3 per cent growth hit at a minimum.

Anyway, away from the war, I was reading Rama Bhima Soma - cultural investigations into modern Karnataka by Srikar Raghavan, earlier this week. This is a remarkable book that traces the emergence of modern Karnataka through its cultural and literary traditions, interweaving the narrative with biographical details of some of the state's greatest cultural icons.

And among them was the scholar and literary critic, D.R. Nagaraj, a name that I hadn’t come across before. In the book, Raghavan extols Nagaraj as among the most original thinkers of post-independent India, “who to quote his good friend Ramachandra Guha, had accomplished a lifetime of work by the time he reached forty”. There was an extract from Nagaraj’s interview with Lankesh Patrike in the mid-90s, in which he contrasts his defence of swadeshi and Indic thought with that of the RSS. I have reproduced it here:

“When we are talking about any philosophical matters, these complications arise naturally. Just because it is swadeshi thought does not mean it should be restricted to the Sangh. I am talking about the language of Gandhi, Ambedkar and Lohia. A culture really blooms only when it reignites the multifaceted strains within itself. This is, in fact, a means to stop the dangerous cultural nationalism of the Sangh Parivar…. Cultural memory is a great asset of desi socialists. If we give that up to Sangh too, then we will be weaponless, that’s all.”

That was quite prescient. The socialists did indeed give up cultural memory for a kind of cosmopolitan rootlessness over the last three decades. The vacuum has been filled with all kinds of charlatans.

I was in the middle of the book on Wednesday as I boarded a flight back home. Just before taking off, I downloaded the latest episode of Amit Varma’s The Seen and the Unseen that had him in conversation with Ramachandra Guha (Episode 440: Ram and Friends). Consider my surprise, then, that in mid-flight, as I was listening to the podcast, Ram Guha brings up D.R. Nagaraj and spends considerable time discussing his background, his deep-rooted understanding of Kannada society, and his originality in thinking and writing about caste and culture.

Clearly, the universe was sending me a signal to go deeper with D.R. Nagaraj. Which is what I did after I landed. I bought Nagaraj’s seminal work of essays titled The Flaming Feet and Other Essays: The Dalit Movement in India, which has sixteen essays on the history and intellectual basis for the Dalit movement, including what it lacks that makes it difficult for it to achieve its ultimate objectives.

It is possibly the best anthology of essays I have read about India. Scratch that. It is the best anthology of essays I have ever read. I will strongly recommend this to you, especially the title essay that contrasts the Gandhian and Ambedkarite views on Dalit emancipation and then argues that they complement each other. In my view, The Flaming Feet is an absolute must for anyone who thinks of Gandhi and Ambedkar as the two opposite poles of Dalit political thought, with Gandhi losing relevance in the past half a century or so.

As Nagaraj writes:

”I am referring to the complex yet fascinating Gandhiji-Ambedkar encounter of the nineteen thirties. It is true, though each continued to refer to the other as a fool and heretic (not necessarily using these very words), till the end of their respective lives. This ferocity was more true, however, in the case of Babasaheb. But I suspect that this was only for the sake of form; it was for the consumption of those who laid a great deal of emphasis on the continuity of form. By the end of the mid-thirties both Ambedkar and Gandhiji were not the same persons they were when they had set out on a journey of profound engagement with each other. They were deeply affected and transformed by each other.”

According to Nagaraj, the Gandhi-Ambedkar debate isn’t or shouldn’t be viewed as a binary, as is the norm, that is, Gandhi, standing for the self-purification of the oppressor, while Ambedkar rooting for the self-respect of the oppressed. Nagaraj argues that this is historically false, though rather convenient. It is true that Gandhi considered untouchability as an abhorrent moral sin of the Hindu society, and it was the responsibility of the caste Hindus to get rid of it through reform and repentance.

Of course, Ambedkar saw it differently as a Dalit who had borne the burden of untouchability through first-hand experience. For him, this wasn’t just a design flaw in Hindu society; instead, this was what it rested on. Therefore, his call for the total annihilation of caste. But through the 1930s, as the two vigorously debate and disagree with one another, Nagaraj contends, with evidence, that the two subtly strengthen their arguments because of the influence of the other.

Through the 1920s, Gandhi, in his writings on untouchability and indeed in his terming of Dalits as “Harijans”, betrays a sense of upper caste paternalism towards them. His core thesis during this period is that true independence of Indian society will mean not just getting rid of colonialism but also freeing up the society of other forms of oppression, especially those that are linked to caste.

In framing the independence movement thus, Gandhi made untouchability a political issue, which then had greater acceptance than it being seen as a social reform. To Gandhi, this was a cultural problem which needed work and reform from within rather than legally induced from outside. However, this form of moral suasion of the upper caste Hindus, with its focus on atonement, worked only for the core group of Gandhians. It barely made a dent in the lives of ordinary Dalits through the reform of society.

Ambedkar, in the meantime, had arrived at a more radical and perhaps accurate diagnosis of the issue. For him, this wasn’t a case of personal choices and individual atonement. Untouchability was a system of institutionalised injustice and those benefitting from the system would be hardly expected to demolish it on their own. It needed the assertion of the oppressed to challenge this structure through legal and economic means. Caste for Ambedkar was unjust and criminal and it had to be dismantled through law and reason. But Ambedkar realised through the 1930s that merely using reason and legal tools to confront caste had its limitations. Caste was a deeply ingrained cultural phenomenon, a belief system that sustained social order. Even those who could escape its clutches through access to education and political power (as it happened with the success of the non-Brahmin Justice Party in Madras province) could easily succumb to practising it on others once they were free from it. Ambedkar realised the necessity of a mindset change needed through moral persuasion for overcoming this centuries-old bias that was deeply embedded in the Hindu psyche. He could see the merit of the Gandhian argument.

Nagaraj goes for a synthesis of these thoughts and champions the view that the debates between Gandhi and Ambedkar influence and transform them. It allowed them to find a more holistic approach to address the centrality of caste in Indian society. Nagaraj ends his essay with the concern that the Dalit movement in privileging Ambedkar and deriding and abandoning Gandhi in recent times (Nagaraj wrote this in 1993) is making a fundamental error - that of ignoring an important half of the argument that Ambedkar himself had come to appreciate. Legal and economic rights are important for Dalit progress but for the society to truly reform, it must bring religious memory, moral arguments and cultural reconstruction into the mix.

I will leave you with the final section of Nagaraj’s essay that captures this complementarity perfectly. And, I will urge you to read his brilliant essay in its entirety.

”To conclude, in what way was Ambedkar transformed by Gandhiji? Babasaheb had always opposed the question of untouchability as a religious question; he accepted the primacy of religion in the matter. He did to religion what Gandhiji did to the idea of economic uplift. It is a pattern of acceptance and altering the same. Religion is the crucial thing, true. Give up Hinduism itself was the Ambedkarite alteration. The 1935 Yeola Declaration of Ambedkar that he would not die a Hindu was an act of recognizing the legitimacy of the Gandhian mode although rejecting the choice in which solution was sought. Economic uplift is the effective remedy, true; let us rejuvenate the entire village not the selective mobility: such was the Gandhian transformation of the Ambedkarite idea. Even regarding the caste system Gandhiji had to change his soft approval of it: in the Harijan issue of November 16, 1935, he simply declared that caste has to go much to the consternation of his orthodox supporters. He even criticised the cruel restrictions on inter-dining and inter-caste marriage, a refreshing change compared to his earlier vacillation regarding these.

Needless to mention at this stage that both Gandhiji and Ambedkar can and should be made complementary to each other. Surely such efforts will be met with stiff opposition from hardened ideologues and researchers, and they are bound to unearth fresh evidence to fuel the fire between the two. One way of fighting such tendencies, apart from pointing out the political necessity of such hermeneutic exercise, is to file a philosophical caveat highlighting the notion of ontological difference to distinguish between contingent details of historical fact and the truth of a deeper historical concern. At the level of deeper historical truth, the conflicting fact disappears to reveal the underlying unity. The theoretical project of this entire book draws its sustenance from the notion of ontological difference. In this case accepting and examining the difference leads to the truth of dynamic unity.”

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Matsyanyaaya: Assessing India’s Response to Supply Chain Conflict with China

Big fish eating small fish = Foreign Policy in action

— Pranay Kotasthane

Earlier this week, I attended a workshop on Supply Chain Conflict: Lessons from the Russia-Ukraine War and China-U.S. Economic Relations, put together by . The workshop brought together researchers studying the weaponisation of energy, electronics, and semiconductor supply chains. I was asked to speak on India’s responses to China's supply chain weaponisation. This gave me an opportunity to synthesise many ideas I have discussed previously in these pages. What follows is a summary of my comments.

The Nature of the Problem

Compared with the West’s economic integration with China, India’s economic relationship with China takes an unusual form. The two countries have an active and seemingly intractable boundary dispute, which means that of the four dimensions of their economic relationship—trade, technology transfer, investment, and talent—India and China don’t do anything substantial on the latter three. Press Note 3 (PN3) screens Chinese investments to prevent opportunistic takeovers. Huawei is already excluded from 5G trials. Visa and personnel restrictions limit talent flows.

What remains is trade, specifically in intermediate goods, where Chinese value-added in Indian manufacturing is high. China is the single largest contributor to foreign value added (FVA) in India’s exports, at 34 per cent as of 2020, implying that India’s exports are highly reliant on Chinese imports. This makes the India-China economic relationship unusually lopsided. Even though there is active containment in three dimensions, there is excessive reliance on a single dimension.

This lopsidedness is now being tested from the Chinese side, and it helps to distinguish between two kinds of restrictions China has imposed—global and India-specific. The strategic logic behind each is quite different.

China’s global restrictions on rare-earth magnets, gallium, and germanium apply to all countries. Essentially, China’s response to US export controls on China was to hold the entire world hostage to key inputs it controls. I had classified this earlier as a case of international market failure. For years, China’s overcapacity was causing the market failure of negative externalities, through which artificially low prices destroyed competitors and intangible manufacturing knowledge base, while creating dangerous vulnerabilities. Now, its restrictions exhibit the characteristics of monopoly behaviour, reducing supply and leveraging its dominance. India is caught in these restrictions, but so is everyone else.

But it’s the India-specific restrictions that are more revealing. Over the past year, speciality fertiliser exports to India were blocked even as China resumed them to other countries. Herrenknecht tunnel boring machines assembled in China were blocked from export to India. Foxconn’s Chinese engineers were recalled from its Indian facilities, and shipments of specialised manufacturing equipment were held. All this was happening even as the political relationship was moving towards normalisation.

These aren’t decisive blows. Each is individually substitutable. Herrenknecht now supplies more from its Chennai facility. Taiwanese engineers will replace Chinese ones within weeks. Fertilisers can be routed through third countries at a higher cost. But collectively, they function as attrition, imposing friction to slow the pace at which manufacturing capability transfers out of China.

The message here is that China views supply chain diversification itself as a competitive threat. Not just the loss of specific orders or contracts, but also the very process of building alternative capacity.

India’s Response Toolkit

India has responded across five tracks to this supply chain weaponisation.

The first is defensive decoupling—PN3, the TikTok ban, excluding Huawei from 5G deployment, forcing joint ventures like JSW-MG Motors. This track has been effective in preventing the creation of new Chinese leverage. Despite conversations aimed at reversing some of these restrictions, recent changes to PN3 have been limited.

The second is trade defence: anti-dumping duties, countervailing tariffs, and non-tariff barriers. This buys time but runs into a domestic political economy constraint: Indian manufacturers that depend on Chinese intermediaries are adversely affected. And much of what looks like dumping is actually a structural feature of China’s economy, where overcapacity driven by industrial policy and weak domestic consumption makes cheap exports inevitable. India’s tariffs can’t fix this structural problem.

The third track is hardware security. India has a Trusted Source-Trusted Product framework for telecom services, screening both vendors and products for supply chain integrity. This framework has recently been extended to satellite services as well.

The fourth and most ambitious track is industrial policy—PLI schemes, upfront capital support, and specific investment exemptions aimed at positioning India as the China+1 destination. Apple is the most prominent recent example of this move. The eight chip assembly plants and one CMOS fabrication plant also fall in this category. But this track also has the widest gap between aspiration and execution.

The last track is pro-market reforms. The transition to a uniform and improved tax regime, the reduction in corporate tax rates, and labour code reforms are aimed at improving India’s manufacturing competitiveness.

What’s missing?

Two gaps stand out.

First, India is doing reasonably well on defence, but has no institutional mechanism to use its market offensively. Consider what China does with SAMR, the State Administration for Market Regulation. SAMR turns antitrust review into a geopolitical lever, delaying or conditionally approving mergers between non-Chinese companies if they generate significant revenue in China. I’ve written about this in a previous edition; the Intel-Tower Semiconductor deal collapsed because SAMR withheld approval as retaliation for US semiconductor sanctions.

India is the only other market large enough to potentially do something similar, and it has a unique asset: over 1,800 Global Capability Centres (GCCs) that are deeply embedded, sticky operational nodes for the world’s largest corporations. That’s the leverage India possesses today with no institution designed to deploy it. The Competition Commission of India focuses narrowly on market competition. We need a conversation about whether India’s market size should be used more strategically. This option is quite risky, and I would not recommend it if we had other cards to play.

Second, since Chinese overcapacity is structural, importing countries need cross-country coordination on price stabilisation. Without it, the domestic capacity painstakingly built behind tariff walls gets destroyed the next time Chinese prices drop. This is a collective action problem that nobody is working on seriously. 91 fabs are currently under construction worldwide, many of them in China. This overcapacity in semiconductors, solar panels, rare-earth elements, and electric vehicles is likely to result in another price crash, putting investments elsewhere at risk.

The broader pattern here is that India’s policy toolkit for managing its economic relationship with China is almost entirely defensive. Screening investments, banning apps, imposing duties, and hardware security mechanisms are necessary. But they don’t give India the ability to shape outcomes in its favour.

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Matsyanyaaya: The Case for Negative Results in Supply Chain Geopolitics

Big fish eating small fish = Foreign Policy in action

— Pranay Kotasthane

The other point of reflection for me was that the “weaponisation of everything” has a narrative bias problem. The dominant narrative goes something like this: we are too dependent on our adversary for commodity X. So let’s produce it ourselves or have our partners do so. This line of thinking lays the groundwork for industrial policy across the value chain.

But the flaw in this logic is that there are a mind-boggling number of chokepoints in today’s supply chains. Addressing all of them is like playing whack-a-mole. As I wrote in a previous edition, by the time governments launch a policy to spur semiconductor production, they are forced to take stock of another material produced by an obscure firm whose name no one knew two days ago. Suddenly, articles appear about how an adversary controls this ‘chokepoint’, and governments are back to the drawing board.

In scientific research, there is a well-known concept called the “negative result”. It’s an experiment that shows an expected effect doesn’t materialise. Negative results are underpublished because journals prefer dramatic findings. Yet they are essential for correcting false beliefs. Supply chain geopolitics has a similar problem. We are awash in studies documenting how dependencies were weaponised. What we almost never see are systematic studies of the opposite: cases where weaponisation was attempted and failed. Without such studies, we are only reaffirming weaponisation as an all-powerful instrument.

But history is full of such negative results. As I documented earlier, Cobalt was the in-fashion dual-use material of the 1970s—one tonne went into every F-16’s jet engine. The US imported almost all of it from then-Zaire. When supply disruptions hit, new mining projects were initiated; the more abundant Molybdenum began displacing Cobalt in certain alloys; efficiency improvements reduced per-unit demand; and military stockpiles provided insurance. The net result was not that Congo stopped being the world’s major Cobalt producer—it still accounts for over 70 per cent of global supply. Rather, Cobalt itself was displaced as the hitherto indispensable material. Once substitutes emerged, the hackles were lowered. Similarly, China cut off tungsten exports to the US during the Korean War. Within three years of the US government guaranteeing a higher price to domestic miners, American firms were producing more than the required stockpile.

The same pattern repeated itself in the Russia-EU energy standoff. In edition #219, I had argued that Putin’s hope of using energy as a weapon bombed spectacularly. European countries reduced Russian oil imports from 26 per cent to 3.2 per cent within a year. Gas imports fell from 38 to 17 per cent. Germany built a long-stalled LNG terminal at record-breaking speed. France fell back on nuclear. Within a few months of Russia’s energy restrictions, it was Europe which went on the offensive by weaponising shipping insurance. Even this worked imperfectly because enforcement was leaky and Russia redirected exports to Asia. Neither side’s weaponisation delivered the decisive blow it sought.

This distinction matters because it tells us where weaponisation might actually work and where it won’t. Knowledge-rich chokepoints—EDA software, EUV lithography—are genuinely hard to substitute because they require decades of capability-building. Commodities and intermediate goods, by contrast, are far more elastic. Yet nobody writes the report titled “China’s restrictions didn’t really work.” This narrative bias has real policy implications. Governments can support firms’ risk-reward trade-offs at the margin, but they cannot replace them with a PLI scheme for every commodity an adversary might restrict.

What we need is a research agenda that documents negative results as rigorously as it documents successful weaponisation. Where did price signals redirect supply chains faster than government intervention? Where did substitutes emerge organically? Where did the Law of One Price erode export controls, as it inevitably will with China’s rare earth restrictions, where international prices are already three times domestic Chinese prices? Such studies might not generate breathless headlines, but they will help governments distinguish between dependencies that genuinely need addressing and those that markets are already addressing.

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HomeWork

Reading and listening recommendations on public policy matters

—Pranay Kotasthane

1. There are a bunch of AI for Public Policy projects useful for readers:

   1. [Show & Tell] I have found the parliamentary standing committee reports incredibly helpful, especially to analyse domains such as defence, where secrecy reduces state capacity. But these reports are locked in websites that are difficult to access and automate. So I built an AI project using Claude Code to tackle this problem. From now on, you will never miss a parliamentary standing committee report. Use this repo to set email alerts, create AI summaries of important reports, and get unified access to all 16 department-specific committees across both Lok Sabha & Rajya Sabha. Fork, bring your own key for AI summarisation (or use ollama), and you are set. Please open PRs to further improve this.

   2. [Show & Tell] Many people are building cool stuff using AI for public policy use cases: visualisations, AI reports, analytical tools, etc. But there is no one directory which lists all these projects. So I built one using Claude Code. The repo is here. Check the Contribution guidelines and add more projects.

   3. [Show & Tell] The Takshashila research team has launched four West Asia war trackers to analyse the daily developments and their impact on India.

2. [Puliyabaazi] The next Puliyabaazi features ’s masterclass on military drones. Do NOT miss.

   पुलियाबाज़ी Puliyabaazi

   जंग के मैदान का नया इक्का? Are Drones Rewriting the Rules of Warfare? ft. Anushka Saxena

   क्या वाकई ईरान और अमेरिका के बीच चल रहे युद्ध में ड्रोन्स सबसे बड़ा मोहरा साबित हो रहे हैं? क्या ड्रोन्स के आने से युद्ध के एक नए युग का उदय हुआ है? इस विषय पर पुलियाबाज़ी के लिए हमारे साथ जुड़ रही है हमारी मेहमान अनुष्का सक्सेना। वे तक्षशिला इंस्टीटूशन के इंडो-पैसिफिक स्टडीज़ में कार्यरत रिसर्च एनालिस्ट हैं और चीन-ताइवान संबंधों तथा भारत की विदेश नीति में …

   Listen now

   2 months ago · Puliyabaazi Hindi Podcast

3. [Paper] Amit Kumar & I have a paper investigating the impact of China’s Gallium and Germanium on American consumption. Hint: not by much.

Insights on current policy issues in India

—RSJ

Things have gotten worse for the world in the third week of the Iran war. Israel has assassinated a few more top Iranian leaders and gloated about it while wishing ordinary Iranians a happy Nowruz. Iranian oil wells have been hit, and the US has battered its oil-exporting port of Kharg.

Iran, with whatever firepower it has remaining, is hitting oil and gas sites across the Gulf while it retains control over the movement of ships through the Strait of Hormuz. How long can Iran wage a war on the global economy and make everyone pay a heavy price for it is a question that’s blowing in the wind.

There’s no off-ramp for Iran except the world agreeing to meet the terms it has already placed on the table. There’s no way those will be agreeable to the attacking duo of Israel and America. Israel is hardly bothered about the impact of the war on the world economy or on itself. It is willing to last this out so long as there aren’t too many military or civilian casualties.

The US is largely self-sufficient on energy and doesn’t fear a direct impact of the war on its economy yet. Trump has either given up on or doesn’t care about the midterms. The Republican voter is overwhelmingly behind him (some 85 per cent support the war). So, he can also wait this out for longer. China has built its energy stockpile and tapped into alternate sources of energy that don’t depend on Iran or the Strait of Hormuz, anticipating a scenario of exactly this kind. China also doesn’t mind the US getting embroiled and distracted in never-ending wars of this kind while it continues to invest in technology, defence and green manufacturing. China remembers the decade-long Iraq and Afghanistan wars that kept the US and allies busy, and helped its spectacular below-the-radar rise during that time. It wouldn’t mind a redux. Russia couldn’t be happier for the war with Iran to last longer so that Ukraine receives less attention and ammunition. No one consequential is pushing for a quick end to the war.

Going by everything that I have seen or read, Iran’s ability to hold on to the Strait of Hormuz or inflict damage on critical Gulf infrastructure doesn’t depend on how many of its leaders are assassinated or if there’s a total decimation of the regime's top brass. There will still be actors left in Iran who can and will hold the world economy to ransom through their ability to wage asymmetric warfare for a long time. That’s not their resilience as people seem to view it. In my view, that’s the design principle that they have used to build their state, anticipating a future like this. There will always be someone to step into the shoes of whoever is eliminated by Israel.

That leaves the rest of the world, especially the allies of the US and Israel, to bear the costs of this war, whose immediate consequence is an unprecedented energy crisis with cascading impact on multiple other sectors. India is right in the middle of those impacted, and it is somewhat strange to see the lack of acknowledgement of the possible risks and plans to mitigate them if the war spills over into April. Maybe there is massive mobilisation that’s happening behind the curtains, but no one really knows.

Like I mentioned last week, the most likely scenario after a couple of weeks from now will be for Trump to declare victory. Since he hasn’t defined the goals of their war, he can highlight all the damage they have inflicted on Iran to claim victory. But even after such an announcement, Iran will still be holding Hormuz hostage while sending a steady stream of missiles and drones into the Gulf nations. Till someone sits down and agrees in some kind of a rapprochement. I guess that will be left for the Gulf nations to work out as a group or bilaterally with Iran, with some kind of a promise to wind down their US-Israel tilt in future. That kind of accord could take a quarter or two after the US withdrawal from this war. So, the earliest life could get back to a pre-Feb 28 kind of normal scenario is July or August.

That is a long time. I was looking at the extent of dependency of India across LNG, LPG and Oil and the downstream impact on their shortage. Hormuz accounts for almost 60 per cent of India’s LNG imports, and that’s about 30% of India’s consumption. India typically sits with 5-6 days of LNG inventory. It is no wonder that the LNG shortage has been immediate. Considering the hit that Qatar LNG infrastructure has taken, this shortage is going to last a while. The LNG supply issue is already being felt in India. The downstream impact will range from transport and logistics to the myriad little ways in which LNG is used as a fuel to run machinery and tools in factories.

Similarly, Hormuz accounts for almost 90 per cent of India’s LPG imports and 60 per cent of its consumption. The LPG inventory with India is about three weeks. Again, a 4-5 month disruption will lead to significant outages across restaurants, hotels and factories that use LPG as a fuel. Unless things stabilise and normalcy returns dramatically by next week, the LPG shortage will be felt across the board by April.

For crude, we possibly have another 5-6 weeks before the shortage feels acute. It is not clear what alternatives are being thought of by the policymakers, except for giving assurances to the public that there’s no reason to panic. The lack of congruence between such assurances and the lived experience of long queues for LPG and LNG shortages seen in factories won’t last. Soon, people will react. A more proactive policy of communicating the likely shortage, raising awareness about rationing usage, and encouraging alternatives is needed at this moment. Separately, India needs an optimal allocation and distribution plan on deploying the limited supply over the next few months. This requires a deeper understanding of the first- and second-order impacts of energy and hydrocarbon products on the economy, and some broad planning for where to deploy scarce resources.

If the aftereffects of the war persist till July, it is also long enough to upend the fiscal math for India for this year. Oil at over $100 per barrel for the next four months will have a cascading impact on CAD, forex reserves, inflation and liquidity. A fiscal package or two will have to be offered to select affected sectors, SME exporters and, maybe, even individual borrowers for the year.

Some of the government and central bank’s actions are already on to prevent the fallout of the war on the economy. The RBI has already used about ₹1.8 trillion from its forex reserves to defend the Rupee over the past four weeks. The open market operations through which the central bank purchases government bonds and supports system liquidity, and the fixed income markets have already crossed ₹9 trillion over the past year, which is almost 75 per cent of the net borrowings that the government will do for the coming financial year. There’s not much headroom left there.

Despite the RBI support, the borrowing costs have continued to rise. The equity market has been badly hit, and the flight to safety has meant another $10 bn of foreign funds have moved out of India since the war began. There’s also a significant risk to the $50 bn of inward remittances from the Indians living in the Gulf as the war impacts their livelihoods. Tight liquidity, a weaker Rupee (around 95) and rising inflation could very quickly move us out of the “goldilocks” zone we seemed to have been talking about a quarter ago. We are already in a troubled zone if you ask me.

Given all of these, it is remarkable how sanguine the government seems to be with the business-as-usual mode all around. I guess the lesson they seem to have learnt from the COVID-19 days is that Indians are willing to cope with a lot without adequate planning or support. A bit of jingoism thrown in along with a new acronym from the PM, some ritualistic thaali-banging or its equivalent, IPL as a distraction, and a few state elections to keep political temperature up; and, voila, people will blame you for complaining about shortages instead of holding the government accountable. I still live in hope that things will be different this time around.

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Matsyanyaaya: Why International Relations Defies Our Moral Intuitions

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

We live in the performative age where social media has compressed complex positions into moral binaries. “Speaking up” on everything is an entry ticket to the Moral Highground Club, while nuance is an instant disqualifier. Every event demands a simple, emotionally legible stance that can be liked, shared, and used to slot people into either “my side” or the “dark side.”

This performative instinct has overflowed from our personal lives into international relations. And it is leading us astray because international relations operate by a fundamentally different logic that many otherwise sophisticated commentators don’t internalise.

Two ongoing crises illustrate this perfectly. Each involves a different error, but both stem from the same source of importing concepts from human relationships into a domain where they have no purchase.

Pakistan’s Taliban Problem

The deterioration of Pakistan-Afghanistan ties is an interesting case study. For decades, Pakistan’s Inter-Services Intelligence nurtured, sheltered, and funded the Afghan Taliban. The Haqqani Network was termed no less than the veritable arm of the ISI by the US Admiral Mike Mullen.

So, when the Taliban came back to power in August 2021, Pakistan’s then Prime Minister Imran Khan celebrated that Afghans had “broken the shackles of slavery.” There was triumphalism in Pakistan that its dream of installing an obsequious government in Kabul had come true. The implicit expectation of analysts was that the Taliban owed Pakistan a lot. And debts, in the world of human relationships, are supposed to be repaid. Many Indian analysts worried that Taliban would do Pakistan’s bidding.

But that’s not how things worked out. The “good Taliban” refused to crack down on the “bad Taliban”—the Tehrik-e-Taliban Pakistan (TTP) that wages war against the Pakistani state from Afghan soil. They challenged the Durand Line. They restarted diplomatic engagement with India. And they refused to be cowed down by Pakistan’s aggression. By February 2026, Pakistan’s defence minister was declaring “open war” against the very regime Pakistan had helped install.

What went wrong with Pakistan’s calculation is the application of the logic of obligation that you owe me, therefore you will reciprocate, to a domain where the only currencies that matter are power and survival. The international system is anarchic. There is no sovereign above sovereigns to enforce promises. This is unlike domestic affairs, where we aspire to uphold constitutional morality.

Once the Taliban captured the Afghan state and its resources, the balance of leverage shifted irreversibly. An agent that captures a state ceases to be an agent. It becomes a principal with its own interests, and those interests turned out to be Afghan nationalism, not Pakistani clientelism. Gratitude is a fine thing between friends, but between states, it is a figment of our imagination.

India’s Iran Dilemma

This also applies to India’s response to the US-Israeli strikes on Iran in February 2026. New Delhi’s initial silence has drawn fierce criticism. Opposition leaders called it a betrayal of India’s principles, as “moral cowardice.” Others argued that “speaking up” would be the “courageous” choice.

Notice what is happening here. We are reaching for the vocabulary of personal character—courage, cowardice, betrayal, moral spine—and applying it to the behaviour of a state responsible for 1.4 billion people.

This anthropomorphism is misleading. India’s calculus is not a moral drama, but a constrained optimisation problem. Over 85 per cent of India’s crude oil is imported, with West Asia as a primary source. Nearly nine million Indians live and work in Gulf countries, their remittances sustaining millions of households. Two-thirds of India’s crude transits the Strait of Hormuz. To take sides would jeopardise energy flows and potentially endanger the Indian diaspora, all for the satisfaction of a rhetorical position that would change nothing on the ground.

As Shashi Tharoor put it in an Indian Express column this week, those who demand condemnation “mistake moral absolutism for moral courage” and “forget that foreign policy is not an academic seminar. It is the arena where principles meet power, and where choices have consequences for millions of lives.”

This does not mean India’s execution was flawless. The timing of the Prime Minister’s visit to Israel created optics that even sympathetic observers found difficult to defend. As the PM himself demonstrated in Moscow after Russia’s invasion of Ukraine, when he told Putin this was “not an era of war” without issuing a condemnation, a middle path exists. But the underlying analytical point remains that judging a state’s foreign policy through the lens of personal moral courage is a category error.

These two cases illustrate related but distinct mistakes. The connecting thread is that we instinctively anthropomorphise nation-states. We treat them as persons with emotions, moral duties, and character traits. We expect them to feel grateful, to be brave, to “do the right thing” as if they were individuals making choices at dinner parties. But states are not people. They operate in a system without a referee, without enforceable norms, and without the luxury of consequence-free moral positioning.

This is not an argument for cynicism. States can and do act on principle, but only when principle and interest align, or when the cost of principled action is bearable. The task of foreign policy analysis is to understand when that alignment exists and when it does not, rather than demanding virtue signalling.

India's first priority remains securing its energy access, contingency planning for diaspora evacuation, and preventing the war from coming closer to its shores. The rest is secondary.

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India Policy Watch #2: A Reminder to Stay Focused on Execution

Insights on current policy issues in India

—Pranay Kotasthane

In edition #332, I had analysed the budgetary allocations for all four years under the India Semiconductor Mission 1.0. Earlier this week, the Standing Committee on Communications and Information Technology has since tabled its Twenty-Fourth Report on MeitY's Demands for Grants for 2026-27. Parliamentary committee reports are valuable because they go beyond budget documents. The committee questions officials, extracts explanations for delays, and records the Ministry's own admissions about what went wrong. And this report confirms several points I had raised earlier.

The fab spending gap is real and worse than I suggested. I wrote that “not a single rupee was disbursed” for the Tata-PSMC Dholera fab in FY24 and FY25. The committee data pins it down further. In FY26, the fab sub-scheme had a revised estimate of ₹1,000 crore while the actual spending as of 31st December 2025 was merely ₹33 lakh. This is a signal that the underlying project architecture is facing delays. The Ministry’s own explanation to the committee confirms this. It says that companies are taking “considerable time” to meet conditions for Fiscal Support Agreements and Trust Retention Agreements due to “the complexity of the projects and associated legal implications.” When the government itself is desccribing execution barriers in these terms, it validates the argument that finance is no longer the binding constraint.

SCL Mohali transformation remains a hope than reality. I flagged the persistent pattern of “ambitious announcements followed by tepid execution” at SCL. The committee data is damning. In FY25, ₹900 crore was proposed, ₹11 crore was allocated at RE, and ₹7.79 crore was spent. In FY26, ₹400 crore was proposed, ₹20 crore at RE, and zero was spent. The committee has flagged this directly, noting SCL’s “massive pruning of funds” and the pattern of intangible progress. This is now a multi-year documented failure of execution.

The DLI scheme remains neglected. My piece noted that the Design-Linked Incentive scheme—targeting precisely the segment where India has comparative advantage—saw disbursements of 15% of budget in FY24, 34% in FY25, and 52% in FY26. The committee data confirms the FY27 allocation has been halved to Rs 100 crore. What’s striking is that the committee doesn’t even flag this as a standalone concern. DLI is buried in the aggregate semiconductor programme observation. This silence reveals that the design ecosystem is treated as an afterthought even in parliamentary oversight, despite it being India’s actual geopolitical lever in semiconductors.

The display fab scheme is dead. I called the apparent abandonment of the display fab scheme “a welcome instance of policy pragmatism.” The committee data shows zero allocation for FY27, and zero spending in every prior year. The committee doesn’t celebrate this, but the numbers speak for themselves.

The OSAT segment is the genuine bright spot. The compound semiconductor/OSAT sub-head is the best performer — ₹2,864 crore in actual spending against ₹3,900 crore BE in FY26. That 73 per cent utilisation is exceptional by the standards of this programme.

Moreover, the committee repeatedly flags training deficits and institutional capacity gaps, not just in semiconductors but across MeitY’s mandate. The committee observes that cuts to the Revenue section will hurt MeitY's ability to fund training expenses, equipment procurement, and institutional upkeep. Read in isolation, this sounds like boilerplate. But read alongside the Ministry's own admission that fiscal support agreement negotiations are delayed because of "the complexity of the projects and associated legal implications", it points to a lack of state capacity becoming a major constraint.

This is a point we have made in edition #198:

Given the economy-wide impact of its decisions, MeitY is arguably the third-most important Union ministry after Finance and Defence. The ministry will make policies related to critical issues such as data protection, digital public infrastructure, semiconductors, cybersecurity, and international cooperation [and now AI]. Without a step jump in capacity, we can expect incompetence to show up in the policies.

The bottom line

The committee report is useful because it puts official numbers and Ministry admissions on the record. The overall picture it paints is consistent with what I argued: the assembly segment has genuine momentum, fab construction is behind schedule, SCL modernisation remains aspirational, and the design ecosystem is starved of attention.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Puliyabaazi] In this episode on India’s energy security, we discuss the supply and demand sides of the LPG, LNG, and crude oil used in India.

   पुलियाबाज़ी Puliyabaazi

   भारत की ऊर्जा सुरक्षा को मज़बूत कैसे करें? How to Strengthen India's Energy Security

   हालिया वैश्विक संकटों ने एक बार फिर से ये साबित कर दिया है कि तेल (Oil) का आज भी कोई विकल्प नहीं है। पश्चिम एशिया में युद्ध की आहट होते ही भारत में एलपीजी की किल्लत क्यों होने लगती है? आज की पुलियाबाज़ी में हम भारत के एनर्जी मिक्स की पड़ताल करेंगे, और चर्चा करेंगे कि भविष्य में अपनी ऊर्जा सुरक्षा बढ़ाने के लिए भारत और क्या कर सकता है।…

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   2 months ago · Puliyabaazi Hindi Podcast

2. [Paper] This Takshashila discussion document has a framework proposing India’s policy options for securing LPG supplies in the short-, medium-, and long-terms.

3. [Data] Many parliamentary standing committees have released new reports which should be of interest to all India public policy watchers.

Global issues and their impact on India

—RSJ

The great pleasure of following geopolitical events is how much sense everything makes in retrospect, even though very little can be accurately predicted in advance. In that sense, its practitioners can sometimes be on a par with astrologers. They remind everyone of the odd prediction, which was loaded with assumptions, they got right while conveniently forgetting others.

There is no shortage of experts who are now talking about the inevitability of the asymmetric warfare that Iran is waging with its blockade of the Strait of Hormuz, the civilisational state that is Iran and how its state infrastructure can’t just be wished away. Everyone now can see the miscalculation that Trump and Netanyahu made in assuming that knocking out the ayatollah and the top brass of the Islamic state would automatically lead to a people’s revolution and regime change. The fact that none of these was part of the war-gaming scenario is an apparent head-scratcher for everyone now. Hindsight is a lovely thing. Well, therefore, all forecasts now about which way things will shape up in the next two weeks are as reliable as believing in your weekly horoscope. No one really knows anything.

We are in a stalemate of the most intractable kind. The Iranian state has survived the worst of aerial bombardment and seems to be as entrenched as ever, with a new head of state who will be as strident as his father. It has now held the global oil supply and logistics to ransom for a week by shutting down the Strait of Hormuz. It has enough missiles and drones left, and with some Russian navigation and targeting support, it is keeping everyone in the Gulf region on tenterhooks. And I guess it still has some 400 kgs or more of 60 per cent enriched Uranium that can’t be taken away from it unless there’s a ground force that physically takes possession of it, which looks unlikely now.

In the meantime, polycrisis is upon us: oil is over $100 per barrel, global LNG supply from Qatar has broken down, there is a real possibility of a global oil crisis in the next few weeks, expats and capital are fleeing the Gulf states and Trump is declaring that he’s won the war and there’s nothing left to strike in Iran.

The problem is that it takes one to start a war but two to call a ceasefire. Iran has no incentive to make things easy for the world and to de-escalate its asymmetric approach. It has now waged a war on the global economy. Nobody, except Iranians themselves, apparently cares for Iran being bombed to oblivion, but everyone understands the petrol price hike, cooking gas shortage and inflation. So, why not hurt them there? For Iran, this is the war to end all wars. Either it ceases to exist as a state, or it ensures no one bombs it again without consequences for a long time.

All blame can be laid at Trump’s door for having initiated this. The convenient way that Trump thought this war would end after knocking off the ayatollah was for Iranians to engineer a regime change or descend into a civil war. Neither has happened so far. The only other option left is to sit down with Iran, agree on a ceasefire, and return to the deal that Oman and other intermediaries were working out prior to these strikes.

But why would Iran agree to that deal now? They don’t want similar strikes to rain down on them in another six months after the deal. What’s the guarantee against that? So, they will ask for Russia and China to be on the table, they will demand lifting of the multiple sanctions that have been crippling them, a guarantee for future security and more. That will mean no deal for quite some time because I can’t see Trump agreeing to these.

I suspect we are going to be in this low-intensity war for the foreseeable future. The US will declare victory and withdraw. Israel will stay in a perpetual state of readiness for war. The Gulf states will work out their bilateral peace with Iran at the expense of the U.S., which will then mean Iran will selectively let ships go through the Strait of Hormuz and guarantee no strikes on airports, hotels, tech companies, et al in the region. But who really knows? All this is just the astrologer in me speaking.

Often on these pages, we write the metaphorical “we have seen this movie before” when we come across a PolicyWTF that’s been repeated earlier. However, this war is a brand new release. We haven’t seen this movie before. But as I thought about the possible endgame scenarios for this, I realised I had quite literally seen a few of these movies before. So, here are my three scenarios for what could happen next, based on three of my favourite movies from three different eras spanning 45 years.

The “No Other Choice” scenario: In this Park Chan-wook adaptation of the Donald Westlake thriller, The Ax, a middle-aged manager of a paper company is laid off as part of a cost-cutting exercise. He then begins to hunt down the people living in his town who could possibly take his job, one after another, so that eventually he remains the last eligible man standing. Every time he eliminates one, things get worse, and he digs himself deeper into a moral quagmire. This is the scenario Trump and Netanyahu are working toward at this moment. They will keep knocking off one ayatollah after another that Iran puts up, pleading they have no other choice, till they find one who will do their bidding. Alas, when they get to that one pliable ayatollah, they will realise that IRGC has developed an AI ayatollah agent using Seedance 2.0 who acts and talks like the deceased Ali Khamenei, and they are now taking orders from him. All the killings and destruction they did led to zilch. Life is meaningless.

The Groundhog Day scenario: Bill Murray is a cynical, world-weary TV weatherman who gets trapped in a time loop in the small town of Punxsutawney. His life becomes an endless repeat of the same day (Feb 2 or the Groundhog Day) and no matter how he tries to alter the day’s proceedings, he wakes up the next morning again to “I got you babe” playing on the radio and it is still Groundhog Day. This seems like the default scenario for Trump in this war. He wakes up every morning thinking of obliterating Iran in a new way that will rid him of the evil regime forever. After another day of calling Iran new names (deranged scumbags, for instance) and pounding them with bombs, he sleeps thinking tomorrow will be a new day. Yet, he wakes up to the same day with Iran still blocking the Strait of Hormuz and oil at over $100. This goes on till one day Trump has a change of heart, falls in love with the reigning ayotallah, breaks naan with him and they tango together to the music of kamancheh. The next morning he wakes up to “I got you babe” on the radio but finds it is indeed a new day with Iranian TV playing Trump rallies on the loop.

The Hirak Rajar Deshe scenario: In the land of Hirak, there are diamonds and riches galore, but there is a tyrant Raja who represses his subjects and starves them while he entertains himself with dance and music at his palace. Any subject who protests or questions the regime is swiftly deported to the jantarmantar, the brainwashing chamber of the Raja, where such rebellious thoughts are squashed. This goes on till Gopi and Bagha, the magical singing duo, arrive at the kingdom and, together with the sole banished rebel, Udayan Pandit, go about setting things right. The film ends with the singing duo mesmerising the king with their singing and then pushing him into the brainwashing chamber from which he emerges as a just and reformed king who happily pulls down his own statue at the central square. All’s well in Hirak Desh. Fantastic as it may sound, to me, this is the most desirable scenario. If only Trump and Netanyahu could be convinced to disguise themselves as wandering minstrels and enter Tehran, they could easily brainwash the entire regime to mend their ways with their magical singing and dancing skills. We could have world peace and a blockbuster Netflix series for 2027 at the same time. Satyajit Ray FTW.

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India Policy Watch #1: Definitely Not China, Padhaaro Mhaare Des

Insights on current policy issues in India

—Pranay Kotasthane

In edition #328, we had a chart listing all the proposals circulating in Indian news outlets regarding a possible recalibration of India’s position on China’s investments. Here’s that chart once again for reference.

So, after all this balloon floating, the government has finally announced a policy change. And turns out, the eventual amendment is far less permissive than any of the solutions that had been floated thus far.

Let me explain. Earlier this week, the Union Cabinet amended the FDI rules governing investments from land-bordering countries (LBCs). If you read the headlines, you might think the doors to Chinese capital are swinging open. They aren’t. Here’s how.

A Quick Recap

In April 2020, at the height of COVID-19 anxiety, India introduced Press Note 3. The rule was blunt and meant to prevent ‘opportunistic takeovers of distressed Indian firms.’ Any entity from a land-bordering country—read China—could invest in India only through the government approval route. No exceptions.

The problem is that blunt instruments such as these created collateral damage. A Singapore PE fund with a Chinese LP holding 8 per cent of the fund got caught in the same net as a Tencent or an Alibaba. Global investors started routing around India. Startups and deep-tech firms began complaining that PN3 was quietly strangling their fundraising efforts.

Six years later, the government responded.

What the Amendment Does

It makes two changes. The more substantive one is the amendment, which introduces a Beneficial Ownership (BO) test at the level of the investing entity. If a fund’s Chinese beneficial ownership is below 10 per cent, that fund can now invest through the automatic route.

This is not a green light for Chinese investors to directly pick up stakes in Indian companies. A direct Chinese investment still requires government approval, regardless of stake size. What’s changed is that a Temasek or SoftBank-type fund— with incidental, passive Chinese LP exposure below 10 per cent—can now invest in Indian startups without going through the approval maze. This matters because the automatic route covers most sectors. For global funds that were being caught by PN3’s broad sweep, this is genuine relief.

But the press release offers no rationale as to why this threshold is 10 per cent. The number is borrowed from PMLA definitions, which themselves were designed for anti-money laundering purposes, not strategic FDI screening. Using an anti-money laundering threshold to calibrate national security risk is a category error.

Also, how would anyone actually verify the beneficial ownership chain through multiple fund structures, SPVs, and offshore vehicles? The amendment requires the investee entity, the Indian startup, to report relevant details. But the investee often doesn’t have full visibility into who ultimately owns the fund investing in it.

The second change is a 60-day processing timeline for Chinese investments in specific manufacturing sectors: capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer. The government wants Chinese firms to come in as minority JV partners and help India build out its electronics and solar supply chains. The government approval route for Chinese investments continues as before, except that decisions on investments in some sectors will be taken in a time-bound manner.

The press release is silent on what happens if no decision is made in 60 days. There’s no deemed approval clause, which would mean an automatic green light if the government misses the deadline. Without that, the 60-day target is aspirational at best. If you were an IES officer in the industry ministry processing these files, nothing about your incentive structure has actually changed.

The Signal

Step back from the details, and the message is clear enough. The government knows it needs Chinese capital. The electronics and solar manufacturing ambitions under PLI simply cannot be realised without accessing Chinese technology, components, and, in some cases, direct Chinese participation in supply chains.

But the government is not yet convinced it has the tools to let that capital in without importing the risks that come with it. So it has done what governments do in such situations: make a partial, hedged move.

The 10 per cent BO carve-out helps global funds. The 60-day window helps some manufacturers. Neither touches the core question of whether and when India will have a systematic framework for distinguishing between Chinese capital that poses a genuine strategic risk and Chinese capital that is just capital. Until that framework exists, expect more cautious incremental moves of exactly this kind.

Here’s another thing worth keeping in perspective. Even as India agonises over whether to let a Singapore fund with 8 per cent Chinese LP money invest in a Bengaluru startup, the West has spent the last two decades doing something far more consequential with China. American and European firms built deep manufacturing dependencies, took on Chinese JV partners, and allowed Chinese capital to flow into their most sensitive technology sectors. The decoupling conversation in the US and EU today is precisely because the integration ran so deep.

India never did any of that because of structural reasons. The India-China economic relationship has always been lopsided and transactional. Bilateral trade is large but shallow. Investment flows, in either direction, have been negligible compared to what China has built with the US, Germany, or South Korea. This amendment doesn’t change that any of this.

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Global Policy Watch #2: TACO FTW

Global issues and their impact on India

—Pranay Kotasthane

For once, the Trump administration has timed a TACO to perfection. The US Department of Commerce has withdrawn a planned rule that imposed some mind-boggling restrictions on the export of AI chips. Sample this Reuters report from ten days ago, which speculated on what the draft was proposing:

“U.S. officials are debating a ​new regulatory framework for exporting artificial intelligence chips and are considering requiring foreign nations to invest in U.S. AI data centers or security guarantees ‌as a condition for granting exports of 200,000 chips or more…

According to a document seen by Reuters, even small chip installations of less than 1,000 chips could need a license. The document said that to qualify for an exemption, the exporter of the chips such as Nvidia or ​Advanced Micro Devices would have to monitor them, and the recipient would have to agree to use software that would not allow the chips to be linked to other ​chips to form a “cluster,” the industry term used to describe large groups of chips.

Foreign firms that want up to 100,000 chips would need to provide government-to-government assurances, according to the document seen by ‌Reuters. It ⁠said the Trump administration already required Saudi Arabia to provide such assurances in order to purchase advanced chips.

Installations of up to 200,000 chips could also require visits from U.S. export control officials, the document seen by Reuters said.” [Alexandra Alper and Stephes Nellis, Reuters]

Now, if you have been following this newsletter, you know I find chip export controls ridiculous. I can understand the logic behind controls on semiconductor manufacturing equipment, which are large, specific-purpose, and meant for only a handful of customers. But I do not understand the logic of tightening controls on chips, which are used by thousands of companies and individuals across the world.

In any case, these restrictions fail to achieve their primary purpose. Not only have chips been smuggled to China and Russia, but they are also being legally deployed by Chinese companies in other countries, as ByteDance's access to a 36,000 B200 chip cluster in Malaysia illustrates.

Given these inherent flaws, policies demanding reciprocal investments from companies and countries in return for buying chips would have been a disaster. Moreover, the prospect of American ‘chip inspectors’ visiting company facilities would have further pushed companies to dissociate themselves from the legal US AI stack.

Notably, the Biden administration had proposed the AI Diffusion Rules, which I had then called the AI ‘compute-rationing’ rules. That version had divided the world into three tiers of compute access. There were also rules to prevent the diffusion of models, whatever that meant. After nearly a year of formally rescinding that version, the Trump administration still chose to go back to this tired old strategy of restricting AI chips. Thankfully, it has shelved the draft for now. TACO FTW.

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India Policy Watch #2: Energy Insecurity

Insights on current policy issues in India

—Pranay Kotasthane

In my talk on critical mineral geopolitics, I have this slide comparing critical minerals and oil, through which I explain that rare earths are NOT the new oil.

Well, who knew that we would see a crude demonstration of this reality so soon? Within days of the war in West Asia, ATF prices have risen, and panic-buying at petrol pumps has begun. Commercial LPG is also in short supply, resulting in restaurants and textile plants shutting down. The negative impact is immediate and widespread. This situation is a cruel reminder that, despite previous instances of such disruptions in West Asia, India was found woefully underprepared.

Things have somewhat improved from where India was during the last Gulf War. There are three conventional energy input streams now—LPG, LNG, and crude oil—each serving different sectors. The uptick in renewable energy has also taken some pressure off gas-based power plants. The strategic petroleum reserves also provide some cushion. Nevertheless, it is clear that this isn’t enough. And the frustrating part is that this inadequacy was well-known.

Over a decade ago, in 2014, my colleague Ameya Naik wrote a policy brief proposing six reforms for ONGC Videsh, built around a four-part framework: securing deposits, securing extractors, securing supply routes, and accessing technology. It proposed six reforms: build technological competencies through joint ventures, use swap deals to bring international oil companies (IOCs) to India, invest where India has a comparative advantage, use bidding consortia to avoid price wars with Chinese nationalised oil companies (NOCs), cultivate alliances with private and foreign players, and incorporate political risk comprehensively into overseas investment decisions.

Twelve years on, the scorecard is grim. Technology JVs with BP and ExxonMobil materialised, but a decade late. OVL’s biggest overseas bet in Russia became a cautionary tale, with billions in dividends stuck due to the war between Ukraine and Russia. Crude import dependency didn’t improve, and it hit an all-time high of 88.2 per cent in FY2024-25. The political risk recommendation was vindicated in the worst way possible.

The LPG problem provides a stark illustration. India’s LPG import share rose from 47 per cent in 2015 to 67 per cent in 2024. Over 90 per cent of those imports come from West Asia, with ~80 per cent transiting the Strait of Hormuz. While the Ujjwala Yojana expanded LPG connections from 15 crore to over 33 crore, the government did not build supply resilience to match this new demand.

Nothing much was done on reserves either. India reportedly maintains crude oil reserves covering about 74 days of consumption. For LPG, which is much more costly to store, there are hardly any such strategic reserves to serve as a buffer.

The natural gas transition could have eased this, but we didn’t do that well either. Only about 1.4 crore households have piped natural gas connections, compared with 33 crore on LPG. CNG stations for vehicles exceeded targets, but household Piped Natural Gas has failed miserably. PNG requires last-mile pipelines to individual households in cities, an exercise made impossible by our dysfunctional urban governance. Meanwhile, the government was also subsidising the import-dependent fuel at scale, while PNG had no comparable consumer incentive.

Nor have we done anything significant on nuclear energy, which could have reduced the demand for gas-based power plants.

The underlying pattern is that India has been strong on access infrastructure like Ujjwala connections, CNG stations, refinery capacity, etc. These are visible and politically rewarding. But it has been systematically weak on supply resilience: strategic reserves, domestic production, feedstock diversification, and chokepoint assessment.

Oil and gas remain the most strategic commodity. While getting into shiny things like chips and rare earths, we first need to solve the same old energy security equation.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Book] The Takshashila Chinawatchers gang proposes a manifesto for a new modus vivendi with China in this new and shiny book. Go buy it now.

2. [Video] On all things related to Pakistan’s foreign policies, check out this conversation ft. Aparna Pande, editor of the Routledge Handbook of Contemporary Pakistan.

3. [Report] The IEA India Gas Market Report: Outlook to 2030 has several relevant statistics.

Global issues and their impact on India

—RSJ

We are now in the middle of another war that’s going to last weeks, if not months, contrary to the initial expectations of the Trump administration. And with that, all bets are off about 2026. The US foreign policy is now based on a combination of fantasy and hubris with nothing to restrain it in the near horizon. The possibility of mid-term election loss is no longer in any calculus. We just have to get used to one spectacle after another every month for the remainder of Trump’s term. However, even by Trump’s standard, this war with Iran, with Israel getting the US to do its bidding, is both daft and amoral, and will have long-term consequences.

It is difficult to figure out the proximate cause of launching these attacks last week because there’s no single, cogent reason offered by the Trump administration. My sense is that it is a combination of a few things.

It is likely Iran was accumulating or manufacturing ballistic missiles at a rate that could tilt the balance in its favour over the number of interceptors stockpiled by Israel and American forces in the Middle East. The other claim offered about Iran being weeks away from using weapons-grade Uranium to build a nuclear weapon seems like a complete fabrication at this moment.

The “success” of the so-called ‘Venezuelan model’ where you decapitate the head of the state and then deal with the next thug seems to have pleasantly surprised Trump. Much of the mobilisation of the American forces in the Middle East started right after it. The idea was to perhaps knock off an array of frontline leaders of the Islamic state in the first wave of attack and then wait for someone to emerge who signs on the surrender documents and then lets Trump and his friends begin their wheeling-dealing with the new regime.

They are still hoping for this scenario to emerge, and they will continue to bomb Iran into a medieval ruin (like Gaza) till it happens. The other option is to wait for Iran to plunge into a civil war, which is acceptable so long as the US and Israel, or its cronies, control the oil fields and the straits of Hormuz.

Or perhaps, the US realised that after the initial strikes it did on Iran last June and the ruthlessness with which the Islamic state massacred thousands of its own people thereafter, it couldn’t just hope for a regime change by the Iranian people themselves.

Any of these or a combination of them could be the cause to launch the strikes. None of them is legal or justifies the civilian deaths and destruction. Back during the days of searching for weapons of mass destruction and launching into the Iraq war, at least there was an elaborate charade of a report, NATO consensus and some UN discussions to justify invading another country.

Whatever the reason, it is clear now that there is no plan for the “day after’. Nobody cares anymore about what targets are being bombed in Iran. Civilian casualties are merely a number, and after another few weeks of bombing, all you will have is rubble across most large cities in Iran. The global leadership at this moment is so bereft of a spine that no one, barring Spain and a feeble France, is talking about the sheer lack of logic to this war. Or, the complete disregard of any norms as seen in a US submarine torpedoing an Iranian ship on its way back from India and then not rescuing the survivors at sea.

The military resolution will perhaps happen in a few weeks. Iran just can’t last more than that. Its intelligence is compromised, its airspace is not under its control, and soon it will run out of munitions. And, China or Russia isn’t coming to its aid. But the political solution or the lack of it, will keep the Middle East and the rest of Asia on a boil for some time to come. Unless there is a planned political solution put in place, expect a refugee crisis, terrorist threats around the world from Iranian proxies and whatever rump of IRGC that remains committed to the old regime and disruptions in oil supply chains. Trump couldn’t care less, I guess, but it matters to all of us, especially in the Indian subcontinent.

The risk for India in all of this is two-fold.

First, energy prices will continue to remain elevated for the foreseeable future. The Strait of Hormuz accounts for about a quarter of total global oil flows, and despite Trump’s assurances, there is going to be both an increase in insurance costs for anyone handling this and a rise in shipping costs in case of re-routing of these containers. About 40 per cent of India’s and 10 per cent of China’s oil imports are routed through these straits. Qatar, which accounts for over 25 per cent of global LNG exports, has shut down its primary facility, and it is unlikely that LNG supplies will be restored to full capacity anytime soon. In any case, the straits are a choke point for this, too.

Conservative estimates suggest Brent crude will go over $100 per barrel, and it is possible that we will be seeing a prolonged oil shock if we even take a realistic scenario about this war. India has barely a month of oil inventory and a limited storage capacity (of about two months) to manage any disruption, unlike, say China, which built its strategic reserve capacity in the past 4 years and has inventory to last about six months. India didn’t learn any lessons from the first phase of COVID-19 lockdown about increasing its crude storage capacity. A back-of-the-envelope estimate of crude at $110 for much of the year (a plausible scenario) suggests about a 60 bps reduction in GDP growth (to 6.5 per cent), an almost 100 bps increase in current account deficit (CAD) and inflation going up to 4.6 per cent. This is just taking into account the first-order consequences. Things could get worse when the dominoes start falling.

Second, GCC countries are significant trade partners of India, and it is likely they will take some time to recover from this war when it ends. India receives about 40 per cent of its inward remittances (about $55 bn) from these countries, and an economic slowdown because of the rise in risk profile of the region or an increase in oil prices because of supply chain disruption will impact the remittances. These countries also account for 16-17 per cent of India’s imports and exports, and also act as intermediaries for India’s exports to the US.

This substantial trade activity is supported by the exposure of the Indian financial system to these markets, which could also become cautious going forward in reducing its exposure. Keeping in mind the search for a safe haven in the US dollar, which has meant FPIs pulling out money from India so far this year, the reduction in remittances from GCC and the likely increase in CAD, the RBI will have to continue defending the rupee and intervening meaningfully in the forex market through the year. That will continue to keep pressure on liquidity, which has become the single biggest factor in impacting growth.

Lastly, I’m intrigued by China’s silence through all of this. In displacing Maduro and eliminating Khamenei, the US has flexed its military might and taken out two of China’s allies (or client states) with barely a whimper from it. If Iran has been getting military hardware support from China, then their performance so far, compared to the might of America and Israel, has been dismal.

The closing of the straits of Hormuz and an increase in energy prices are as much a worry for China as they are for India, yet it has shown no desire to act in managing these risks. And then you have the 15th five-year plan document that it released this week which acknowledges the challenges it faces in restructuring its economy and its willingness to opt for slower growth (4.5 - 5.0 percent) but “high quality development’ target (more R&D spend and investment in AI and tech), restraint on fiscal stimulus to spur growth, finding ways to boost domestic demand and fostering “new quality productive forces” (continue to focus on higher value-added manufacturing sectors). All quite sober and realistic aspirations.

My sense is there’s some kind of retreat to the good, old-fashioned Deng maxim of “hide your strength, bide your time”. This isn’t Xi of the wolf warrior diplomacy phase. Maybe the thinking is that when your chief rival is losing friends and alienating people all over the world, why not position yourself as a quieter, level-headed and more responsible power that people can get behind. As much as many commentators believe this war shows China’s limitations on acting as a global superpower, it is possible they are waiting and playing the long game.

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Global Policy Watch #2: The Summit of AI’s Impact

Global issues and their impact on India

—Pranay Kotasthane

The daily AI discourse has a familiar cadence. Who’s building the biggest models? Will there be chip export controls on chips going to China? How many GPUs has the Indian government empanelled? How will getting into Pax Silica change the game? These questions matter. But if they are the only questions we ask, we’re putting the cart before the horse.

This is where Michael Mazarr’s new RAND report/book, A New Age of Nations: Power and Advantage in the AI Era, comes in. There are many books that claim to evaluate national competitiveness in the AI age. But most of these accounts fixate on narrow technological challenges, such as access to GPUs, data centres, and models. But Mazarr makes the case that “success in the AI Era is more a societal challenge than a technological one.” Countries that win the AI era won’t simply be those with the best models, but those that take the necessary steps to make their societies more competitive.

The book begins by acknowledging the transformative power of a general-purpose technology like AI. Rooted in a thorough analysis of prior technological revolutions, Mazarr sets the problem statement quite nicely:

“The world stands on the cusp of another technological revolution—the emergence of artificial intelligence (AI) as the latest and potentially the most wide-ranging and influential general-purpose technology in history. Like its industrial precursor, the resulting change will decide national fates and reshuffle the deck of global power. Some countries will become the Britains and Japans of this age—the dominant early leaders or the clever, determined fast followers. Others might end up as the Ottoman Empire of the AI Era, dragged down by social and political patterns disastrously mismatched to the demands of technological and industrial leadership. Still others will become the Russias of this period—large and powerful by the indices of the previous era and too potent and too determined to be ignored but not remotely competitive with the leading economies across the variety of frontier technologies and social innovations.”

He makes the provocative point that goes against the current winds, with every country thinking of a technical AI strategy:

We don’t need an AI strategy. We need a strategy for national renewal and competitive advantage that uses the capabilities and opportunities of the AI Era to achieve its goals.

So, what determines a society’s competitive advantage? For this, Mazarr relies on a prior study for the US Office of Net Assessment, which identified seven societal characteristics that shape whether nations rise or decline in long-term rivalries. These are national ambition and will, unified national identity, shared opportunity, an active and engaged society, effective government institutions, a learning and adaptive intellectual climate, and diversity and pluralism. In A New Age of Nations, he applies this framework to AI, examining how artificial intelligence might strengthen or weaken each of these characteristics.

This resonated with me deeply because the dominant narrative around AI still gravitates towards input controls on chips, compute, data centres, and models. These are the shiny objects of geopolitical commentary. But as I’ve argued repeatedly in this newsletter, if you think GPUs are the thing stopping a country from getting ahead, you’ve already lost the game. The real bottleneck is whether a society can absorb, deploy, and manage the effects of a powerful general-purpose technology.

Nandan Nilekani has been making a related argument in the Indian context. He has long maintained that India will be the use-case capital for AI, and recently described diffusion—the ability to take technology from lab to field at population scale—as the real competitive edge. The Aadhaar example he frequently cites is instructive. Aadhaar didn’t succeed because India invented some breakthrough biometric technology. It succeeded because institutions were redesigned, and organisations across sectors absorbed the technology into their daily operations. Nilekani’s emphasis on diffusion is important but only addresses the ‘how’. Mazarr goes one step further to ask: what enables a society to diffuse effectively in the first place? His answer is the seven societal characteristics.

Read through an Indian lens, these seven characteristics become a useful diagnostic tool. While the report is written primarily for an American audience, the framework is universally applicable. So let’s try to evaluate where India ranks on them.

Start with national ambition and will. This is arguably India’s strong suit. The Viksit Bharat 2047 vision has done something that Mazarr considers essential. It has created a society-wide aspirational narrative that cuts across party lines and social strata. Whether one agrees with every policy detail or not, the idea that India should aim to be a developed nation by its centenary of independence is the kind of national ambition that Mazarr identifies as the fuel for sustained competitive effort. The AI mission, the semiconductor push, and the recent AI Impact Summit all sit within this broader narrative. India scores well here, and this is an underappreciated asset.

A unified national identity is more complex. India has always had to negotiate unity amidst extraordinary diversity. Mazarr’s point is that societies with a shared sense of who they are can mobilise more effectively during technological transitions. India’s civilisational identity provides a bedrock here, but the centrifugal pressures of competitive populism and social polarisation are real. Add to that the recent divisive trends of growing communalisation and a State-backed caste census. The question is whether the AI transition can itself become a unifying project, like the way the space programme or the UPI story generated a sense of collective achievement. If AI is perceived as something that benefits everyone, it can strengthen national cohesion.

Shared opportunity is where India has both its biggest promise and its biggest risk. The promise of AI is that it can increase access to expertise in healthcare diagnostics, legal assistance, agricultural advisory, education, etc. India’s scale means that even modest AI applications, if they reach the masses, can generate enormous value. That’s where the focus on building multilingual text-to-speech and speech-to-text also fits in.

But the risk is that the benefits of AI accrue primarily to a thin layer of English-speaking, digitally fluent professionals in a handful of cities. Mazarr’s framework reminds us that societies in which the gains from technological revolutions are broadly shared tend to outperform those in which they are concentrated.

An active and engaged society. What Mazarr describes as a society with a vibrant civic life and an entrepreneurial, energetic population is another area where India has underlying strengths. India’s sheer demographic energy points to a society that is anything but passive. The challenge is channelling this energy productively. A society where a significant portion of young people are either unemployed or underemployed is one where activity turns into frustration rather than innovation.

Effective institutions. This, in my assessment, is India’s most acute weakness within the Mazarr framework. India’s State capacity constraints are well-documented. Deploying AI in governance requires not just buying software but fundamentally rethinking how government agencies process information, make decisions, and deliver services. The successful examples, such as GST’s data architecture, CoWIN during the vaccination drive, and the Direct Benefit Transfer infrastructure, work because they combined technology with institutional redesign. But these remain islands of excellence in an ocean of institutional mediocrity.

A learning and adaptive intellectual climate presents a mixed picture. India produces a large number of STEM graduates and has a deep bench of AI researchers, many of whom go on to work in other countries. The deeper question is whether the education system fosters the kind of adaptive, critical thinking that a society needs to navigate a technological revolution. Credentialism won’t cut it in an era that demands continuous reskilling and intellectual flexibility. On the other hand, the explosion of online learning platforms, the growth of vernacular tech content, and the sheer hunger for upskilling among young Indians suggest that the demand for a learning culture exists. The supply side is what needs urgent attention.

Finally, diversity and pluralism. Mazarr argues that societies which welcome diverse perspectives and allow open debate tend to be more innovative and adaptive. This is, in many ways, a natural Indian advantage. India’s diversity of languages, cultures, and viewpoints is a source of resilience and creativity. The challenge is ensuring that this diversity is genuinely leveraged. India’s multilingual AI efforts and the push for Indian-language models are steps in the right direction, but much more is needed.

The balance sheet is neither as bleak as techno-pessimists suggest nor as rosy as summit declarations imply. Mazarr’s framework is valuable because it reframes the AI competition. India cannot out-invest the US and China in frontier AI research, and it doesn’t need to. What it can do is create the societal conditions that allow it to be an exceptionally effective adopter and diffuser of AI. But that requires a domestic reform agenda and not just a technology procurement agenda.

This book is worth your time and attention.

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Reading and listening recommendations on public policy matters

1. [Post] Bruno Macaes has another good Substack post on the futility of the war in West Asia.

2. [Podcast] Check out the latest Puliyabaazi on the economics and psychology of digital scamming ft. Snigdha Poonam, author of the new book, Scamlands: Inside the Asian empire of fraud that preys on the world.

3. [Paper] How Artificial General Intelligence Could Affect Rise and Fall of Nations by Barry Pavel et. al. does a useful scenario exercise.

Insights on current policy issues in India

—RSJ

As we wrote last week, the US Supreme Court ruled against tariffs imposed by Trump under IEEPA (emergency powers) on various countries since the “liberation day” announcement last April. So, all reciprocal tariffs enumerated in that infamous chart, fentanyl-linked tariffs on Mexico and Canada, Russian oil buying penalties on India and China and random punitive tariffs on Brazil for putting Bolsonaro in jail, are invalid. Sector-specific tariffs and a few tariffs specifically targeted at China will continue.

More importantly, the Supreme Court ruling also directs the federal government to refund about US$175bn of tariffs collected so far. To whom and how? We don’t know that yet. It has passed the parcel on that problem to the lower courts to determine. Expect lawyers to make a lot of money unentangling that jungle of knots.

Trump, in response, ranted against the Supreme Court judges, then invoked Section 122 of the Trade Act (1974) to impose a flat 10 per cent tariff (or is it 15 per cent?) uniformly on all nations. Section 122 allows the President to impose a tariff of up to 15 per cent for up to 150 days to address a “fundamental international payments problem”. This is a provision that has never been used in the past, and no one knows the legal basis and evidence needed to justify its use.

In any case, does anyone know what the real applicable tariffs are at this moment or any time in the past year? I have mentioned in previous editions of having worked on lading and shipping processes of global logistics players. Even a minor change in tariffs between various countries can take months to deploy accurately on their systems and then to train processing agents to follow them based on the type of goods, port of origination, loading and destination and the arrangement between various parties on who will pay what part of the tariff, etc. I would be surprised if those systems had been upgraded since then to such an extent that they could take these frequent, random changes of tariffs on various goods and countries, and their combinations.

I suspect they are still testing their systems for some of the tariff changes made 6-9 months ago. This is evident from the effective tariff rate calculation done for the Oct-Dec 2025 quarter for US imports. It comes to about 11 per cent, which is way lower than the effective tariff rate should be if all tariffs were applied on the goods as the law stood during the quarter. This kind of significant leakage will persist because no one can really keep track and institutionalise so many changes on the system in such a short time. In a way, a uniform 10 per cent tariff across all nations must be a source of temporary relief to them compared to the complexity of Trump’s tariffs.

Where do we go from here on US tariffs?

Well, a useful place to start will be to define ‘here’ first. There are five different legal provisions available to the Trump administration to apply tariffs outside of the IEEPA provision. There is Section 301-310 of the Trade Act of 1974 (commonly called Section 301) that allows the USTR to impose tariffs or quota restrictions to counteract unfair trade practices by foreign nations. These have been used in the past two years to target Chinese EVs and batteries, with plans to extend them to other areas like medical products and semiconductors. These measures have to be country-specific, and USTR usually takes about 12-18 months to investigate and arrive at a report on unfair trade practices that could justify such retaliatory action.

Then there is Section 232, Trade Expansion Act (1962), which allows the President to impose tariffs on imports that are deemed a threat to national security based on Department of Commerce investigations. Trump has imposed these against imports of steel and aluminium from various countries, including China, India and Mexico, arguing for the need to protect the domestic industries in these areas that are critical for national defence.

There is also Section 201, Trade Act (1974), that allows the US president to impose a temporary tariff on imports that materially injure or threaten to injure a specific domestic industry. The President can impose a tariff of up to 50 per cent over the existing duties, usually for a duration of 3-4 years. A whole host of tariffs on solar panels and equipment from China was imposed by the Biden administration and later extended by Trump using this.

And finally, there is Section 338 of the Tariff Act of 1930 (or the good, old Smoot-Harley Act) that allows the President to impose ‘new or additional rates of duty’ on goods imported from a foreign country, which would impose unequal discrimination against US commerce or benefit other countries at the expense of US trade. In cases of persistent discrimination, the statute allows for the exclusion of imports from a foreign country. Tariffs enacted under this law have a cap of 50% and no fixed duration.

That’s a wide buffet of options available, and we know Trump loves to use tariffs as a panacea for the economy and a weapon for international diplomacy. So, he isn’t going to take the Supreme Court order lying down. The most likely scenario that is going to unfold now is this. The Trump administration will use the 150-day window available to it under Section 122 to re-negotiate all the bilateral deals it has signed with various nations and “intelligently” use the provisions of Section 301, 232, 201 and 338 to restore the status quo on tariffs as planned in those deals. This is a complex exercise involving another round of negotiations with perhaps less willing partners than in the past, to arrive at a solution that will be bad for those partners in any case.

I don’t think this will be done in 150 days, in which case Trump will renew Section 122 for another 150 days. Whether such a renewal needs Congressional approval, I’m not sure at this moment. In fact, Section 122 itself can be contested in the courts (as I expect they will be) since it was originally meant to address Balance of Payments issues in the pre-1974 era when there was a fixed rate system prevailing.

Can Balance of Trade of today be argued as a Balance of Payment issue? I suspect not. But then it will take much more than 150 days for any legal challenge to eventually reach the Supreme Court, where the final word on this will be heard. What all of this means is that we will have another year of chaos and negotiations, with random late-night messages from Trump imposing new tariffs on countries. The net gainer from all of these will only be China, whose significant overcapacity and dumping practices will seem saner and more predictable compared to whatever the US will offer. India will have further delay on finalising the US trade deal, and the fact that the relative disadvantage of China will go down in comparison to other nations, including India (under Section 122), it is likely that Indian exports will be under a lot more pressure.

This whole business is exhausting for everyone except Trump, and the expected drubbing that he is going to receive in midterms might make him go more ballistic on tariffs in the next 12 months. The pressure on INR because of this (and slowdown in IT exports) and the defence of the rupee by the central bank will continue to weigh heavily on liquidity in the system, which is the single biggest factor impacting credit growth. The four state elections will only aggravate the currency in circulation, draining liquidity further. I’m not sure many can explain the 7.6-7.8 per cent GDP growth forecasts based on the new GDP base, given such constraints. But then that’s the new great Indian rope trick.

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Global Policy Watch: A Busy Week for Technology Geopolitics

Global issues relevant to India

—Pranay Kotasthane

Anthropic made it to the political page headlines this week, not once, but twice. The first instance relates to its scuffle with the Department of War on the usage of its models for military purposes. Negotiations between the Pentagon and Anthropic for a $200 million contract failed to meet the Friday deadline set by the US Secretary of War Pete Hegseth.

The US government’s demand was that it must have “full, unrestricted access to Anthropic’s models for every LAWFUL purpose in defense of the Republic.” Anthropic, on the other hand, was okay to license its technology, but insisted on two safeguards.

One: its models should not be used for mass domestic surveillance (it was okay with their use for “foreign intelligence and counterintelligence missions”). And two, since AI systems are currently not reliable for deployment in fully autonomous weapons, they should not be deployed just yet. This is a conditional reservation, not an absolute one, as Anthropic’s official statement acknowledges that it is willing to “work directly with the Department of War on R&D to improve the reliability of these systems, but they have not accepted this offer…They need to be deployed with proper guardrails, which don’t exist today.” Eventually, neither side budged, and the deal fell through. Soon enough, OpenAI got the contract and agreed to the US government’s conditions.

The dominant narrative over the last week portrayed Anthropic’s stance as a responsible one, where a technology company was pushing back against a capricious administration.

But that would be a misinterpretation. As I have highlighted above, Anthropic’s ‘red lines’ are specific conditional reservations, not a complete rejection of the use of powerful AI systems in US warfighting. Anthropic definitely doesn’t want US adversaries to have military AI, but it is pretty much okay with the US military deploying it, albeit with some guardrails. National governments have the upper hand on this question, and I expect Anthropic to fall in line soon. In any case, there are other models on offer, and we should have no doubt that the most powerful AI models will be deployed in American military systems, regardless of the Silicon Valley rhetoric.

Technology analyst Ben Thompson lists a separate reason that points to the same conclusion:

Anthropic talks a lot about alignment; this insistence on controlling the U.S. military, however, is fundamentally misaligned with reality. Current AI models are obviously not yet so powerful that they rival the U.S. military; if that is the trajectory, however — and no one has been more vocal in arguing for that trajectory than Amodei — then it seems to me the choice facing the U.S. is actually quite binary:

• Option 1 is that Anthropic accepts a subservient position relative to the U.S. government, and does not seek to retain ultimate decision-making power about how its models are used, instead leaving that to Congress and the President.

• Option 2 is that the U.S. government either destroys Anthropic or removes Amodei.

  [Anthropic and Alignment, Stratechery]

The other news involving Anthropic comes on the heels of the latest DeepSeek release. Last week, Anthropic published evidence that Chinese labs were ‘distilling’ Claude at a massive scale. The blog post reads:

“We have identified industrial-scale campaigns by three AI laboratories—DeepSeek, Moonshot, and MiniMax—to illicitly extract Claude’s capabilities to improve their own models. These labs generated over 16 million exchanges with Claude through approximately 24,000 fraudulent accounts, in violation of our terms of service and regional access restrictions.

These labs used a technique called “distillation,” which involves training a less capable model on the outputs of a stronger one. Distillation is a widely used and legitimate training method. For example, frontier AI labs routinely distill their own models to create smaller, cheaper versions for their customers. But distillation can also be used for illicit purposes: competitors can use it to acquire powerful capabilities from other labs in a fraction of the time, and at a fraction of the cost, that it would take to develop them independently.”

The evidence is compelling, but the policy conclusion of doubling down on input controls (chips, API access) deserves serious scrutiny. The current approach of export controls restricts inputs (chips, API access) as a proxy for controlling use (military, surveillance, bioweapons). But these proxies have collateral damage. Restricting chips doesn't just slow weapons research; it also slows cancer research, climate modelling, and education.

If a French or Japanese lab had done this exact same distillation, would we be reading the same blog post with the same national security language? If not, the issue isn't distillation.

It's just that China is doing this. Anthropic frames rapid Chinese AI progress as largely dependent on distillation from American models. This conveniently implies that US dominance is natural and any catching up must involve theft. But competitive industries converge. That's just how technology works. "They used 24,000 fake accounts to get access" is presented as proof that the world needs tighter controls. I'd argue it’s proof that controls are already imposing enormous friction. The question is whether the marginal security gain of more restrictions is worth the marginal cost to global innovation.

We don't restrict electricity because someone could build an electric chair. We don't ban chemistry because someone could make poison. We create narrow, targeted rules around use. AI should be no different. General-purpose technologies need use-based governance, too. The FATF model isn't perfect, but it shows a path: multilateral agreements focused on specific dangerous applications, with monitoring frameworks adapted to the technology. It’s hard, but better than a blunt regime that treats every GPU crossing a border as a potential weapon.

The security framing does powerful rhetorical work. It makes disagreement feel unpatriotic. But conflating "a company lost competitive advantage through ToS violations" with "national security threat" is a move we should name clearly and evaluate honestly. I'm not arguing for no controls. I'm arguing that input-based controls on a general-purpose technology will always be leaky, always impose massive collateral costs, and always be one step behind. Narrow, multilateral use-based controls are better in the long run.

Another big development this week was the New York Times story titled The Looming Taiwan Chip Disaster That Silicon Valley Has Long Ignored. Tripp Mickle reports:

“A confidential report commissioned in 2022 by the Semiconductor Industry Association for its members, which include the largest U.S. chip companies, said cutting the supply of chips from Taiwan would lead to the largest economic crisis since the Great Depression. U.S. economic output would plunge 11 percent, twice as much as the 2008 recession. The collapse would be even more severe for China, which would experience a 16 percent decline..

If Taiwan’s factories were knocked offline, the impact would be immediate, the roughly 20-page report said. Economies would flounder. In China, the gross national product would fall by $2.8 trillion; in the United States, the drop would be $2.5 trillion.

Other reports, including one by Bloomberg Economics, a research service, estimate a conflict would cost the global economy more than $10 trillion.”

We covered this topic in edition #324. The economic impact of a blockade of Taiwan remains underestimated. I would be surprised if the US hasn’t made a contingency plan to evacuate the key leadership of TSMC in case of a Chinese blockade or invasion. Even so, replacing TSMC’s Taiwanese facilities elsewhere could take up to five years. This assessment remains valid even after accounting for the many mature node fabs being built worldwide and TSMC’s own new advanced node fabs in Japan and the US.

The only hope is deterrence. The economic loss due to Taiwanese fabs shutting down will be felt most severely by China, and perhaps this would discourage any misadventure. However, this scenario doesn’t consider the possibility that China would coerce TSMC to run under its control, while the world would fall in line just to avoid the adverse economic consequences.

This is precisely why US chip export controls might backfire. The controls force China to build domestic capabilities. Over time, this would mean its dependence on Made-in-Taiwan chips is reducing, implying that its marginal costs of occupying Taiwan become less than the marginal benefits. Ben Thompson of Stratechery again is right on the money here:

“…cutting China off from advanced chips doesn’t just reduce the likelihood that Chinese companies are dependent on a U.S.-based ecosystem, it also reduces the cost of destroying TSMC. More than that, if AI becomes as capable as Amodei says it will — the equivalent, or more, of nuclear weapons — then it actually becomes game theory optimal for China to do exactly that: if China can’t have AI, then it is, at least under current circumstances, relatively easy to make sure that nobody does.” [Anthropic and Alignment, Stratechery]

We need second-order thinking to understand the true cost of chip bans.

The last technology news snippet that caught my attention was the inauguration of Micron’s memory chip assembly plant in Sanand. Micron is an A-tier memory chipmaker, and the launch of its commercial operations marks the first major outcome of the India Semiconductor Mission. The first batch of assembled chips has been ordered by Dell for its laptops being made in India for the domestic market.

Before we get ahead of ourselves, it is important to contextualise what this assembly plant does and what it does not. This plant converts advanced DRAM and NAND wafers from Micron's global manufacturing network into finished memory products. Micron’s press release says that it expects to assemble and test tens of millions of chips at Sanand in 2026, scaling to hundreds of millions in 2027. Thus, the facility will be ramped up to full capacity over time.

Business Standard reports that Micron has shifted some of its machines from Penang, Malaysia, to India to kick off the plant setup, suggesting early-stage equipment deployment rather than full tooling.

Also, Micron has explicitly categorised what it’s doing in India as conventional, i.e., mature, established-process assembly, test and packaging. It is the older, less technologically demanding end of the packaging spectrum. The advanced stuff—next-generation packaging required for HBM (High Bandwidth Memory) and chiplet integration, which is critical for AI chips—is still going to happen in Micron’s US plants.

So, don’t be taken in by the hyped-up reports. Keep building. It’s a long way to go.

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Reading and listening recommendations on public policy matters

1. [Podcast] Here’s a Puliyabaazi Show & Tell episode on how we are using AI tools for work. Researchers should also check out Chris Blattman’s damn good setup.

2. [Paper] On the Taiwan contingency question, this Takshashila paper presents three economic impact scenarios.

3. [Podcast] In the latest episode of the Ideas of India podcast, Pranay and Shruti discuss the political economy of critical minerals.

Insights on current policy issues in India

—RSJ

The India AI summit concluded yesterday with the government machinery making the usual claims associated with such events: PM Modi’s vision for responsible AI, Viksit Bharat by 2047, investment pledges totalling up to $250bn (some $20bn in deep tech ventures alone, apparently) and the usual self-congratulatory stuff about India leading the global south, etc.

During the week, the AI summit gave us all the masala that we have come to expect from a Bollywood blockbuster. Song and dance, comedy (more on it later), action, dialoguebaazi, tragedy and hope. The only element missing was farce which was duly supplied on the last day by youth Congress activists who demonstrated shirtless inside the venue.

Cutting through the hyperbole and the usual self-serving corporate speak, of which there was plenty, the summit was helpful in getting a first-hand understanding of the state of play of AI in India and how global companies are viewing the India opportunity.

The idea of an annual AI summit is sound, and it is good that India has taken an early start in occupying this space. India has the market and an open tech ecosystem to draw in all the key AI players. The prevailing thesis that India will benefit from downstream AI services that will be used by various industries can only be tested and augmented by proving it through a platform of this kind.

If the likes of TCS and Infosys believe that the foundation models will take time to be adopted in large enterprises because of legacy platforms and data inconsistencies, and this gap offers tremendous engineering services opportunities for players like them, then a platform like an annual AI summit is the best place to prove it to the world. The same argument applies to AI native startups who are building on foundational models to solve real-world problems in healthcare, education, governance or financial inclusion. Any solution using AI at scale for India will have its application in similar markets (‘global south’) that might have problems of access and talent. Again, a globally branded AI event will help these startups find newer markets faster.

The way I think of this is like one of those large consumer expos in China where companies from all over the world converge and find there is always a Chinese company that exists that can offer you a world class product (everything from cosmetics to home furnishing to machine tools or suitcases) and paraphernalia (packaging, shipping, billing etc) at unbelievably low costs. This is how hundreds of D2C brands in India have taken off in the past 3-4 years.

There is some design innovation or branding insight from the Indian promoter to get the product going, but everything else gets done from China (in most cases). In a similar vein, I can imagine a future India AI summit where companies from world over come to find there is always an Indian vendor who has used AI already to build a world-class product or a service proposition that they can just pick up from the summit and deploy in their business or their country without having to reinvent the wheel themselves.

Despite the many glitches in this edition, this summit is a step in the right direction, and there should be greater investment in time and effort to make it bigger next year with a fixed calendar that everyone knows well in advance. There is a general investor sentiment about India being among the basket of countries seen as “AI losers”. The best way to address this is through an event of this kind that could provide a systemic response on economic gains to be made through AI adoption and being positioned as champions in helping others adopt AI.

I spent a fair amount of time reading through the interviews and content of panel discussions that featured in the extensive media coverage of the event. As luck would have it, I could meet a few of the participants outside of the event during the week to get a first-hand sense of their views on AI and India’s position in it. There are five conclusions I drew from these about the summit specifically and the AI space more broadly in India.

One, the government should hand over the organisation of the summit to an industry body and restrict itself to the role of enabler and promoter of the event globally. Almost everything that was cringe about the event was on account of the government running the event. There is already the excellent example of the Global Fintech Fest (GFF), managed by NPCI, which takes place annually in Mumbai. It has gotten bigger, better and smoother every year with global players, local fintechs and governments from around the world participating in an area (fintech esp payment and lending) where India is seen as a world-class innovator. In fact, other nations are now copying the GFF playbook (Singapore is the most recent) to showcase their fintech capabilities. The desire for optics over substance, cronyism in selecting who will set up pavilions, lack of quality control at every step and absolute thoughtlessness about the venue facilities and logistics can easily be avoided if we just follow the GFF example.

Two, like almost everyone else, I was also impressed with a lot of homegrown AI innovations showcased at the summit, including, of course, Sarvam.ai. Ignore the hyperbole of Sarvam doing with 40 researchers what DeepSeek could do with 5000 (there is really no comparison) and the jingoism around a sovereign foundation model, which has no meaning for where India is at this stage in AI evolution. Or even the impressive real-time local language translation capability that the platform demonstrated. The thing that was noteworthy to me was the clarity among its founders about building the core model using local data, algorithms and engineering for enterprise use cases and B2B applications and not going beyond it for now. It isn’t trying to be a free chatbot and compete with global LLMs, as many in India are hoping it to do. This approach of bounded sovereignty that helps Indian enterprises to not be dependent on global LLMs while benefitting from products built on it that are customised for local markets will have resonance in many other emerging economies.

Three, there are other infrastructure constraints that will come in the way, which will require long-term policy support and enablement. The announcements about significant investments in data centres by global and domestic players need to be tempered with an understanding of what it takes to run such large data centres. Reliable, cheap, and clean energy is already in short supply in India.

The future power requirements to support AI ambitions and commitment must be mapped, and more specific plans to address them have to be put in place. The private power and energy sector is increasingly an oligopoly, and that won’t help when the demand shoots through the roof.

Similarly, talent will become a bottleneck soon if the long term vision of dominating AI downstream services isn’t articulated and communicated to the university system. The usual assumption that in a free market, the demand and price signal for this talent will eventually solve for supply might not work or work with a lag. I have visited the AI labs (or equivalent “futuretech” labs) in at least three different modern, private universities of variable repute in the past four months. Every single one of them had that robodog that has global fame now, thanks to the shenanigans of Galgotias University. But beyond students playing with such toys (drones, robodogs, etc.), there is no real and rigorous AI training happening that inspires confidence.

Surprisingly, in a good way, each of these universities had some good quality applied engineering labs for students to use their hands in creating a tangible product solving a real-world problem. In any case, there is a need to address such constraints more proactively to support all those ambitious talk and investment pledges.

Four, there is a need to build a wider consensus among the political class on the risks and opportunities of AI, job losses and creation challenges and a common willingness to support this vision through future government changes and election cycles. I’d put it at the same level as defence or foreign policy in having consensus across the political spectrum on what we should defend, where we should invest and how we should promote this core capability. I suspect this government won’t have much interest in doing so on its own, but those advising it should suggest the importance of this.

Lastly, if India wants to position itself as the champion of AI services (legacy modernisation, automation, agentic platform building, etc.), it has to embrace LLMs from Chinese tech giants too. After all, it is a two-horse race on the upstream capabilities, and India should be prepared to work off any of these models regardless of their provenance. In a similar vein, India should view the Chinese markets as a big opportunity for its system integrators (IT services giants) to innovate on AI services. This means India should actively court China as a market and be open to the use and learning of Chinese LLMs within India. Whatever sovereign or data risks we might think we have with Chinese LLMs are equally true for the U.S. models in the Trump (and post-Trump) world. India needs to be indifferent to these.

On balance, there were way more positives emerging from the India AI summit. While my view on medium-term risks for India's IT services model was further strengthened from what I saw or heard at that event, I was also encouraged to see the alternative opportunities that might partly replace them. These will only get stronger if we continue the momentum in creating the market for ourselves.

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Global Policy Watch #1: Tariff Tantrums

Global issues relevant to India

—Pranay Kotasthane

What a week it has been for the US reciprocal tariff regime!

The Supreme Court upheld the cases filed by two small firms and struck down the Liberation Day Tariffs. The case conclusively argued that tariffs are a form of tax on Americans. And no taxation can happen without the approval of the representatives of the people, i.e., the legislature. That’s because it’s the body where representation is most granular. The American President represents every American citizen, which paradoxically means the President represents no one in particular. This is a weaker form of representation for tax purposes, because taxation creates winners and losers at a local level. Hence, the mandate is that there can be no taxes without deliberation and approval of the legislature. Further, the complainants were able to prove that, while the President has the power to reduce imports, it does not give him the power to impose taxes, i.e., tariffs, to achieve this goal.

This is a fantastic case of US institutions fighting back against whimsical executive power. But it doesn’t mean tariffs will wither away soon. As we discussed here, Trump is convinced about the utility of tariffs and idolises the “tariff king”, President William McKinley. Most of all, tariffs are the quickest way to create the spectacle of country leaders kowtowing to the American emperor, something the President clearly enjoys.

Thus, this reversal is good but unlikely to reduce global uncertainty. There are still sufficient constitutional mechanisms available to the executive to impose tariffs. Sure enough, Trump soon imposed a 10 per cent global tariff by invoking Section 122 of the Trade Act, a provision that allows the president to impose duties of up to 15 per cent for 150 days to address "large and serious" balance-of-payments issues. A day after floating this balloon, the administration further increased the tariffs to the 15 per cent upper limit.

Then there are two other slower means to impose tariffs: Section 301 and Section 232.

Under Section 301, the US Congress has granted the US Trade Representative (USTR) authority to investigate and respond to unfair trade practices by other countries. But it mandates a formal investigation process. This is the mechanism used for the China tariffs starting in 2018.

Under Section 232, the President can impose tariffs on specific items if the Secretary of Commerce determines that imports of such goods threaten national security. This measure again requires the US Congress to determine the national security impact.

In other words, while the sword has been blunted by the recent case, it still remains with the wielder. What it has definitely achieved is to pause this mercurial tariff imposition through social media. Future changes will be far slower and more deliberate. It also means that wildly different tariff rates against all countries are unlikely to sustain—it will either be a constant ‘fifteen is the new zero’ rate on all countries; on a handful of countries proven to be using unfair trade means; or on dominant exporters of goods important for US national security. Not much yet, but given the stakes and recent trends, the world will accept this gleefully.

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Global Policy Watch #2: Emotional Taxes

Global issues relevant to India

—Pranay Kotasthane

We have long argued that Robin Hood Taxes don’t work. We have also explained what the calls repeatedly made by well-meaning NGOs for taxing the wealthy get wrong in the Indian context.

Nevertheless, these arguments keep coming back and are steadily gaining political currency in the US. The Economist has an excellent lead story arguing that even robbing the richest entrepreneurs in the world wouldn’t cause a big dent on inequality. Here are a few striking numbers:

“Consider revenues first. There are simply not enough fat cats to fund welfare states by themselves. The proposed wealth tax in California would raise about 2% of the state’s annual output—not much for a swingeing one-time levy in the place with one of the world’s greatest concentrations of billionaires. The figure for Mr Mamdani’s proposal is around 0.25% of output annually. The limited revenue-raising power of the rich is why European governments have to fund their big spending with broad-based levies, such as taxes on consumption. By contrast, America, with its low overall tax burden, can get by with one of the world’s most progressive tax systems.” [The Economist]

This argument applies more so in the Indian context, where the rich are far fewer. Wealth Tax, Inheritance Tax, Gift Tax—India has tried it all before. The only long-term solution is economic growth.

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1. [Podcast] The latest Puliyabaazi is on the state of the Indian macroeconomy ft. Narayan Ramachandran. Narayan always has the best metaphors and analogies to explain complex topics in a way that learners outside the discipline can understand. Check the episode on YouTube or any podcasting platform.

   पुलियाबाज़ी Puliyabaazi

   मैक्रो इकोनॉमी की मास्टर क्लास। Status of the Economy 2026 Explained ft. Narayan Ramachandran

   पिछले साल दूसरी मुद्राओं के सामने भारतीय रुपया कमज़ोर हुआ है। साथ ही भूराजनीतिक उथल पुथल के चलते भारतीय शेयर बाज़ार भी हिला हुआ है। तो ऐसे में क्यों न हमारी अर्थव्यवस्था का एक ब्यौरा लिया जाए? आज की पुलियाबाज़ी एक मास्टरक्लास है, जिसमें हमारे मेहमान नारायण रामचंद्र जी अलग अलग आर्थिक पहलूओं को संदर्भ सहित समझाते हैं। हमें तो बहुत कुछ सीखने को मिला है इस क्ल…

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   3 months ago · Puliyabaazi Hindi Podcast

2. [Article] Medianama’s coverage of the AI Impact Summit is another good one, separating wheat from the chaff.

3. [Article] Don’t miss this opinion piece on the future of American tariffs by Douglas Irwin, who has authored THE book on the history of American trade policies.

Insights on current policy issues in India

—RSJ

The US market has been roiled by fears of AI-led disruption in the past two weeks. Much of the commentary last year focused on massive upstream investments in LLMs, computing power, and data centres, which fuelled fears of an AI bubble.

Instead of the bubble bursting, the mania seems to have spread downstream on how AI could disrupt traditional data or information-centric industries. The traditional (or perhaps, last year’s) narrative was that creating enterprise-ready AI agents that can scale will be a time-consuming affair. AI companies will have to work with their clients to understand traditional industries, learn the workflow, protect sensitive information and then develop enterprise-wide agentic platforms that can automate a lot of it - so the thinking went.

Well, in the past month or so, the upstream AI-model builders like Anthropic (Cowork), Gemini (project Genie) and OpenAI in the US and Alibaba (Rynnbrain) and Bytedance (Seedance 2.0) unveiled models that are aimed at directly disrupting sectors and functions as diverse as software services, legal and compliance work and manufacturing.

Now there are two ways of looking at it. One is how the markets have responded, with sector after sector selling off because of news of an AI upstart showing agentic capabilities that couldn’t have been imagined even a couple of quarters back (Altruist wealth advisory and Insurify being two good examples of this).

There is no method to this. The punters can’t keep going long on the usual Big Tech forever. So the next best option is to short traditional industries. That’s the trade playing out now. One day it is traditional IT services (SaaSpocalypse as it is being called), the next it is wealth and investment management, and then another day it is ratings agencies or even construction equipment companies. After a while, this too shall pass, and we will realise things aren’t as disruptive as they were thought to be.

The other way of looking at it is to actually take these developments at face value and test things for yourself. Forget all the opinion pieces about how electricity put candlemakers out of a job, but then created a whole new industry of entertainment, or that downstream AI application kind of work will create newer kinds of jobs that we can’t imagine now. Leave all that aside and just go out and use the latest plug-in from Claude Cowork or Code Assist.

You won’t need to be too farsighted to see where these tools could eventually take you once you have used their current, already fairly impressive versions. Now that Claude Cowork has changed the game in how AI agents can directly interact with enterprise workflow and automate routine knowledge work without any extensive training on native datasets, the focus will be on how many similar generative AI apps will be launched that will be considered category killers across the services space in the next 12 months. Everybody will want to build a universal Cowork like plug-in for the industry or function they understand.

There is a degree of scepticism among Indian policymakers and businesses about both the speed and scale of impact that this will have on both Indian IT and business process services and on Indian corporates. I have spent a fair amount of time in the past month seeing firsthand the scale of impact already in organisations in the Indian subcontinent. These organisations aren’t in some kind of “proof of concept hell” where they have multiple little successful experiments that aren’t scaling up, as many would like to believe. For proof, look at the financials of the larger BFSI firms in the previous two quarters, where the balance sheet growth is upwards of 10 per cent, but the employee headcount is down, and wage cost has remained flat (excluding the one-time impact of the labour code).

The differences between the previous tech hype cycle and this are evident from my interactions.

First, the nature of AI disruption is such that you don’t need an intermediary to set you up to use it. Almost every previous big idea (cloud, digital, virtualisation, et al) needed organisations to reach out to integrators or providers to help them get off the ground. As much as there is a belief among IT service providers that AI will create similar demand for them, I find this notion too optimistic. Most large organisations have already enabled their engineering teams with access to AI tools faster than larger IT services firms. So, in many cases, it is the client organisation that’s ahead of the service providers in thinking through the possibilities of using AI.

Second, more than any other tech disruption in the past, the AI tools have first targeted the individual user to demonstrate their capabilities. The CXO is now using a Copilot, seeing the productivity gains firsthand and then asking the question why can’t this be scaled up faster. This is quite unlike, say, a large ERP implementation, where you have 2 years of painful implementation, where you only see demos and wireframes before an end user really starts using it for a transaction (by which the world has moved on, and it’s time for an upgrade). This inversion of individual users getting comfortable with the tools and then looking for enterprise use cases is speeding up adoption and creating more demand for enterprise-wide plug-ins to which the AI players are now responding.

Third, there is a notion that eventually the cost of using tokens, training staff and streamlining data architecture will mean large-scale AI adoption in organisations will fail the business case test till the price of tokens falls significantly. That will take time, considering the huge upstream investments already made by AI players, whose rationale is being questioned. I think there is some merit in this argument, but only up to a point. The reason why global organisations outsourced technology services was because they didn’t have access to a large pool of engineers in their local market and any attempt at hiring large numbers would increase their costs prohibitively. This giving away of control on key programs never sat well with them, but who could argue with the business case of outsourcing to India?

As the global delivery model matured, the clients realised they could now set up their own centres in India and get the same economic benefit while retaining control. That’s what has led to the boom in GCCs in the past decade. AI coding tools now allow them to take out the average engineer out of the equation almost entirely. Most early users of these tools have seen up to 30-40 per cent reduction in human coding effort (if not more). That kind of saving without having to cede control of IT development is compelling enough already to take the high token cost in stride. It will only get easier and more compelling in the near future.

We are in the first stage of disruption right now. Most large IT services players are walking the fine line between protecting their existing revenue lines (by resisting AI as much) while pitching for new lines of work that will be AI enabled. This explains the random optimism we see in some quarters among select players based on a few wins.

The mid-sized IT services firms that don’t have as much existing revenue to protect are going out and cannibalising the revenue streams of larger players by pitching AI-assisted programs for the same work to those clients. This explains the relatively faster growth seen by these players. Soon, smaller players and startups will start eating the lunch of these mid-sized players, too.

The past four quarters have made it clear that whichever way this plays out, the net headcount of the IT services sector will only come down in the medium term. This, by itself, is a significant headwind for the Indian economy for the next couple of years. The second stage of disruption is already upon us. AI firms will only speed up in coming up with enterprise-enabled tools, which will make adoption easier for large service organisations or in the horizontal functions (finance, legal, professional services) of organisations. This will be significantly margin accretive for these firms while reducing their headcount. There is possibly a third stage filled with autonomous agents, AI reimagined workflows etc that I think we can leave aside for the moment.

What’s already out there and getting adopted is disruptive or transformative (take your pick) for the economy. This impact (negative in the short term) is not modelled into any forecast for the Indian economy. I sense that by the end of this calendar year, we will be forced to contend with it.

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Another Perspective: Code as Handicraft

— Pranay Kotasthane

This was the week when the penny dropped for me after using Claude Code for some pilot projects. Going beyond the now-ubiquitous chatbox, LLMs and their many wrappers are becoming amazing tools. One still must know how to code to guide these systems effectively, but it is no longer a gating condition. Anyone can quickly spin off a hobby website, an applet, or a project.

Would this be the new end of coding? Here’s how I think of it.

As machine learning becomes more capable, “hand-crafted” code could become rarer and command a premium. Coding might quite literally join the ranks of other handicrafts at the higher end. But what about the low-end? Everyone would be able to code half-decent stuff with basic knowledge. This is a major productivity gain. The flip side will be what Amit Varma calls the “Cavendish Banana” problem—everyone’s code will start looking similar, and the variance and novelty might reduce.

Let me explain this AI boon with another analogy from public finance. When one level of government gives grants to another level, there can be two types of effects. The receiving government could substitute its own spending in that domain with the money it receives (why pay attention if someone else is paying for the work to be done). On the other hand, buoyed by additional financial support, grants can stimulate further spending by the recipient government.

Whether grants have a substitution or a stimulation effect depends on the grant design and conditionalities. Similarly, today’s LLM tools have both substitution and stimulation effects from an individual’s perspective. We can use them to substitute for our own intelligence by relying exclusively on the summaries of books, histories, and ideas that these tools excel at. By letting go of the process of forming connections across disciplines, which happens non-linearly over time through a diversified knowledge base, we will lose something vital. This effect again has the Cavendish Banana problem. At the lower-end, all of us can know something about everything—I can give a full presentation on quantum computing (of which I understand almost nothing) tomorrow. But at the higher end, those who do not use LLMs to replace their thinking will command a premium.

On the other hand, these tools can stimulate our intelligence by allowing us to push the boundaries of what we can do on our own. For example, a non-coder can easily create their own apps and websites. Sure, you won’t be a good coder this way, but you will be able to add to the repertoire of things you can make. As a knowledge worker, the most valuable skills are asking the right questions and planning how to approach the answers, rather than going down the rabbit hole of implementation.

The challenge for us would be to balance these stimulating and substituting effects. Ideally, we would use these tools to stimulate outcomes in areas we enjoy working on and to substitute our efforts in areas we don’t like. But these tools will tempt us to substitute our cognition and learning in all domains. Figuring this balance will be a personal journey.

On that note, I have also noticed that some very smart people are caught in an ethical dilemma: should I use these tools for unserious tinkering, given their energy-intensive footprint and the resulting adverse environmental impact? This is a fair concern—the current implementation is indeed energy-hungry. But we needn’t look at this from an Ehlrichian angle of scarcity. There is a lot of research going into alternative compute architectures, cleaner energy sources, and better models. Just as fossil-fuel-powered vehicles replaced horses, thereby enabling previously unimaginable things, AI tools can have a stimulating effect on what we do today.

The real challenge is to remember the handicraft analogy. By refusing to use these tools, which will commoditise many skills, some people can still enjoy the prestige that “hand-crafted” clothes makers do today. But that prestige will be reserved for a small number of people who demonstrate excellence and long-term commitment to their craft.

Now, back to the macro questions that RSJ has written about. I have a more optimistic take to offer from an Indian perspective. Some SaaS companies might indeed feel the heat (hail creative destruction), but SaaS isn’t going away. Deploying production-ready enterprise AI will still need integrators, and that’s where SaaS comes in. Yes, the labour arbitrage model, which counts billable work hours, might well take a hit. But India’s software services industry has weathered many changes in the past and plays this game at a global level without any protectionism. Even if some lagging companies fall away, there is enough Indian talent to create new AI SaaS models relevant to smaller, more nimbler customers of tomorrow.

The point about the client organisation being ahead of the service providers in thinking through the possibilities of using AI is quite interesting. It does feel that companies might well rely more on in-house teams that co-team with AI rather than hand over wholesale implementation to service providers. But here again, staying ahead of their customers was never the value proposition of India’s software services firms; it was high-fidelity implementation. SaaS contractors are often embedded in bigger employee teams at client locations. I don’t think that is going away anytime soon.

For more, check out the latest Puliyabaazi on this very theme.

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India Policy Watch #2: Filmy Anomaly

Insights on current policy issues in India

—Pranay Kotasthane

Earlier this week, I was intrigued to read this Hindustan Times report, quoting the film actor Aamir Khan, who rues the lack of film screens in India. This shortage results in smaller box office collections compared with other major markets like the US and China. Whereas India’s many film industries produce more than twice as many films as Hollywood, their total collections are less than 20 per cent of the American market.

Now, comparing with a country 30 times richer than India is somewhat unfair. The comparison with China is more instructive. Chinese industries are renowned worldwide for manufacturing most of the things in our lives—except movies. Perhaps hobbled by excessive self-censorship, well-known Chinese films tend to be set either in the distant past or to focus on super-safe contemporary themes. And yet China has roughly 90,000 movie screens while India has about 9,000. Chinese box office collections dwarf India’s, even after accounting for differences in living costs.

The contrast becomes starker when you examine trajectories. Between 2010 and 2016, China added an average of 16 screens per day, bringing the total to over 40,000. During the same period, India’s screen count declined from around 10,000 to 8,500.

To a large extent, this difference can be attributed to income levels. But as is often the case, there is a public policy story here too.

A majority of India’s screens are single-screen theatres. They comprise more than 60 per cent of the total screens and over 80 per cent of the total seats. They were struggling even before the pandemic, but COVID-19 broke their back entirely. A 2018 Deloitte report, Screen Density – Key to Unlocking the Hidden Box Office Potential, explains the origins of the problem:

“The film exhibition industry in India is mainly comprised of single screen and multiplexes. Most single screen properties in India are more than 50 years old and run by the second or third generation entrepreneurs. These properties were built in the pre-digital era when the analogue cinematography equipment and the physical reels posed exorbitant costs, upwards of INR 50,000. These together with the distribution costs necessitated a huge audience in order to be profitable per show. The result was that, theatres (single screens) were built with huge capacities – 500 to 1,000 seats per screen. Such properties also required huge catchment area to drive footfalls to such a huge capacity theatre. However, with the advent of digital cinema, the print costs reduced to almost one fifth making it profitable to have smaller theatres. As a result, most of the theatres that have come up in the last decade are small (up to 250seats per screen) theatres. The reduced distribution costs, growing supply of content and appetite of the Indian consumer have also allowed them to have more than one screen per property.” [Deloitte, 2018]

Technology changed, but the old theatres remained stranded assets from a bygone era. You have likely seen them in your city: dilapidated, forlorn single-screens that have been closed down. Why don’t their owners simply sell the land and move on?

Because they can’t. Here is the Deloitte report again:

On one hand, in a bid to prevent the theatres from closing down, certain states such as Maharashtra have introduced exit regulations restricting single screen properties from redeveloping into commercial properties. To redevelop a cinema theatre a capacity of 1,000 seats, it is mandatory for exhibitors to build a smaller cinema theatre of 330 seats at the same place prior to re-development.

On the other hand, the single screen theatres fail to qualify the infrastructure requirements for multiplexes such as parking space. Hence it is difficult to convert most of these single screen theatres into multiplexes. Renewal of licenses for single screen theatres is also challenging as they are expected to comply with the requirements for modern theatre properties.

These theatres can’t close, can’t convert, and can’t compete. They simply decay and become zombie properties on valuable urban land, trapped by regulations meant to protect them.

Other self-destructive policies play supporting roles. Several states impose price caps on movie tickets, compressing margins and reducing incentives for new investment. Linguistic protectionism in many states means restrictions on how many screens can show films in other languages. And the standard Indian malaise of regulatory delays means multiplex chains routinely have to wait two years or more for operating licenses after construction is complete.

The cumulative effect is an industry struggling to build the infrastructure it needs. India produces more films than any country on earth, but has fewer screens per capita than almost any major economy. Cinema is one domain where India should be flexing its muscles. Instead, we have chosen to tie our own hands.

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Reading and listening recommendations on public policy matters

1. [Article] Nitin Pai makes the case that there are multiple paths to AI power. Money quote:

   “Yet much of the global debate is framed in narrow terms. It focuses obsessively on frontier innovation: who builds the biggest models, who owns the most advanced chips, who dominates the performance benchmarks. These questions matter, but they do not exhaust the sources of technological power. Power also flows from being an agile adopter, an efficient diffuser and a competitive enabler of adoption. You do not need to invent engines to run a great airline. Over the long term, especially for a general-purpose technology like AI, adoption can matter as much as invention.” [Nitin Pai]

2. [Paper] This Takshashila discussion document proposes ideas for plurilateral blocs that India can co-construct to manage the world disorder.

3. [Book] Richard D Brown’s The Strength of a People: The Idea of an Informed Citizenry in America, 1650-1870 has several insights to offer on today’s debates about democracy, civil society, and free speech.

Insights on current policy issues in India

—RSJ

A long-revered tradition in India, which has only accelerated in the past decade, is to rate the Union budget 11 on 10 (Spinal Tap copied the idea from us). So, I raised my left eyebrow by an eighth of an inch when I read through the opinion pieces about the record-breaking ninth consecutive budget presented by FM Nirmala Sitharaman. Apparently, the remarkable thing about this budget, according to the talking heads and other worthies, was that it was unremarkable. That’s what India needed, it seems, in this world full of geopolitical tumult. Like modern-day Sherlock Holmes in the Budget version of Silver Blaze, these columnists were explaining to us, the lay readers, the curious incident of the dog in the night-time. The dog did nothing. The unremarkable was therefore the remarkable.

Now, I am all in favour of the Union budget becoming an unremarkable event in our economic and political calendar. Policy-making is a round-the-clock, year-round exercise. The annual budget should just be a statement of accounts and a revenue, spending and borrowing plan for the year ahead. Yet, despite gradually going up the maturity curve on policy-making over the years, the annual budget speech is still an important event in signalling or reaffirming the policy intent of the government and announcing big-ticket schemes to support that vision. It retains its salience.

There has, of course, been no dearth of schemes in the recent past from the government. In the past few years the budget speech has included among other big announcements, a national manufacturing mission, an employment linked incentive scheme promising 4 crore jobs in 5 years, an internship scheme that would have seen over one crore internships in 5 years across top 500 companies, a variety of start-up India initiatives and multiple urban development schemes (something called urban challenge fund of ₹1 lakh crore was set up for new age cities last year, if I remember right). No one is wiser on what these schemes have achieved because we have since moved on to the next scheme.

Given this track record, I’m naturally predisposed to a budget that’s somewhat low on big schemes, to the point and unremarkable. But even with that bias, this year’s budget was so unremarkable that it left me wondering if, in its 13th year of being in power, this government has concluded that letting the economy run its normal course with a few fiscal, monetary and, crucially, statistical tweaks is the best it can do. If that can deliver 7 per cent growth and help us with the crown of the fastest growing major economy in the world, with periodic updates of going past the size of economies of the UK or Japan, that should be good enough for people. Throw in a few aspirational, feel-good taglines (Amrit Kaal is behind us, Viksit Bharat is on now with three kartavyas anchoring it, if you are keeping track), and we are done till it is time for the next budget.

Returning to the budget presented last week, there are a few points worth discussing.

First, there is no abatement in public capex that’s planned at ₹12.2 lakh crore which is more than double the ₹5.7 lakh crore of capex in FY22 when we were emerging out of COVID-19. There’s a significant allocation set aside for road transport and railways (about 45 per cent) with dedicated freight corridors, new waterways, infrastructure improvement in tier 2 and 3 towns and logistics efficiency as areas of focus. There’s also a sizable jump of over 17 percent in allocation of ₹2.2 lakh crore to the defence sector.

The usual argument in favour of public capex is that it eventually “crowds in” private capex as the confidence in the economy builds up, and that such spending creates a strong multiplier effect in the economy, leading to more jobs and wider economic growth. The sustained increase in public capex over the past four years doesn’t seem to have done either.

The private capex is still waiting on the sidelines with corporates continuing to deleverage, buyback shares and improve their return on equity rather than go on a greenfield expansion spree. The reasons for lack of confidence are many - from scepticism about real domestic growth opportunities to the fear of China building up significant capacity and a lack of export competitiveness. Also, a significant part of public capex is in sectors where there is clear market concentration (the usual conglomerates) among private players, which has its own dynamics in terms of need to scale up, price discovery and value for the end user. I haven’t seen any study that has gone deeper into the reasons why the multiplier effect hasn’t worked on the back of the public capex spike we have seen in the past 4 years.

Second, while the government has stayed on the path of fiscal consolidation (market was expecting a bit more), the gross borrowing requirement of the union government came in at about a trillion more than planned at ₹17.2 lakh crore. Add to this about ₹12 lakh crore of planned gross borrowing by the state governments, we will have a significant supply of government paper to be absorbed next year. The 10-year GSec rate that has stayed high despite a cumulative 125 bps repo cut in the past 12 months will not come down with that kind of oversupply. The 5.7-5.8 per cent range that it has operated within has meant there’s not been a real transmission of the rate cuts. And, this isn’t likely to change given the current dynamics playing out in the economy. This oversupply will continue to crowd out other players looking for credit, which will feed into the problem of private capex waiting on the sidelines.

This is also a good time to segue into the other big news of the week - the announcement of the Indo-US trade deal that was done in his customary way by Donald Trump on TruthSocial. If someone had told me around this time last year that by Feb 2026, the US would have hit India with a tariff of 18 per cent, along with restrictions on the purchase of Russian oil and some random US$500 billion committed (?) purchase of American goods, I’d have sat down to steady myself.

Yet, it is in a way a tribute to the genius of Trump that most of us are looking at this outcome as some kind of a win after the scenic route he has taken us through in these 12 months. The way media outlets have reported about tariffs being slashed from 50 per cent to 18 per cent would suggest we have been at that high tariff regime for decades. As a reminder, average US tariffs on Indian goods were around 2.5 per cent in March 2025. Maybe the details of the deal that are elusive now (an interim document is out as I write this) will show all the benefits we are getting from this deal.

But right now, all I see is India committing like Japan and South Korea to all sorts of purchases and investment in the US, reducing duties to zero on a vast set of US goods, including farm products (as claimed by Trump and US trade representative Jamieson Greer) and getting very little incremental gains in return. Access to the US markets was already available to India with almost zero tariffs for most sectors.

Perhaps some incremental opportunity will open in the farm and dairy sectors, but that space in the US is already crowded and reasonably self-sufficient. The thing that worries me the most is whether the upshot of the trade deal is a reduction in the US trade deficit with India, which was around $46 billion in 2024. Because it will hurt the one thing that’s turning out to be the biggest impact player in the Indian economy of late - liquidity.

As I have written before on these pages, the slowdown in the economy in most of 2024 was on account of the tight liquidity kept by the central bank in its effort to contain what looked like an asset bubble building up in the unsecured loan segment. It went a bit too far on this tightening, thus squeezing the system out of credit and slowing down GDP growth. The new governor who came in early 2025 committed to keeping liquidity in surplus. That’s what the central bank has done for most of the last 12 months, except they have had a new problem to deal with since Trump took over - capital outflow from India.

I have dealt with the structural and cyclical reasons for the outflow in previous editions. The upshot of this has been an unrelenting pressure on the Rupee that has required some stout defending from the RBI in the form of open market operations (thus depleting the forex reserves). If there is a significant rebalance of trade with the US and an increase in the cost of oil imports after delinking from Russia, the capital outflow problem could persist, along with the need to defend the Rupee and the attendant problem of tight liquidity. This could then impact credit offtake as the deal moves into the execution phase.

Lastly, the general impression I take away from this budget is the realisation of a party in power which has figured out a way to win elections in India that’s not contingent on strong economic performance. So long as you don’t screw up the economy badly, a combination of emotional issues and timely welfarism (direct cash transfer just before elections is a new, powerful tool now) should see you through most elections. Therefore, a 6.5 per cent growth and a 4 per cent fiscal deficit in a world that’s volatile and unpredictable is good enough to keep the global investors mildly interested while keeping the winning machine going domestically. That may not be enough for us to get out of the middle-income trap or lose out on the narrow window of demographic dividend we had. But the willingness to take bolder bets to address such structural challenges seems to have dissipated. More of the same is what we have settled for.

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India Policy Watch #2: Budget Takeaways

Insights on current policy issues in India

—Pranay Kotasthane

As I have done for the past three years in this newsletter, I analysed the budget data from the lens of two sectors: semiconductors and defence. Here are some key points.

Semiconductors

The latest union budget speech mentions that the government plans to launch a second version of the India Semiconductor Mission. As four years have passed since the launch of India Semiconductor Mission 1.0, now is a good time to assess progress using the government’s own spending data. And to make a fair assessment, we must go beyond speeches and announcements.

Thus, I looked up the budget data for all the years since the policy came into effect, and the results suggest a huge gap between promise and delivery.

The chart above shows all budgeted and disbursed amounts to date. Every financial year has two bars of the same colour. The first bar shows the expenditure forecast for the beginning of that year (also called budgeted estimates, or BE). The second bar of the same colour shows the actual disbursements at the end of that financial year (actuals). The difference between ex-ante budget allocation vs actual spending is especially important because the policies have front-loaded the disbursement on an equal footing basis during capital acquisition and construction stages, instead of tying financial support to production.

In FY27, the government expects to spend ₹8000 crore (~10 per cent of the total outlay) for the already approved projects under ISM1.0. Breaking down this overall number indicates the health of each sub-scheme.

1. The one area which seems to be proceeding well is the scheme for chip assembly and testing. While there is still a vast gap between the budgeted estimates and disbursals, the steady rise in disbursements in absolute terms indicates on-ground progress.

2. The budgeted outlay for a fab shows a muted picture. Despite the budgeted allocations for the Dholera fab in FY24 and FY25, not a single penny was disbursed. The FY26 revised estimate is also substantially lower than the budgeted allocations. Thus, it indicates that the project is progressing much more slowly than the government’s own projections.

3. Next, the government has been planning to modernise the government-owned R&D fabrication unit in Mohali this year without much success. Despite allocating money for it in several budgets, virtually nothing has been spent yet.

4. The sad disappointing concerns a sector where India’s comparative advantage actually lies, i.e., fabless firms. The Design-linked incentive promised to support 100 start-ups in their go-to-market strategy, but the disbursals show how far off the target the scheme is. There was no disbursement in FY23; The FY24 disbursements were 15 per cent of the budgeted allocation of ₹200 crore; the FY25 disbursements stood at 34 per cent of the budgeted expense; and the FY26 disbursements stood at 52 per cent. In FY27, the budgeted expenditure is ₹100 crore. The reasons for tardiness include strict provisions that put firms raising substantial foreign money out of contention, confusion on the government’s right to the company’s intellectual property, and entrusting a government company, which is also a player in this domain, as the nodal regulator of this scheme. I have outlined problems with the Design-linked Incentive Scheme here.

5. The display fab scheme hasn’t attracted any interest, and the government hasn’t budgeted any amount for it this year either. I have long argued that display fabs are not strategic, and spending taxpayer money on them merely to reduce imports from China is not sensible. Good riddance if the government stops wasting time, money, and effort here. Let private players build these display fabs on their own dime. Provide reliable electricity and reliable land titles instead.

6. The headline announcement is India Semiconductor Mission 2.0. The new mission aims to move beyond fab construction to focus on semiconductor equipment, materials, and full-stack Indian IP development. A budget of ₹1,000 crore has been allocated for FY27, indicating a gradual ramp-up.

7. A related scheme is the Electronics Component Manufacturing Scheme. The Finance Minister announced that there was a high demand for this scheme and hence the outlay for this scheme was raised to ₹40,000 crore from ₹22000 crore. Here again, the government is planning a spend of ₹1500 crore in the next financial year.

To summarise, India’s semiconductor journey remains a work in progress. The assembly segment shows genuine momentum, but fab construction is behind schedule, SCL Mohali modernisation remains more promise than reality, and the design ecosystem—where India has natural strengths—continues to be let down by poorly designed incentive structures. ISM 2.0’s focus on equipment and materials is strategically sensible, but execution will be key. As with previous years, the gap between announcements and allocations, between budgeted amounts and revised estimates, tells the real story.

Defence

Between the previous budget and the latest one, there was Operation Sindoor. So, you would expect defence capital outlay to rise to account for new purchases. Though the data does show an increase in capital outlay and overall defence spending, there doesn’t seem to be any step jump in terms of procurement plans.

The chart below shows defence expenditure as a proportion of GDP and as a proportion of government expenditure. A rise in the former would indicate a move towards rearmament, while a rise in the latter indicates defence being prioritised over other governmental expenses.

As the chart shows, there is a marginal increase in the defence expenditure as a percentage of GDP over the current financial year, and no substantial change is planned for the next. Defence expenditure as a percentage of total government expenditure does show a hike.

The good news is that defence spending on equipment has found its mojo back. Capital outlay now accounts for nearly 28 per cent of total defence spending, up from a low of 23.6 per cent in FY19, back when the spending on defence pensions exceeded the spending on equipment purchases. This is also reflected in year-on-year growth rates of capital outlay as shown below. As a result, we can expect some platform purchase announcements or deliveries in the coming financial year.

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Reading and listening recommendations on public policy matters

1. [Puliyabaazi] Everyone of us has heard that there are problems with land acquisition in India. But what exactly are these problems and how did they arise? This episode with Ankit Bhatia explains it all.

पुलियाबाज़ी Puliyabaazi

ज़मीन अधिग्रहण इतना पेचीदा क्यों? Why Is Land Acquisition So Messy in India?

भारत में जमीन की लेन-देन एक जटिल मामला है। इसमें जमीन का अधिग्रहण तो और भी पेचीदा होता है क्योंकि आम धारणा के विपरीत इसके लिए कोई एक कानून नहीं बल्कि कई कानूनों का जाल है। इस पेचीदा विषय को आसान बनाने के लिए आज पुलियाबाज़ी पर हमारे साथ जुड़ रहे हैं अंकित भाटिया जिन्होंने लंबे समय से इस विषय पर शोध किया है। आज की पुलियाबाज़ी में बात जमीन अधिग्रहण कानून के इ…

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3 months ago · 1 like · Puliyabaazi Hindi Podcast

2. [Article] This essay How to spot a monopoly by Brian Albrecht is illuminating.

Insights on current policy issues in India

—RSJ

The Indian Rupee crossed the 92 level on Thursday before the central bank intervened. This kind of heavy lifting by the RBI to shore up the rupee has become a regular feature since April of last year. Foreign capital flow has been net negative in this fiscal year, and export performance remains weak, given the multiple headwinds to global trade. It is easy to brand this balance of payment weakness as cyclical, but that would be wrong.

The Rupee has been the worst-performing major currency in the past year, falling almost twice as much as its emerging market peers. There is more to this, therefore, than just the cycle hurting everyone equally. Much is made about how this round of sharp Rupee depreciation is different from the past because of strong economic growth, good fundamentals and a healthy forex reserve. And the argument therefore goes that we shouldn’t worry much about the Rupee so long as we are in the goldilocks zone, or we are an oasis of calm (take your pick of the metaphors) among all major economies in the world. So, as the Economic Survey 2026 notes:

“The paradox of 2025 is that India’s strongest macroeconomic performance in decades has collided with a global system that no longer rewards macroeconomic success with currency stability, capital inflows, or strategic insulation.”

Is this true? Or is it a convenient case of blaming the “system” and calling a difficult problem a paradox to avoid finding real solutions?

Let’s look at capital inflow. There is no doubt that all the Trump shenanigans have meant a flight to safety to the dollar from the emerging markets. This outflow has been more marked from India as it has come under direct Trump fire on tariffs, purchase of Russian oil and a delayed Indo-US trade deal, which just doesn’t seem to find the finish line. The optimists believe that once the deal is struck, a lot of capital waiting on the sidelines will flow in. I’m sceptical about it.

Firstly, the FPIs who have been net sellers for the last 12 months aren’t returning in a hurry. The net FPI outflow figures of last year mask the significant investment that came into the Indian debt market after its inclusion in global bond indices and a change in weights. That one-off won’t persist going forward, and while I sense some FPI equity investment will return in FY27, it won’t be enough to make up for the relative reduction in debt investment inflow. As much as we love listening to the homilies from global CEOs and fund managers visiting India about the strong domestic market, consumption-led growth and economic resilience, it has translated to very little real follow-through action.

We might not like hearing it, but investors view India in a geopolitical tight spot, a zugzwang of sorts, with limited manoeuvrability. The FTAs and trade deals will help obviate some of this stress, but they will continue to be thwarted by the desire across nations to revive local manufacturing, especially in strategic sectors, and protect domestic markets. This instinct is high in India, with all kinds of definitions of swadeshi being touted to justify protectionism, which will only invite a tit-for-tat response.

The other factor, possibly short-term in nature, is the FPIs favouring “AI winners” in their fund management strategy, which will weigh on their India allocation. This might not sit well with many who think there’s no reason to consider India as an “AI loser” at such an early stage of its evolution. They may have a point, but that’s not how equity capital is flowing at the moment. Building upstream AI capabilities and investing in innovation is almost impossible at this moment for India. Those costs are prohibitive, and there is already an asset bubble building there with insane valuations. Interestingly, the Economic Survey concurs with this:

”Attempting to close this gap would involve prohibitive fiscal costs towards what is becoming an unsustainable approach to AI development.”

The problem is figuring out what the downstream leadership in being an “AI consumer” in various sectors actually means and how that translates to net value creation. This clarity will take time to emerge. It is possible that India might create firms, or its traditional IT services strength will translate to dominance in the “AI user” economy worldwide, but foreign capital isn’t going to be convinced about it anytime soon.

On FDI, things aren’t different. There is good momentum in areas where global firms are pursuing a ‘China+1’ strategy and diversifying their supply chain and manufacturing base. This is a classic case of India being the best alternative to China in terms on cost and talent at scale. The need for India to integrate with the global supply chain and make it easier for such firms to set up plants in India is understood.

But beyond this, there are challenges. There’s been a gradual erosion of confidence among global companies that serve the Indian domestic market to build further capacity in India. The increasing monopolistic nature of multiple sectors in India that are dominated by the same set of 2-3 players with local knowledge and ability to work policy in their favour has meant a certain reluctance for foreign capital to enter those sectors.

The continued expansion of the footprint of these conglomerates across multiple sectors has meant a gradual closing of the doors for MNCs to invest in expansion. These domestic conglomerates by themselves aren’t keen on entering global markets and increasing India’s export competitiveness. They are happier doing the easier job of muscling their way into other sectors within India and using their clout to buy out or outprice existing local players.

The MSME sector, which has done well in the past four years, helped by the formalisation of credit (Udyam and GST information have been game changers for credit offtake), has benefited from the diversification away from China by global companies. But there is a limit to this beyond which the expectation will be for these companies to scale big and build significant capacity.

The problem is that China hasn’t remained still, watching this diversification of the supply chain away from it since COVID-19. The results of the significant increase in capacity during this time are being seen now, with China ramping up its production and outpricing the nearest competitors in multiple industrial segments. The record $1 trillion plus record surplus that it has seen in the previous quarter is the clearest sign of this.

Now, which MSME manufacturer in India wants to take a long-term capex investment and risk to build a large factory and then get totally outpriced by China in future? It is easy to say that Indian corporates have been given tax cuts, PLIs and faster credit, so it is now their turn to repose faith and increase capex. But who wants to be saddled with debt on their balance sheet and a rampaging China dumping their goods all around the world?

There are other factors involved, too. With the US wrecking the global trade order it built over the past eight decades, there is a belated recognition of the merits of being self-sufficient among its so-called middle power allies. Defence budgets are being shored up, energy self-sufficiency is being explored, and manufacturing is being revived.

This turn to swadeshi worldwide has given its Indian proponents new wings. There was a hint in the past six months that India was unwinding some of the trade barriers it had put up in the past six years in the form of duties and QCOs on intermediates, which would eventually help with exports. But I suspect the global turn to atmanirbharta can easily be used to name every other sector ‘strategic’ and then raise trade barriers on imports to protect it. Eventually, that will become a tax on exports and reduce the competitiveness of domestic firms.

So, the business of defending the rupee won’t stop unless we address the twin and interlinked challenges of the flow of foreign capital and raising exports. These challenges, as I have pointed out above, are more structural than cyclical. The impact of supporting the Rupee isn’t only about depletion of forex reserves and a steeper import bill that brings along inflation. The real problem of defending the Rupee is how much of liquidity is sucked out of the system to support it.

This is what has happened in the past nine months. The RBI has actively injected liquidity into the system with multiple open market operations (OMO) buying G-secs from banks. But that liquidity has been sucked out by its defence of the Rupee during this time. The tight liquidity will bite the banking system. It hasn’t done so far this year because, for long stretches, the liquidity has been positive. But it eventually will, and what it will do is starve the system of credit. We have seen this through 2024-25, where persistent liquidity deficit killed credit offtake and that led to a slowdown in growth.

The system liquidity is quite tight already, and given the pressure on the Rupee, I foresee a vexed challenge on hand for RBI to keep its promise of durable surplus liquidity to support credit growth while managing to keep the Rupee under 92. The only real solution is for capital inflow to come back. That will take time. The India consumption story is often taken for granted. It isn’t. It runs on the wheels of credit, which is greased in turn by system liquidity. Take that away, and it will sputter.

There’s an old joke about statistical average - that of your head being on fire while your feet are on ice, but you shouldn’t complain since your average temperature is just right. As much as I’d like to believe India is in the Goldilocks zone of being at the just right temperature, there’s a possibility that we are misreading the average.

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Global Policy Watch: Locking Your Geniuses in Datacentres

Global issues relevant to India

—Pranay Kotasthane

Daro Amodei, the CEO of Anthropic, posted an important essay earlier this week. Titled The Adolescence of Technology, the novella identifies four major risks posed by powerful AI systems and goes on to identify defences against them. It is an influential essay worth reading and thinking through.

But for this post, I want to focus on the geopolitical aspects. Amodei is in the camp that strongly bats for chip export controls against China, and for the US “arming other democracies” with AI but doing so carefully and within limits. This paragraph summarises his view on how to maintain the lead against China:

First, we should absolutely not be selling chips, chip-making tools, or datacenters to the CCP. Chips and chip-making tools are the single greatest bottleneck to powerful AI, and blocking them is a simple but extremely effective measure, perhaps the most important single action we can take. It makes no sense to sell the CCP the tools with which to build an AI totalitarian state and possibly conquer us militarily. A number of complicated arguments are made to justify such sales, such as the idea that “spreading our tech stack around the world” allows “America to win” in some general, unspecified economic battle. In my view, this is like selling nuclear weapons to North Korea and then bragging that the missile casings are made by Boeing and so the US is “winning.” China is several years behind the US in their ability to produce frontier chips in quantity, and the critical period for building the country of geniuses in a datacenter is very likely to be within those next several years.³⁵There is no reason to give a giant boost to their AI industry during this critical period.

Geopolitics or chips doesn’t seem to be the essay’s strong suit. First, GPUs are nothing like nuclear weapons. An Nvidia H200 GPU is the size of a mithaai dabba and can be easily transported, smuggled, or accessed remotely. Moreover, the vast majority of applications of the H200 GPU are in the private sector. Unlike nuclear weapons, they can be ordered by any company that has $ 30,000 to spare. And unlike nuclear weapons, which only have destructive uses, GPUs are important for companies to take advantage of the many benefits of AI that Amodei himself lists.

More fundamentally, such arguments suggest America’s technologists and analysts have much less confidence in the American technology ecosystem than I do. For if you think GPUs are the thing that is stopping China from getting ahead of you, you're already cooked. You’ve lost the game because, given their widespread commercial applications, a motivated adversary will always find ways to access these chips regardless of your sanctions.

Consider the case of the H200 chips. There are roughly 700,000 such chips in Nvidia’s inventory. It would roughly take 2000 of these to train a DeepSeek-v3 model in under two months. There’s just no way of preventing the PLA or CCP from accessing 2000 mithaai dabbas from other countries if that is the only thing preventing them from gaining access to the supposed game-changing technology of the century.

To some extent, I can understand the logic behind targeted restrictions on China's purchase of advanced semiconductor manufacturing equipment. These are huge machines used only by a handful of companies worldwide. They are easy to track and control. But export controls on chips, really?

I thought the US's strength was its excellent technology ecosystem, its ability to attract the world's best talent, and its power to mobilise capital in innovative ways. Instead of doubling down on these strengths, the squabbling over chips indicates weakness and insecurity, not confidence. China restricts rare earths; the US restricts chips. What's the difference between the two then?

Sure, blocking chips can buy some breathing time for American companies building AI models. That perhaps is the primary motivation. Fair enough. But if the stated goal is to prevent an adversary State from accessing frontier AI, chips are hardly the bottleneck. Just as you can make a less-efficient motor without Chinese rare-earth magnets, the PLA can make powerful military AI systems using slightly less-powerful chips.

The other unsaid part of Amodei’s argument is that it subtly advises the US government to control the flow of chips not just to China but also to other capable democracies. As he writes:

I am supportive of arming democracies with the tools needed to defeat autocracies in the age of AI—I simply don’t think there is any other way. But we cannot ignore the potential for abuse of these technologies by democratic governments themselves. Democracies normally have safeguards that prevent their military and intelligence apparatus from being turned inwards against their own population,³¹ but because AI tools require so few people to operate, there is potential for them to circumvent these safeguards and the norms that support them. It is also worth noting that some of these safeguards are already gradually eroding in some democracies. Thus, we should arm democracies with AI, but we should do so carefully and within limits: they are the immune system we need to fight autocracies, but like the immune system, there is some risk of them turning on us and becoming a threat themselves.

All good words. Who could disagree? Except when you think that the “we” here means the US administration, which is currently hell-bent on antagonising major democracies like the EU, India, and Canada. The argument for “arming” democracies is inherently political and will depend on US policy orientation, which is hardly predictable at the moment. Thus, a much better approach is to keep the State at bay and leave GPU buy-sell decisions to companies alone. AI—like other general purpose technologies—is not a finite, zero-sum game. Don’t make it one.

PS: I wonder how this essay’s arguments would change if and when Amazon (a major investor in Anthropic) allows the physical sale of its own Trainium chips. Would it be okay to lose out on the lucrative China market? I guess not.

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Matsyanyaaya: What Kind of a Great Power Would India Be?

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

With Trump decimating American authority, the mask is off. Many past American misdeeds around the world are coming to light, and the US is fast losing its narrative superiority. In such a scenario, a question worth pondering is: hypothetically, would India behave any differently if it had the power of the US? Are all great powers destined to misbehave, or is the US an outlier? It is a hypothetical question, and India is a long way from becoming a great power, but there are no taxes yet, on letting our imagination run wild.

A crude way to answer this question is to look at India’s conduct in a domain in which it is already a superpower and see how it has deployed its influence. And there is one domain that gives us a preview of India’s dominance: cricket.

India’s supremacy in cricket is structural. The BCCI receives approximately 40 per cent of the ICC’s annual revenue. England, the next highest, gets just 7 per cent. India accounts for roughly 85 per cent of the ICC’s global television revenues. The BCCI is wealthier than all other cricket boards combined. If international cricket were the international order, India would already be the hegemon. So what has it done with this dominance?

On the positive side, India’s support for Afghanistan's cricket stands as a genuinely generous act of sporting diplomacy. When Afghanistan needed a home, the BCCI provided one—the Shaheed Vijay Singh Pathik Sports Complex in Greater Noida became their home ground in 2016, followed by venues in Dehradun and Lucknow. Former Indian cricketers coached the Afghan national team in various capacities. India contributed to the construction of a cricket stadium in Kandahar. Even the Taliban’s spokesman publicly thanked India for its “continuous help in capacity building.” Similarly, I am sure the BCCI has contributed to cricket in Nepal and in Bangladesh a couple of decades ago.

This is what India’s benevolent hegemony could look like: using structural power to elevate those who have none.

But here’s the thing: beyond Afghanistan, the benevolence largely disappears. Consider what India has not done with its unmatched power. There are 23 African nations that are members of the ICC through the Africa Cricket Association. Kenya once played a World Cup semi-final. But India's engagement with African cricket development has been negligible. There is no visible systematic effort by the BCCI to transform cricket in regions where the sport could genuinely grow. BCCI itself is obsessed with the traditional “big four” of cricket—Australia, England, South Africa—and what happens between them.

If anything, India’s conduct in the past year reveals something more troubling than mere neglect. It reveals the instinct to weaponise sporting dominance. At the Asia Cup in September, the Indian team refused to shake hands with Pakistani players across all three matches. The no-handshake policy has since been extended to India’s women’s and Under-19 teams.

The Bangladesh situation is even more instructive. In January 2026, the BCCI directed Kolkata Knight Riders to release Mustafizur Rahman, due to “developments all around”—a euphemism for deteriorating political relations. Bangladesh responded by banning IPL broadcasts and refusing to play T20 World Cup matches in India. Former Australian cricketer Jason Gillespie asked why Bangladesh couldn’t be afforded the same accommodation India received in the past. He was trolled and had to take the post down.

This use of such power can be seen through an analytical framework. What India is losing in the cricketing domain is not power, but authority. Authority is power plus legitimacy. Legitimacy disarms others, making them willing to accept your leadership without coercion. The US, after the fall of the USSR, had both. What accelerated American decline was the erosion of legitimacy through unilateral actions that alienated allies.

India’s cricket dominance is following a similar trajectory. Though other cricketing boards might not make it explicit, they would be considering forming their own plurilaterals to counter Indian power.

Perhaps every great power behaves in ways we won’t like, but different powers misbehave differently. China’s mercantilism is extractive; America’s hegemony was often militaristic; India’s cricket dominance is proving to be neighbourhood-obsessed.

The point is that India is still not a great power in domains that matter far more than cricket—hard security, economic might, technological capacity. We still have time to shape how India will turn out. The current cricket conduct is worrying precisely because it is a preview. If India deploys neighbourhood obsession, thin-skinned nationalism, and institutional capture at this scale for a sport, imagine what happens when the stakes are genuinely high. This cannot be said about the US or China anymore. Their characters are mostly formed. India’s is still being written. Therein lies some hope.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Puliyabaazi] In our next episode, we discuss ’s analysis of the four new labour codes in India, and the importance of flexibility in working hour regulations.

2. [Paper] This is a foundational paper on reservations by Madhav Khosla and , which advances a theory of caste formalism. These are the hero lines:

   One of our principal aims is to advance a theoretical argument about what we

   term caste formalism. This formalism manifests in at least two ways. First, caste operates as a rigid classification scheme, presuming causal effects on individuals without further specification. This detachment of group membership from its causal impact immobilizes or prejudges the effects of caste on individuals. It treats caste as the dominant explanatory variable for many different conditions—to which various castes can appeal—overshadowing other factors. The most visible manifestation of this is that mere lack of proportional representation is increasingly a measure of backwardness, and both the under-and-overrepresentation of a caste group provokes suspicion. In this way, the turn to caste membership in and of itself has universalized a structural theory of caste-based discrimination. There is neither place for individual experiences in the causal narrative that explains social outcomes nor for group experiences that may not be reducible to caste.

   Secondly, purely formal terms define the policy instrument of affirmative

   action, namely achieving numerical quotas. One measures the success of the

   policy by the attainment of these quotas. If a caste group secures a designated

   number of seats, the mechanism is a success. Just as the lack of representation is a signifier of backwardness, the achievement of representation provides the suitable remedy. This formalism reduces the ideal of substantive equality to a principle of equal representation on the basis of caste for all caste groups, offering representation as the answer to diverse concerns such as inequality, backwardness, and discrimination. The current framework no longer adequately attends to the mechanisms that produce exclusion—specifically, the link between discrimination and inequality—and it collapses the distinctions between different kinds of harms and disadvantages that citizens might suffer. In doing so, it not only bears an arbitrary character but also risks obscuring persistent practices of discrimination, even within Dalit communities, by prioritizing representation over other forms of redress.

3. [Blog] An Analysis of the India-EU Technology Action Agenda, with recent developments serving as the backdrop.

Insights on current policy issues in India

—RSJ

With the customary year-end break and the beginning of the year predictions done in the last two editions, it is time to look at what else has been happening since the start of the year that doesn’t involve Trump. No easy task given the incredible talent of the man to generate news cycles out of thin air, but there’s more happening in India that is worth a conversation or two.

The first thing I was interested in was the trend in Q3 2026 results of listed companies, coming on the back of the GST rate cut boost that came into effect in late September. During the festive period (most of October), there were multiple media reports quoting unnamed company sources that suggested a massive uptick in consumer goods, durables, and automobiles. Biggest ever festive season, unprecedented booking numbers, a hundred per cent growth etc were the headlines thrown about then.

With about 200+ companies having published their Q3 results as I write this, I guess we have a better picture of the numbers now. Revenue growth on an aggregate basis has been about 9 per cent y-o-y, which is a couple of points above what the medium-term trend had been so far. Aggregate profits came in weak at 4 per cent on account of supply chain disruptions, price impact of GST cuts and the adoption of the new labour code, which increased wage costs. Parsing through the data, the FMCG sector growth was up about 7 per cent y-o-y, which was actually lower than the trend in previous quarters. Retail same-store growth was also 7 per cent, and credit card spending after the jump in October actually ended flat by the end of December. Passenger vehicles and two-wheelers are the only segments that saw a mid-teen growth number, which was expected, given that September was a washout as people paused their purchases.

Frankly, I was expecting much stronger numbers than these. Clearly, the price elasticity assumption that drove the enthusiasm for GST rate cuts has not materialised. Volume increase hasn’t offset the price cut to the extent expected. I will wait for the results of the larger FMCG companies (including HUL), expected next week, but I suspect the data won’t change materially. Will the 9 per cent revenue growth seen so far sustain itself in Q4? Unlikely, given the trend in December and the commentary that I have heard so far, where people pay lip service to GST rate cuts but then give innovative answers to why the volume growth has been tepid (the most creative reason was from a large retailer who blamed pollution in northern India for poor volumes).

In the last edition of October, I had looked at the festive season demand uptick and written this:

“My sense is that when the dust settles on Q3 and we get a final picture of sorts, we will find a 3-4 per cent or so increase over the long-term trendline on consumer growth. It is a nice uptick, but not the kind that’s being suggested on a standalone basis without the benefit of a long-term view. Whether this 3-4 per cent sustains itself in Q4, we will have to see…”

Given the evidence so far, I think the 3-4 per cent increase in consumption growth that I expected was a tad optimistic. I suspect it is more likely to be about 2 percent and I don’t think it will sustain itself beyond Q4. I expect the annual budget on Feb 1 to have announcements to further boost consumption in another attempt to get the flywheel going. The real challenges continue to be slow real wage growth and weak job numbers, which has been the case post-COVID-19. The tactical boosts are welcome, but won’t solve the structural issues hurting consumption.

The other area to take stock of is India’s exports to the US since September, when the 50 per cent tariff came into effect. Four months is a good period to get a sense of what’s happening here. Did Indian exporters take a hit on their prices to share the tariff burden (as Trump expects), or were the US buyers and retailers forced to digest tariffs to not pass on the price increase to the US consumers or did the retail price for US consumers go up as the tariff increase got passed on to them (as a consumption tax like traditional economics predicts)?

A recent report from the Kiel Institute for the World Economy, “America’s Own Goal: Who Pays the Tariff,” has an interesting case study on Indian exports to the US since September 2025 that is quite illuminative. The report states:

“India provides a particularly valuable validation case. Like Brazil, India faced sharp tariff increases in August 2025: a 25% tariff on August 7, raised to 50% on August 27. But India offers something Brazil does not: detailed export customs records capturing FOB (Free on Board) prices at the port of departure. This data source is invaluable because it eliminates potential confounds. When we observe US import prices, we cannot distinguish changes in exporter prices from changes in shipping costs, insurance premiums, or other trade costs that might vary systematically with tariff policy. But FOB export prices are recorded before the goods leave India, capturing the price received by the Indian exporter net of all international trade costs.

If Indian exporters were absorbing part of the US tariff, we would expect to see their US-bound prices fall relative to shipments destined for other markets (Europe, Canada, Australia) that did not face tariff increases. This is precisely what we test.

We compare Indian exports to the US against Indian exports to the EU, Canada, and Australia—destinations that did not impose new tariffs on Indian goods during this period. The pattern is striking: export unit values to the US remained unchanged relative to other destinations. The volume effects, however, were substantial. Export values to the US fell by approximately 18–24% relative to other destinations, and quantities fell by similar magnitudes. Indian exporters responded to US tariffs by shipping less, not by cutting prices. They adjusted on the quantity margin, not the price margin.” (the paper can be found here)

My personal experience in dealing with exporters in the past quarter is that many among them have found alternative routes to reach the American shores, exactly like China has used intermediate sites in Vietnam and Malaysia to have its exports flow uninterrupted despite tariffs and dumping charges. So, while the value of exports to US fell by 18-24 per cent relative to other destinations, it is eventually finding its way to the US.

Global trade channels are so intermeshed and complex that traded goods, like water, find a way to flow along the pressure gradient. These alternative channels may have increased the costs for Indian exporters (every intermediary will take its cut for the value added), but it’s better than a 50 per cent tariff any day. Also, most exporters believe these tariffs are a short-term phenomenon which will go away with the trade deal or Trump may change his mind one day. So, sticking to the price makes sense rather than cutting it now and then trying to increase it later (always a difficult thing). So, the Indian exporters have taken some volume hit (by reducing their exports to the US) and some margin hit (finding alternative routes to send their goods) while navigating the tariff. Indian exporters will be fine but, as the paper suggests, US consumers will eventually face inflation.

Lastly, we have a new retrospective taxation case in India. As the Business Standard reports:

“The Supreme Court on Thursday ruled against US-based investment firm Tiger Global in its challenge to taxation on a major stake sale in ecommerce firm Flipkart. The apex court said tax authorities had correctly rejected Tiger Global’s application seeking exemption from capital gains tax arising from the transaction.

According to Bar and Bench, the court held that once a transaction is found to be prima facie structured to avoid income tax, the statutory bar under the proviso to Section 245R(2) of the Income Tax Act, 1961 applies. In such cases, tax authorities are not required to examine the merits of taxability.”

Quick background here. Till April, 2017, Indian law and tax authorities had held that if an investor had a valid Tax Residency Certificate (TRC) from Mauritius, they could avail the benefits of a tax treaty signed back in 1983 that allowed for investors based in Mauritius to sell shares of Indian companies without paying capital gains taxes in India. The idea was to attract foreign direct investment in India. Courts usually agreed that tax planning wasn’t tax evasion.

In April 2017, the treaty was amended to align with General Anti-Avoidance Rules (GAAR) while clearly stating that treaties signed prior to that date were to be “grandfathered” that is those treaties will hold. Tiger Global had invested in Flipkart back in 2012-15 through a Mauritius-based fund. After it sold its stake to Walmart, it sought an advance ruling on tax exemption using the India-Mauritius treaty. The tax authority ruled against it, stating the structure appeared designed mainly to avoid taxes. I mean, what else was the treaty there for? Mauritius is no talent magnet for global fund managers. Anyway, Tiger went to the High Court, which rejected the tax authority’s ruling and reaffirmed the TRC and the grandfathering principle.

The Tax Authority then appealed to the Supreme Court, which agreed with them that TRC is not the final word for treaties signed prior to April 2017 if the structure is designed to avoid tax. Grandfathering is apparently subjective. Further, the Court also held that if the tax benefits arise after GAAR came into force, the old arrangement can be considered invalid.

I’m still getting my head around this logic. We are the Messi of self-goals.

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India Policy Watch #2: A Review of The Caste Con Census

Insights on current policy issues in India

—Pranay Kotasthane

In edition #271, RSJ and I put forth two differing perspectives on the implications of the caste census.

Challenging three common assumptions about the census, my view was:

The model I have in mind is that a caste-based census is a leverage point in a complex system (the Indian society), meaning that a small change in this policy can have non-linear, disproportionately large effects on the entire system. In this case, most of those effects are negative. At the very least, we must reflect deeply on the assumptions underlying the push for a caste-based census.

Given my priors, I was intrigued to find that Anand Teltumbde—a data science professor, a Marxist, and one of the most-prominent Ambedkarite scholars—was also making a somewhat similar argument in his latest book. So I picked it up for deep reading. What follows is my commentary on this book.

These lines from its preface lay out the core argument:

This books takes a sceptical stance toward the current discourse around caste enumeration. It questions the dominant assumption—shared across progressive and reactionary camps—that caste data is an unqualified good. What is often missed is that enumeration is not a neutral exercise. Like its colonial predecessor, today’s caste census risks becoming a commanding ritual—one that does not simply reflect caste ralities but actively shapes them, making caste more legible, administrable and politially salient.

Support for the caste census has become a fashionable position among progressives, but the long-term impact of the exercise deserves careful reflection…

I hope this book compels readers to confront caste not as a fact to be reconciled with but as a challenge to be overcome.

The book begins with a quick primer on the history of caste. Teltumbde is of the view that Brahminism was not the sole cause or origin of caste. It was a ‘fluid, localised and relational system’ rooted in local contexts. It was not standardised, and in any case, the lack of physical mobility meant that caste couldn’t be codified into a single universal measure. Nor were caste identities unchangeable. Through ‘temple building, ritual imitation, donation to Brahmins, or martial success,’ groups gained upward social mobility.

But it was the colonial state that bureaucratised caste. Guided by ideas of systematisation, race theory, and motivated by the principle of ‘divide and rule’, the enumeration of caste began after 1857. So while the British did not invent caste, they ‘created a caste order through text, rather than discovering one on the ground.’ The bureaucratic recognition of caste accorded it semi-permanence and froze the caste status of communities in exchange for official recognition or state-provided benefits.

Such was the power of this categorisation exercise that even after independence, caste continued to be further bureaucratised rather than move towards annihilation. While one scheduled caste member of the Constituent Assembly called for the abolition of caste, not just untouchability, the other 31 SC members did not press for this. Teltumbe speculates it was because ‘they feared that the abolition of caste would jeopardise reservations.’ On how to abolish caste, he goes on to make an interesting claim that:

the abolition of caste is quite straightforward in principle. All it requires is a legal and social prohibition of caste-based distinctions in both state administration and civil society. Had the state pursued this rigorously, outlawing caste-based practices and launching mass educational efforts against caste, the system could have been dismantled within a generation or two.

I am not sure if outlawing a social practice could have ended it. In practice, it would have meant citizen groups tattling to the State against each other. There would inevitably have been false cases motivated by personal feuds. This would have increased State power and further decreased bridging social capital between people of different caste groups. Nevertheless, I am happy to reconsider my view on this point.

Moving on. Once caste was implicitly accepted and reservations were enabled on that basis, the ‘weaponisation of reservation’ became imminent. Teltumbde says that using the vague social and educational backwardness as a criterion for identifying backward classes paved the way for ‘future casteization of the society’, as every caste in a poor and hungry India could lay claim to backwardness. Annihilation of caste was annihilated at that moment. In a sharp paragraph, he writes:

the institutionalisation of caste under the rubric of social justice came without a sunset clause: no timeline, metric of success or mechanism for dismantling the very identities it mobilised for redress. Instead of treating reservations as temporary correctives within a wider project of universal advancement, the Indian state has normalised them as permanent fixtures, cementing caste as a permanent axis of identity and state action. This constitutional logic has also conditioned intellectual and policy imagination. Most public discourse and academic work on equality in contemporary India starts with the assumption that caste is immutable, and hence the only feasible path to justice is greater caste-based differentiation. In a strange twist, in public struggles, the assertion of identity and difference—often at the level of sub-castes—has come to be celebrated as a means of fighting caste. The proliferation of sub-quotas, caste censuses and intra-reservation classifications institutionalises this framework. The idea of an India without caste has been rendered not just utopian but unthinkable in dominant paradigms of political thought.

After this brave stance questioning the conventional logic behind the caste census and caste-based reservations, the book veers into a confused territory. I guess there’s a limit to how much you can agree with a Marxist scholar. Here are some points which had me scratching my head:

1. Having taken a stance against the ‘weaponisation of reservation,’ the author is also against the Supreme Court’s 50 per cent cap on total reservations. He says such a limit ‘effectively reserves half of public resources for elite castes.’ I was dumbfounded because obviously, it is the other way around. Anyone can choose to compete in the general category, and it isn’t reserved for specific castes. This is like saying a system without any quotas in other countries reserves 100 per cent of seats for the elite castes. I agree that the 50 per cent cap is arbitrary (we wrote about it here), but I also don’t see how expanding caste-based reservation to 80 per cent would make caste less salient, as the author wants to do. In fact, it will raise the stakes further for sub-categorisation.

2. Apart from the principle-based reasons listed by the author above, his major concern seems not just that the caste census is bad, but that the idea is being implemented by a political establishment he doesn’t think has the right intent. He thinks this could be used to justify the abolition of caste-based reservation in favour of expanded Economically Weaker Section (EWS) reservation. This again had me confused. If we want to move beyond the adoption of caste in governance, wouldn’t an affirmative action based on a composite score of economic and social inheritance be an improvement over the status quo?

3. Launching a tirade against the ‘neoliberal’ system, Teltumbde’s solution—directly contradicting his own ideas in the book—is to extend reservation to the private sector. Apparently, because the private sector leaches off public resources—’ land, infrastructure, savings, subsidies, human capital.’ I will leave it for readers to react to this claim, but this was perhaps the book’s weakest point. Marxism (or any ‘ism’) places an upper cap on thinking logically.

4. To give credit where it’s due, the author proposes that reservations should continue, but with a major update: we should adopt a dynamic ‘creamy layer’ exclusion, which dampens an individual’s access to reservations if their family has already utilised it in the past. I again found it to be impractical in implementation—tagging a person’s reservation score with their family’s past usage of reservation benefits will increase friction, open up multiple cases contesting reservation claims, and open up a new front for caste-based politics.

These disagreements aside, the author concludes that reservation policies can serve only as a final backstop, while the main solution is universal provision of education, healthcare, and livelihood opportunities. While I disagree on what this ‘universalisation’ means, we can agree that we must hold governments accountable on all three counts.

I encourage you all to read the book and reach your own conclusions. The editing is sloppy, and the logic can be frustrating at times. Nevertheless, it is a brave polemic with fresh ideas that questions the mainstream narrative while always being sensitive to the concerns of the disadvantaged.

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India Policy Watch #3: India’s Critical Minerals Strategy Has a Mine-Sized Gap

Insights on current policy issues in India

—Shobhankita Reddy and Pranay Kotasthane

(An edited version of this article first appeared on the Indian Express website on Jan 19 with the title, India is talking about critical minerals. But do we have a plan?)

Less than 20 per cent of India’s vast geological potential has been explored, and much of this has been carried out by governmental agencies like the Geological Survey of India. It has been tasked with conducting 1,200 exploration projects by 2030 under the National Critical Mineral Mission. Yet realising India’s mineral resiliency goals is an uphill battle, as the global average time from discovery to first production in mining projects, according to the International Energy Agency, is over 16 years - with Indian projects often faring worse amid regulatory challenges, low private-sector investment, and several stalled projects.

India has a mine-sized gap in its mineral strategy. In many ways, the policy changes made since the 2012 Coalgate scandal continue to have detrimental effects for the industry today. India’s recent attempts to secure critical minerals must grapple with the mining industry’s long-standing trust deficit and historical baggage.

The Context

Following the 1991 economic liberalisation, the National Mineral Policy in 1993 and the 1994 amendments to the Mines and Minerals Development and Regulation (MMDR) Act, 1957, sought to expand the role of the private sector and fuel FDI by allowing any company registered in India to apply for a prospecting or mining license. The period between 1998 and 2008 saw a boom in activity.

Subsequently, a policy of First Come, First Served (FCFS) was put in place to allocate mineral blocks. A 2012 report of the Comptroller and Auditor General of India on coal block allocations between 2004-2009 cited a notional loss of ₹1.86 lakh crore to the exchequer, revised from a previous estimate of ~₹10 lakh crore, owing to the government’s failure to employ competitive bidding.

In its judgement on the 2G spectrum license allocations in 2011, the Supreme Court (SC) held the FCFS method to be flawed, prone to manipulation and favouritism, and cancelled 122 issued telecom licenses. It later opined that auctions were a preferable method insofar as the objective is revenue maximisation, but acknowledged that the “common good”, not revenue maximisation, must be the guiding principle behind resource allocation. The court held that the primary test of the method employed is that it be fair, transparent and in pursuit of healthy competition. 204 out of 218 coal blocks allocated since 1993 were deemed to have failed this test, and cancelled.

As a result, the 2015 amendment to MMDR replaced the FCFS method of granting mineral concessions with the auction system. About 66,000 applications pending with different state governments from the pre-2015 regime got automatically cancelled. An additional National Mineral Exploration Trust (NMET) contribution, charged at 2% of royalties and now increased to 3%, and a District Mineral Fund (DMF) levy were introduced to fund exploration projects and support districts affected by mining activities, respectively. Deeming the pre-2015 allocations non-competitive, a higher DMF of 30% of royalties (compared to 10% for newer licenses) applies to them.

Auctions are conducted in a two-stage process with progressively competitive bidding, where the highest bid from the first stage serves as the floor in the second stage. The highest percentage bid (over a minimum threshold) of the value of the produced mineral payable to the government wins.

Auction data from 2015-2021, however, indicates that this change did not spur any meaningful mining activity. For instance, several auctioned blocks were already operational (not greenfield) and triggered by a lapse of certain leases in accordance with MMDR 2015, a mere procedural feature.

Furthermore, several auctions saw extremely high bids, even exceeding the estimated value of the mineral reserves, skewing the bidder profile toward captive miners able to transfer mining losses to downstream activity rather than merchant miners who sell the ores in the open market. Additionally, high auction bids, combined with statutory payments such as NMET and DMF, along with corporate taxes and other forest- and water-related taxes, are sure to make mining economically unfeasible. Consequently, this would either hinder the operationalisation of the mine or skew the costs of downstream products for the economy.

The 2010s also saw several blocks previously explored under reconnaissance or prospecting licenses surrendered to the government due to a combination of land acquisition and clearance delays, environmental protests, economic and technical challenges. For instance, Rio Tinto, a British-Australian multinational company that had led the successful, milestone greenfield exploration of the Bunder diamond deposits, abandoned the mine in 2017 after investing $90 million and 14 years. This was auctioned off by the Madhya Pradesh government to the Aditya Birla Group in 2019, which continues to await approvals to start operations. Rio Tinto has not invested in India since.

A decade later, it is this track record and the burden of a tarnished reputation that India must shed to unlock its vast mineral reserves.

Recent Developments

The 2023 amendment laid emphasis on critical minerals, and policies have since rapidly improved to streamline processes. Six minerals were removed from the list of “atomic” minerals, allowing private sector participation. The cap on the sale of minerals in the open market by captive mines has been removed, and the NMET, in its rebranded form, invests in international projects. These are positive changes, but several bottlenecks remain.

A separate exploration license (EL) regime was introduced for prospecting and reconnaissance. This was meant to attract junior explorers focused on specialised technology work, requiring high risk at the early stage, to act as feeders into mining operations granted via auctions, while avoiding vertical integration in the sector. However, exploration activity is incentivised by a preferential right to mine which the EL does not offer. Several jurisdictions also offer junior explorers tax rebates to offset exploration losses. The current system in India offers a 50% cost reimbursement, capped at ₹20 crore, split across six stages of the exploration process, which is too little, when compared with the ~₹150 crore exploration costs. The long wait for production, contingent upon which the EL holders earn revenues, will deter prospects.

Way Forward

Exploration is the leverage point, not mining itself.

One way to remodel the current EL regime may be to approach critical mineral extraction as a semiconductor fab construction project and provide upfront capital support on a pari passu basis. The funding needed for this should be sourced without imposing additional burdens on mining firms.

Further, despite GSI’s investments in early prospecting, the UNFC resource classification followed by India is proving inadequate to distinguish between varying grades of ore and their economic viability and mining feasibility, contributing to low auction uptake. India must seek to transition to a system such as Australia’s JORC in alignment with international norms.

Secondly, the two-stage auction process with iterative bidding should be converted to a single, sealed-bid process to avoid overbidding.

And finally, while the royalties on several critical minerals have now been rationalised to 2-4%, the royalties on major minerals remain high, resulting in an effective tax rate for mining companies in India of 60-65%. While the system should have progressed towards lowering this, the SC in 2024 held that royalty on mining is not a tax and upheld states’ power to levy additional taxes on mining activities, overturning a previous 1989 judgement. The ruling’s implications for state demands were made retrospectively applicable from April 1, 2005. Payments are due starting April 2026 and staggered over a period of 12 years. This is characteristic of an extractive state, and needs revision - especially because royalty rates had been steeply increased since 1992 in light of the 1989 judgement.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Puliyabaazi] An in-depth discussion on various facets of the gig-work debate.

   पुलियाबाज़ी Puliyabaazi

   Policy Perspective On Gig Work: नौकरी के नए मौके या श्रमिकों की मजबूरी?

   Quick Commerce के इस दौर में प्लेटफॉर्म और वर्कर का रिश्ता कैसा होना चाहिए? क्या वर्कर के पास वाकई अपनी मर्ज़ी चलाने की ताकत है? क्या इस सेक्टर में ‘Protectionist’ नीतियां लाने से कामदारों की मदद होगी या उनका नुक्सान? तो चलिए, चाय की प्याली उठाइए और शुरू करते हैं आज की पुलियाबाज़ी।…

   Listen now

   4 months ago · Puliyabaazi Hindi Podcast

2. [Paper] We have a paper arguing that India should double down on rare earth recycling. It proposes policies that can make urban mining of rare earths a reality in India. If these policies are implemented, the paper estimates that recycling can meet 35% of India's rare-earth oxide needs over the coming decade.

3. [Article] The latest round of purges in the PLA is making heads turn (and roll). Here’s an excellent Eye on China post by which will bring you up to speed.

   Eye on China

   The Rule of The Zhangs Is In Jeopardy

   Guarding the Great Wall: Trouble Strikes Too Close To Xi…

   Read more

   4 months ago · 9 likes · 2 comments · Anushka Saxena

4. [Article] and have another excellent take on the Tiger Global taxation case.

Insights on current policy issues in India

—RSJ

The usual routine for the first post of the year is my list of predictions. This is a bit of an indulgence. But like all indulgences, I love doing them. There isn’t any science to them, nor are these so specific with binary outcomes that you can truly gauge how accurate you were at the end of the year.

Over the years, however, I have tried to be more specific with predictions with a tighter range of figures wherever possible and avoided extrapolating a trend to arrive at a prediction or two. There’s a pleasure in looking at trends and then taking an imaginative, bucking-the-trend leap about where a thing or two will end up. But that was when things were normal and boring. And, when peering into the future brought a minor frisson of excitement into my boring life.

We live in the age of Trump now, where daily events and announcements are such sharp departures from the past that you can only shake your head in disbelief and update your priors. This may seem like making predictions daunting. On the contrary, I think it makes them more fun.

So, I had more than my usual share of fun in coming up with the ten predictions for 2026. There’s only one key difference about this set of predictions from those made in previous years. In the past, I tried to keep my predictions individually distinct but mutually compatible. Simply put, the consequences of one prediction, were it to come true, wouldn’t negate the other predictions. I have done away with this kind of compatibility. This is because Trump is shaking up geopolitics in a manner that all bets are off on what this year could bring in terms of one-off events. Any of these one-off events, if they come true, could obliterate every other prediction about the economy or the market.

With that out of the way, here are my somewhat specific predictions for 2026.

1. Almost every fear that the traditional liberals have now about Trump upending the post-Cold War global order will come true this year. This includes the US engineering at least three more regime changes. My guesses are Iran and Cuba, apart from Venezuela, of course. I had this prediction even before Maduro’s evacuation. Further, Trump and Vance will bully Denmark and the EU into ceding significant but not full control of Greenland while coming within a hair’s breadth of using the military option there. And finally, this will mean the end of NATO as we know it, and I won’t be surprised if he imposes an embargo on federal funding for NATO until some of his other absurd demands are also met. I’m being conservative here about the possibilities. The Trump administration loves spectacle, projects its domestic insecurities onto the world (especially Europe), expecting them to act in the MAGA way and can spin any act, however absurd, as being America First. This is the recipe for more madness.

2. Outside of these US-led interventions, things will be much quieter in the rest of the world, unlike the belief that the US, Russia and China agreeing to and carving out their spheres of influence will lead to more military interventions. I don’t see China doing anything tangible on Taiwan beyond the usual optics of naval exercises around it or involving itself in fresh territorial disputes in Southeast Asia or India. It needs access to markets to continue to keep its export engine chugging, and it can ill-afford political clashes and embargoes. China hasn’t shown even an iota of interest in protecting its “allies” (Iran, Venezuela) and challenging the US. All it wants this year is to let its exports rise unfettered and get the GDP growth back to 5 per cent. At least 2026 isn’t going to be the year for China to indulge in geopolitical muscle flexing. Something similar holds true for Russia, too. It will find a way to close a deal with Ukraine because it can’t afford to have more tightening of screws on its economy or further commitment of Western Europe to arm itself and Ukraine. Barring Iran, where I predict a regime change, West Asia will be quieter too. Netanyahu will focus on winning the elections to stay out of prison, and Saudi Arabia and the UAE will be busy whitewashing their reputations and taking away business and investments from the rest of the world.

3. Surprisingly, in 2026, Europe will buck the trend of right-wing parties gaining ground in elections. I think the overt support from the MAGA crowd plus the US national security strategy document published last month that openly seeks to support “patriotic European parties” and “to help Europe correct its current trajectory” will backfire. The firm stand by the current leaders to Trump’s bullying, to China’s dumping and promised manufacturing stimulus will steal some of the thunder of the right. The result of this will be seen in their underperformance across the board: of Farage’s Reform UK in the midyear local elections, AfD losing what seems like a slam dunk now in state elections in Germany and similar setbacks in France and the Netherlands for right-wing parties. And, in perhaps the most visible sign of this, Orban will lose in Hungary this April.

4. On the global economy, things will be fairly stable because, as I mentioned back in October 2025, we have gone past peak Trump. Nothing surprises the market anymore, and every possible geopolitical lurch is already priced in. The dollar will continue to weaken with all major currencies as investors will continue to derisk from Trump volatility, long-term US deficit math and inflation challenges. Trump will continue to impose random tariffs based on his whims, but the average US tariffs that are currently at about 14 per cent will stabilise within a 100 to 200 basis points from here.

5. The independence of the Chair of the Federal Reserve will be compromised as Trump will hire a lackey to replace Powell. But this won’t make any medium-term difference. Inflation is the single biggest risk to any thesis about the US economy for 2026. My prediction is that it will continue to rise and go beyond 3 per cent by year-end as the real impact of tariffs flows through the system. A new Fed Chair who will cut rates to keep Trump happy will soon have to deal with even more inflation that will hurt the Republicans' chances in the mid-term and, more importantly, along with the weakness of the dollar, spook bond markets. The bond markets are the ultimate disciplining mechanism, as we have seen in the past, and even Trump kind of understands it. My guess is we will go through this cycle once during 2026 before order is restored and the Fed Chair starts to do things independently.

6. China will be at its best behaviour around the world as it figures out how to dump the excess manufacturing capacity it has built up post COVID-19. China will be on a PR overdrive through the year, talking all the right stuff and mending fences all around the region, including with India (I predict a Modi-Xi summit during the year). China has had a record export surplus in 2025 through some front-loading of its exports before Trump tariffs came up, and by its strategic use of intermediate bases like Vietnam and Malaysia to bypass trade restrictions. 2026 will beat that record before real measures against Chinese dumping take shape around the world. The Chinese stock market, which benefited in 2025 on the back of historic cheap valuation and AI momentum from the Deepseek breakthrough, has given a false sense of the strength of its economy. There is no respite for its domestic economy - consumption isn’t picking up, fiscal deficit is above 10 per cent, total debt to GDP ratio is almost at 300 per cent, and real estate troubles and a weak banking sector continue to hamper it. China needs the world now more than ever but it will find during the year that the world isn’t willing. This will mean fairly targeted anti-China trade measures from Western Europe that will push China to work on a compromise. Expect multiple trade deals that will look like wins for Europe.

7. Many had predicted an AI bust in 2025. I was absolutely sure it wasn’t happening. Now there’s a stronger belief that the AI bubble will bust in 2026. I’m still sceptical. It’s true that there is almost no relational justification for the capital that has gone into AI investments in 2025. But for the bubble to bust, there has to be a shortage of capital or a spectacular surprise in the financial performance of those betting big on AI. I see neither of them happening this year, unless, of course, there is a serious flight of capital out of the US because Trump does something that’s beyond the realm of imagination right now (starts a nuclear war, for instance). There will be a minor correction perhaps among the so-called AI stocks (maybe 10 per cent), but there is no crash coming here in 2026. Instead, we will see real gains from AI showing up in multiple sectors and much stronger use cases that will justify the hype.

8. It will be business as usual for the Indian economy. GDP growth at a little over 7 per cent, inflation back to 4.5 per cent, and market indices at about 5 per cent higher. There won’t be any interest rate cuts, and I see the RBI letting the rupee breach 100 to a dollar during the year. The defence of INR beyond a point is not helping with the liquidity that’s needed to keep domestic credit and consumption going. I expect the budget next month to be significantly more reform-oriented because this is the last opportunity to do so for this team. The 18 months after the budget are dotted with five big state elections that will preclude any big move. The budget will have a significant tax break across slabs to boost consumption momentum, which is already flagging after the GST rate cuts last quarter. I expect more specific deregulation measures, including rationalisation of entire regulatory bodies and ministries in the budget.

9. BJP will lose Assam to its surprise and make significant gains in Tamil Nadu (10-15 seats) and Kerala (5 seats) assembly elections. West Bengal, where I have been twice in the past month, will be too close to call, but I sense a hung verdict with part of TMC breaking away to form the government with outside support of the BJP. UDF will win Kerala, with Shashi Tharoor positioning himself as a CM candidate during the campaign. But his rise to the post will be scuttled by the central leadership.

10. By the end of the year, a significant breakaway group will threaten to quit Congress and form a new party. Therefore, this will be the last year of Rahul Gandhi leading the Congress or maybe even the Congress as we know it. The moment of reckoning for the post-Modi BJP won’t arrive in 2026 (it will wait till UP elections). But I expect some serious jostling to begin between the Amit Shah and Adityanath factions during the latter part of the yea,r leading to Adityanath threatening to resign (but not resigning) as the CM in the run-up to UP elections in 2027.

Those are my predictions. I will wait and watch.

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Global Policy Watch: The Long History of Non-fuel Mineral Geopolitics

Global issues relevant to India

—Pranay Kotasthane

The weaponisation of minerals seems unprecedented, but it really isn’t. While people are well aware of instances when fuels (oil, gas, etc.) were weaponised, past cases of non-fuel minerals being weaponised are hard to recall. That creates a perception that China’s hold over rare earths is unprecedented and undefeatable.

Yet, there are multiple prominent cases in which the geopolitical leverage countries had because of their dominance over critical minerals dissipated quickly. It’s not as if these countries stopped producing the minerals; they just couldn’t weaponise them for too long.

Take the case of Cobalt. It was the in-fashion dual-use material of the 1970s. One tonne of it went into every F-16’s jet engine. The US imported almost all of it, most of which came from then-Zaire (Democratic Republic of Congo). The USSR was signing mineral agreements with African countries, providing technical assistance in exchange for a share in total output. Modelled on the OPEC, there were cartels for Bauxite, Copper, and the like. A US Congressman termed the situation the ‘materials myopia’ of the West. And then, things came to a head when some rebels occupied mining regions in Zaire, leading to a supply cutoff and a sudden price increase.

And yet, there was no repeat of the 1973 Oil Crisis. What really happened?

A combination of several moves eventually reduced the strategic edge that Cobalt-producing countries enjoyed. First, the high prices made Cobalt mining in other, more stable countries lucrative—mining in Canada, Brazil, and Australia picked up.

Even as these new mining projects were taking shape, prior research on substitutes for Cobalt was commercialised much more quickly. The more abundant Molybdenum began displacing Cobalt in certain alloys as jet engine makers warmed to new composites and carbon fibres.

Next, companies began to economise. Just like we read reports today that every electric car, submarine, or jet fighter uses X kgs of neodymium, without which the world would come to a grinding halt, there were similar concerns about Cobalt in the 1970s. But the demand proved more elastic than people had assumed. Non-priority uses of cobalt were reduced by using other materials in alloys, and when substitution wasn’t possible, efficiency improvements helped contain overall demand.

The fourth leg was government intervention. Military stockpiles were built to meet emergency defence applications. For the broader commercial market, governments also took up price-risk mechanisms and offtake guarantees.

The net result wasn’t that Congo was displaced as the world’s major Cobalt producer; it still accounts for over 70 per cent of global supply today. Rather, Cobalt itself was displaced as the hitherto indispensable material necessary for dual-use applications. Once substitutes were developed, the hackles were lowered, Cobalt stopped being a geopolitical talking point, and the world became comfortable with buying Cobalt from Congo once again.

Several such instances exist in the near past. China cut off tungsten exports to the US during the Korean War in the early 1950s. China had been supplying half of American demand at a dirt-cheap $16 per pound. Then came the operationalisation of the Defence Production Act of 1950, which allowed the government to offer offtake guarantees, write off investments, and provide low-interest loans. The US government guaranteed a price of $63 per pound to domestic miners, and within three years, domestic firms were producing thrice the government’s reuired demand.

Similarly, Mercury was another dual-use material of the 1950s, crucial for walkie-talkies and ammunition. A looming shortage and rising prices caused widespread furore. But through the same process of market-led substitution and alternative sources backed by government guarantees, the strategic significance of Mercury went down.

I see a version of these Cobalt, Tungsten, and Mercury stories playing out in the case of China’s weaponisation of rare earths, too. As I have written in multiple editions, substitutes will be operationalised, alternative sources will emerge, and efficiency improvements will reduce per-unit requirements. Additionally, the Law of One Price (LOOP) will play its role. China’s extensive export controls have meant that the international prices of Chinese rare earth oxides (say in Europe) are at least three times the domestic prices in China. Under such stark conditions, many Chinese companies will be willing to take the risk of evading controls in exchange for the promise of extravagant profits. Shell companies might be set up, and third countries might be used to convert ‘black’ rare earths into ‘white’. LOOP will kick in, and the price differential will wither away.

Given these trends and in the spirit of making falsifiable predictions, I claim that by December 2028, China will lose its geopolitical leverage due to its dominance in rare earths. While it will remain the world’s largest rare earths producer, the strategic importance of these materials will decline. China will stop putting additional export controls on these technologies and begin diluting existing ones by that time.

Hope this newsletter will be alive three years from now to test this prediction. But if not, I am sure some sharp readers are keeping track.

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Matsyanyaaya: Pax Silica! Ab Tera Kya Hoga India? Part 2

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane and Tannmay Kumarr Baid

(An edited version of this article first appeared in India’s World on 16th January 2026)

In January 2026, the United States envoy, Sergio Gor, invited India to join Pax Silica. Pax Silica is a US-led effort with an aim to align partners across semiconductors, AI infrastructure, and critical minerals. The stated objective of the initiative is to reduce dependencies in the technology supply chain and shape how the AI economy is built.

This invite came barely a month after New Delhi was conspicuously absent from the initiative’s inaugural summit in Washington. Some suggested that the absence reflected India’s declining relevance in Washington’s technology calculus, while others inferred that it proves India was a lightweight in the semiconductor domain.

Despite the alarmism, one of us (Pranay) had blogged that India’s initial absence from Pax Silica matters far less than the noise suggested, and that India would eventually become a part of the grouping. That position seems to have held its ground. The core reason is simple: India already sits at the centre of the global semiconductor and AI ecosystem, with or without formal membership. The absence reflected ongoing trade frictions and tariff disputes, rather than a downgrade of India’s role in the US technology strategy.

India is deeply embedded

Framed as a new organising principle for the global silicon and AI supply chain, Pax Silica aims to coordinate trusted partners through policy alignment, joint projects, and investment coordination to diversify supply chains, with an outward focus on reducing dependence on China. That ambition was understandable. But even then, the way the initiative was launched suggested it was more a political signal than an operational framework.

Read in that light, India’s absence weakened Pax Silica on paper, but it did not materially alter or affect India’s position in the global technology ecosystem.

India is, and remains structurally embedded in the semiconductor value chain. Pax Silica does not, and cannot, change that in the foreseeable future. This is important because semiconductor design is explicitly identified as a core pillar of Pax Silica. In this segment, India is already indispensable. Nearly every top-25 fabless semiconductor company by revenue operates large design centres in India. Crucially, these are not peripheral support offices. Most of them work on core intellectual property and system-level design. These are the processes that are at the heart of chip development cycles.

This massive base that global companies have in India is driven by incentives, talent availability, and ecosystem depth. The Indian government claims that nearly 20 per cent of the global chip design talent is in India. Any attempt to bypass India’s design base would impose higher costs and slower innovation on the very firms Pax Silica seeks to support. In that sense, India is already inside the tent where it matters most upstream.

This design strength also explains why India’s absence from a diplomatic grouping did not imply exclusion from future technology gains. The semiconductor supply chain is not neatly modular. Design, software, and systems integration are tightly coupled with downstream manufacturing and deployment. Pax Silica may seek to coordinate trusted production nodes, but it cannot exclude India, which is where a significant chunk of the thinking, testing, and iteration already takes place, and hope to succeed.

Manufacturing cannot be wished away

India’s manufacturing role, while still emerging, is no longer hypothetical. Eight OSAT (Outsourced Semiconductor Assembly and Test) plants and one commercial CMOS fab are under active construction. While these projects do not compete with Taiwan or South Korea on advanced logic nodes, they do not need to. Assembly, testing, and packaging are becoming increasingly cutting-edge to squeeze out better performance without necessarily making transistors smaller. This is also where diversification is most feasible and easiest to achieve.

In the coming decade, India is likely to emerge as a meaningful OSAT node. If the objective is to reduce concentration rather than just signal alignment, then having capacity in a large, independent market is a huge asset, not an inconvenience.

The same logic applies to artificial intelligence. Pax Silica places heavy emphasis on AI infrastructure and deployment, yet India sits close to the centre of both. Indian software firms are well-positioned in what Kai-Fu Lee has described as “enterprise AI”, where models are integrated into business processes rather than built from scratch. This adoption, rather than just creation, is where most economic value is likely to accrue over the next decade.

India is also one of the largest potential markets for AI deployment across finance, logistics, healthcare, manufacturing, and public services. An effort to shape the global AI economy while leaving out both major integrators and a market of this scale will struggle to deliver returns for participating firms. AI supply chains do not end at data centres. They end where systems are deployed at scale.

Looking Ahead

The first cut of participants in Pax Silica reflected diplomatic convenience rather than supply chain completeness. We have seen this before. Coalitions built around technology tend to expand in phases. Early announcements prioritise ease of alignment over comprehensiveness.

There is also a risk of over-securitisation. Treating AI and semiconductors purely through a national security lens can narrow choice and raise costs. Recent easing of certain chip export controls and deals with China in rare earths suggest that even Washington recognises the limits of blunt restriction. China will continue to remain a player in the AI, semiconductor and critical minerals market in the future, and an attempt to cut it off entirely is neither feasible nor economically wise. The aim must remain to reduce single-source dependence.

Timing and next steps

A more plausible explanation for India’s initial absence lies in trade frictions rather than strategic distance. Tariff disputes continue to weigh on India–US economic ties. It is reasonable to hypothesise that India may have chosen not to join a high-visibility economic grouping while being singled out on trade, or that the US may not have chosen to include India at that moment. This made the absence a bargaining position, not an outright rejection of cooperation, as subsequent events now suggest.

There is precedent for this approach. India was not a founding member of the Mineral Security Partnership either. That triggered similar concern at the time. India joined later, once the contours of the grouping were clearer and its interests better reflected. Pax Silica has followed a similar trajectory. Semiconductor and AI firms with deep exposure to India have little incentive to see India permanently excluded from any framework that shapes their operating environment.

Even in December, there was little reason for alarm. Semiconductor firms have continued to expand design and engineering work in India. AI providers have continued to invest in Indian data centres and deployment to monetise their models. OSAT capacity under construction did not hinge on the outcome of one summit.

India’s continued priority should be domestic execution: improving manufacturing competitiveness, reducing regulatory friction, scaling packaging and testing capacity, and focusing on AI deployment. Delivering on these projects will be the make-or-break factor for India.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Paper] Ore Wars: The Problem of U.S. Dependence on Foreign Materials, a 1982 paper by John Orme, is a prescient take on mineral geopolitics.

2. [Puliyabaazi] A conversation on the opportunities, barriers, and information asymmetry in the legal market in India, ft. Bhargavi Zaveri.

3. [Article] Amitabh Kant on the five reforms India needs. Good to see this line in the article: “to export competititvely, India must import efficiently.” We’ve been talking about this since 2020 in this newsletter.

—RSJ

Our best wishes for a happy, healthy and prosperous year ahead. The past year was volatile by even the high bar that’s been set for that term in the past decade. Tariff wars, real wars, assassinations, further polarisation and distrust, semicon politics, massive AI investments, Gen Z revolutions and a China rebound - these enthralled and engaged us through the year and, of course, gave grist to our mill as we wrote 45 editions in the past year. There was never a dull week in 2025. I hope we have a duller, calmer and boring 2026. We all could do with some catching of breath and rest.

I will get the first edition of the new year going with a look at how I fared on the predictions I made at the start of 2025. I will follow it up with predictions for 2026 in the next edition. I know, I know this prediction business at the start of the year is a mug’s game, but like most pointless things in life, it is also tremendous fun. It also offers an opportunity to put 2025 into perspective before we get going in 2026. So, let me get going on the 2025 predictions report card.

#1: Those who expect Trump 2.0 will be less chaotic than the first term because he has more administrative experience now under his belt will be in for a rude shock. I see this administration going for wild swings on areas like tariffs, immigrant deportation, education, healthcare, relationships with NATO allies, and tax cuts in its first year in a fashion that will make Trump 1.0 look like an oasis of calm.

Heh. Trump exceeded my wildest dreams in creating chaos. There’s an industry out there trying to make sense of Trump and retrofitting logic to his ways and I wish them the best in staying consistent with their arguments in future. The truth is there’s no method to his madness except self-aggrandisement and profiting in his role of chief executive. Any long-term strategic benefits from the random acts he has triggered this year will be accidental. He lectured long-term allies on their domestic politics, sent federal troops to cities and states he didn’t like, courted Putin, embarrassed various heads of state at televised White House press conferences, blew hot and cold with China, spoke seriously about annexing Greenland, lobbied for a Nobel Peace prize by inserting himself into every global problem regardless of whether he was needed and turned geopolitics into a series of one-off transactions largely aimed to benefit him and his family. Trump or Trumpism won’t last forever but the dent he has made on the American image globally will take a long time to repair.

#2: Trump isn’t using the tariff threat to wrangle a better deal for America from its trade partners; he will impose tariffs of various kinds through 2025 because he wants to project power. While the promised 10 per cent tariff across the board on imports, with the expected 60 per cent on Chinese goods and possibly 25 per cent on Mexican and Canadian imports, might not fully play out in 2025, we will get going on this. The negotiation on this, if any, will happen later. He sees global trade as a zero-sum game and tariffs as a source of revenue that the US has foregone for long.

I knew it would be bad, but I didn’t realise how daft Trump would be on this. The defining image of Trump in 2025 and for the future will be that ridiculous reciprocal tariff chart that he waved as a prop at the White House Rose Garden on the “liberation day”. It made zero economic sense, the calculations to arrive at the tariffs were laughable but everyone had to take them seriously. Trump, of course, chickened out on most of them. We will see what the tariffs eventually bring to the US economy in terms of revenues and jobs (my guess is nothing). But the loss of trust in America on trade is now universal. Nothing Trump does in the rest of his term will match the symbolism of that idiotic moment at the Rose Garden.

#3 Unlike what most people expect, there’s going to be no end to the war in Ukraine in 2025. There will be talks of a peace agreement, and there might even be a lull in the fighting for an extended period during the year, but there won’t be a deal with Putin. Trump and the US foreign office sense that Putin won’t be able to continue funding the war for long, and it is better to let him stew for a while before discussing a settlement. In West Asia, Also. Trump will let Netanyahu run free because he genuinely believes the US has no business to be involved there. This means West Asia will remain a flashpoint that will continue to spring negative surprises in 2025. I don’t rule out a full-scale war between Israel and Iran during the year.

Got that almost all correct, including predicting a full-scale war between Israel and Iran. Trump tried to broker a peace in Ukraine towards the end of the year, but in Putin, Trump has to contend with a hard negotiator who plays the strongman card really well. Netanyahu, in a similar vein, ran free throughout 2025 knowing well that he had Trump in his pocket.

#4 Import tariffs, deportation of immigrants and tax cuts will mean significant inflationary pressure on the US economy. I don’t expect a Fed rate cut for much of the year unless Trump drops Powell and replaces him with a crony. Maybe a 25 bps cut in the mid-year at best. The US fiscal deficit will not be helped by these moves, too, and any of Musk-Ramaswamy DOGE’s cost-cutting measures will not be sufficient to bring it down. This will put enormous pressure on the bond market and a continued lack of confidence in US treasuries. Fiscal deficit is going to be a problem for US markets this year and it will be an overhang on every economic decision. The bond market will be particularly skittish during the year.

The bond market was skittish, but there was no inflationary pressure seen in 2025. Some of this was on account of front-loading of imports, and the rest by corporate America absorbing the cost of tariffs for the moment. I still believe inflation will show up, but I am surprised by how long it has held off. On rate cuts, I got that wrong. There were three quarter-point rate cuts that happened from September onwards as the Fed focused on supporting the job market with the spectre of inflation not showing up. The dollar had its worst annual performance since 2017, with foreign investors hedging against it given the uncertainty around Trump’s economic policies and tariffs. In light of these, the three rate cuts were somewhat understandable.

#5 The political economy of Western Europe and the UK will go from bad to worse. There’s social unrest because of immigration, a sluggish economy, a lack of innovation, ambiguity about China being a friend or enemy, a falling population, and the rise of populist rights throughout the region. The EU lacks imagination on tackling this, and the big two—France and Germany—will be roiled with political instability through 2025. I expect a recession across the board in the big 4 EU economies during the year.

Well, technically there was no recession, although the UK, France and Germany economies barely grew (all below 1 per cent) through the year. Social unrest, anti-Immigration rhetoric and right-wing populism grew during the year. Germany barely cobbled together a government to keep AfD at bay, but I guess we will look back at 2025 in future as the year that almost sealed the deal for right-wing, nationalistic parties in these three countries to win the next elections.

#6 China will have a tougher 2025 than 2024 (which was bad by itself). The Trump tariffs on China will lead to other nations imitating them with similar trade-distorting measures. This could reduce global trade or, contradictories increase it if countries go around US and China to conduct their business. But such realignment won’t happen in a hurry. The massive overcapacity it has built up in green tech, EV, and AI will not find enough markets with the US, India, and Japan effectively shutting down and the EU reticent. Xi will have to hope the WTO pushes back against such tariffs and the huge price advantage of Chinese goods makes its own way into these countries. No deal can be struck with Trump because China has used trade as an instrument of power, and the geopolitical risk of not containing it is real. The hostility towards China is real in the Trump team.

Got this wrong. China had a much better 2025 than 2024 largely thanks to Trump who made sure Xi and China appeared like sane multilateralists who want to build bridges (literally and figuratively) around the world. China found ways to bypass US tariffs, flexed its muscle on rare earths to its tactical advantage, stunned the world (at least temporarily) with its homegrown, inexpensive LLM, Deepseek and rapidly filled up global markets with its EV products that are simply superior to anything coming out of America. The reason for pushback to China on trade hasn’t gone away, but 2025 allowed China to create a platform for those seeking an alternative to America. That camp is growing in size (including India) because of Trump’s shenanigans.

#7 2025 will be the year of sanctions on social media apps worldwide. More countries will follow Australia’s suit in prohibiting social media access to school children. Expect legislation around smartphone bans in schools, too. However, this will morph into greater control on social media platforms in the name of public safety across countries. Populist leaders and their social media armies have recognised the threat of independent social media influencers in shaping public opinion. This will be an interesting battle to watch this year.

Got this wrong. There was a lot of talk about controlling access to social media among children but nothing concrete came out of it. Rather apps like TikTok and Instagram continued their outsized influence over youth culture and outlook. I suspect the Australian sanction was more a one-off than a real ban and this won’t catch on elsewhere.

#8 There is no AI bubble that will burst in 2025, as many predict. I expect the cost of using AI platforms will fall by half, and the use cases will double during the year. Agentic AI will be the trend of the year. And the adjacent AI and AI stocks will continue outperforming the broader equity market by a margin in 2025. Energy will become a topic of conversation while discussing AI capabilities at a national level. Token per dollar per watt is the metric that will come into discussion.

There was no AI bubble that burst in 2025. In fact, the hype only got bigger with outsize investments made by Big Tech on data centres and research, sky-high valuations, insane price paid for acqui-hiring of talent, and, of course, DeepSeek and China also getting into the act. Energy will be a limiting constraint as companies look for reliable and cost-effective access.

#9 The Indian economy will look exactly the same in 2025 as in 2024. Public expenditure will drive GDP growth, which will be pretty robust. Consumption will continue to lag with credit growth stalling below 10 per cent because a retail NPA cycle in personal loans, MFI and credit cards will play out, making banks and NBFCs risk averse. Inflation will be sticky at 5 per cent. The equity market will underperform as the Dollar strengthens and net FII inflow turns negative. More private equity and VC money will flow out because there will be a divergence in rate cuts between the Fed and RBI. Expect at least a total of 50 bps of cut from RBI during the year.

Got the inflation forecast and rate cut estimate wrong. Inflation for the second half of the year was at record lows while the rate cuts were front loaded (75 bps) with another 25 bps coming in December. Consumption wasn’t great for the first three quarters but then picked up after the GST rate cut. The equity market performance, Rupee strength and negative FII flows turned out as predicted.

#10 There are two state elections during the year - Delhi and Bihar. BJP will win Delhi comfortably. Bihar will be close, but eventually, BJP will lead a coalition government in Bihar with support from rebels from RJD and Congress. The run-up to the West Bengal elections in Mar 2026 will start with the Bihar elections. Expect a massive spike in communal rhetoric that India hasn’t seen before. Also, the UCC bill will be brought in during that time to polarise sentiments further.

BJP won Delhi comfortably as I expected. The landslide in Bihar was a head-scratcher. No one saw that coming. The communal rhetoric I anticipated wasn’t as shrill, thankfully. BJP scaled new peaks in the art of election management there. A combination of last-minute targeted direct cash transfers to women voters, strategic deletion of voters on electoral rolls through SIR, significant disparity on electoral funding through bonds, a pliant EC, active management of media narrative and last-mile booth management has made it almost impossible for an already weak opposition to mount any kind of real challenge except episodic flourishes and yatras.

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Global Policy Watch: 250 Years of the Butcher, the Baker, and the Brewer

Global issues relevant to India

—Pranay Kotasthane

The excellent Amol Agrawal’s Financial Express column reminds us that 2026 marks 250 years of Adam Smith’s book, An Inquiry into the Nature and Causes of the Wealth of Nations. Quite coincidentally, the world in 2026 is facing just the perfect storm, one that underscores the book's core ideas.

Fifty years ago, Milton Friedman commemorated 200 years of the book with an afterword to a new edition of Leonard Reed’s “I, Pencil” with these words:

“I know of no other piece of literature that so succinctly, persuasively, and effectively illustrates the meaning of both Adam Smith’s invisible hand—the possibility of cooperation without coercion—and Friedrich Hayek’s emphasis on the importance of dispersed knowledge and the role of the price system in communicating information that ‘will make the individuals do the desirable things without anyone having to tell them what to do.’”

We are in 2026. The idea of price as a decentralised coordination mechanism still remains less understood. So does the idea that self-interested individuals trading voluntarily is the best engine for social welfare. Like the fish in David Foster Wallace’s “this is water” story, the most obvious realities are the most difficult to describe. Their significance and presence become apparent only in brief periods when they are taken away.

This is exactly where the world finds itself 250 years after The Wealth of Nations. Just a couple of days back, my colleague told me that China had launched an antidumping investigation into dichlorosilane coming from Japan, in the backdrop of escalating tensions between the two countries (yet again). She asked me if I knew about this chemical, as it’s one of the core inputs in semiconductor manufacturing. And I absolutely didn’t; this is the first time I’d ever heard of it.

And that’s precisely the Smithian argument. No sane person outside the small world of semiconductor etching should care about what dichlorosilane is. As long as it is traded without major barriers, only buyers and sellers need to care about it. High prices send a signal to its buyers to economise and its sellers to sell more, which cools down prices until the buyers’ frenzy again raises prices. The market works just fine without the outside world having to care about arcane chemicals.

But that’s not the world we live in. The weaponisation of interdependence means we are all forced to care about what permanent magnets are, how turgid-sounding rare-earths like Terbium are produced, and why Taiwan Semiconductor Manufacturing Company, a low-key contract manufacturer of chips designed by some other firm, matters to the world. Being blissfully unaware of gallium's uses or GPU prices is a luxury we can no longer afford.

Forget the cognitive burden on individuals. Governments find themselves in a much tougher situation. They are having to play a never-ending whack-a-mole game. By the time they launch a policy to spur semiconductor production, they are forced to take stock of another material being produced by an obscure firm whose name no one knew two days ago. Suddenly, articles appear about how an adversary country controls this ‘chokepoint’, and governments are back to the drawing board to launch a new Production-linked Incentive for this ‘chemical-I-literally-first-heard-of-yesterday.’ Soon enough, the flag of economic nationalism flies high, and the logic of self-reliance is internalised. People start assuming that governments can coordinate the production of everything; all it needs is a little bit of focus here and a little more investment there.

But the more governments try to coordinate, the clearer the Smithian/Hayekian logic becomes—there is always some core product or raw material for which we must rely on an outside entity. No government—whatever its capability—can remove all bottlenecks. There will always remain some vulnerabilities and chokepoints.

But this is an uncomfortable thought for governments and for society in general. So we should expect countries to still go down the path of ignoring Smithian ideas before coming around to them. Hoping against hope I know, but wouldn’t it be a perfect tribute to the Wealth of Nations if the dominant narrative were to reverse this year itself?

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India Policy Watch #1: Compassion vs Empathy, the Gig Work Edition

Insights on current policy issues in India

—Pranay Kotasthane

This year in policy began with an intense conversation on the condition of gig workers in India. The backdrop was a call for a strike by some delivery partner groups on New Year’s Eve, followed by a response defending the gig economy model from a founder of a prominent delivery firm.

Expectedly, it led to another discussion that pits firms against workers, capital against labour, and growth against welfare. There were the usual laments about the unfairness of compensation and a harking back to the Marxian Labour Theory of Value.

I’m sure that by now, you have already read some good articles presenting both sides of the argument, and so I won’t go into them. My stance is that the delivery partners are an organised group; they are within their rights to negotiate for better working conditions. The companies, on the other hand, can choose to respond, react, deny, or comply with the demands. I have no dog in the fight.

Going beyond the high-sounding moralism, what interests me is how policy analysts should approach this issue. And from what I could gather anecdotally, a lot of analysis seems to be falling into the trap of over-empathising with delivery workers. The plight of the workers is apparent because we see them struggling on India’s streets every single day. Thus, it comes naturally to most of us to imagine ourselves in their shoes and sympathise with their troubles. It’s great that we haven’t lost our ability to empathise, but that’s not a frame suited for better public policies.

Madhav K and I explain this as follows:

Empathy is the ability to understand and share another person’s feelings. It involves stepping into someone else’s shoes and experiencing their emotional state as if it were one’s own. Empathy can be an excellent motivation for community action and for trust-building across groups. However, when imported into public policy, this approach can cause us to become overly invested in the plight of a specific individual or group, leading us to overlook broader systemic implications of state action. This myopic view can result in proposing emotive, simplistic solutions that fail to address the root causes of complex social issues.

Dutch historian Rutger Bregman makes a similar point in Humankind: A Hopeful History:

“One thing is certain: a better world doesn’t start with more empathy. If anything, empathy makes us less forgiving, because the more we identify with victims, the more we generalise about our enemies. The bright spotlight we shine on our chosen few makes us blind to the perspectives of our adversaries, because everybody else falls outside our view.” ~ [Humankind: A Hopeful History, page 215]

Single-minded empathy can also result in proposing emotive, simplistic solutions that fail to address the root causes of complex societal issues. For instance, empathising with small farmers who cannot repay loans might cause a well-meaning analyst to recommend a simplistic solution like loan waivers. But the prospect of a future waiver creates a moral hazard—more people end up taking unsustainable loans, and in cases when these loans aren’t waived off, some might even take the extreme step of committing suicide….

Rather, compassion is a better frame for public policy analysts:

Compassion is not the same as empathy. It represents a more detached and rational concern for the general well-being of all people. It is rooted in a desire to alleviate suffering on a broader scale. Compassion allows policy analysts to maintain a degree of emotional distance while still recognising the inherent dignity and worth of every individual affected by their decisions.

With compassion as a guiding principle, policy analysts can weigh trade-offs, consider unintended consequences, and think of solutions that promote the greatest good for the greatest number of people. Compassion encourages analysts to look beyond individual narratives, examine systemic factors, and think about the general equilibrium (long-term implications of policy actions), ultimately leading to more effective policy recommendations.

I want to remind analysts that this same instinct to empathise would have created a discourse that led to policies like items reserved for manufacture exclusively by the small-scale sector, which hobbled India’s manufacturing for decades. By making demons out of job-providing firms while ignoring that delivery partners have agency to weigh their own trade-offs, we might be committing the same mistake.

A compassionate version of this argument would focus on reducing entry barriers and enabling better exit options for delivery partners. It would find ways to address the externalities at play—any ten-minute delivery promise, for instance, makes roads unsafe for others who have played no role in the transaction. It would propose alternative social security mechanisms and consider ways governments can pitch in without drastically changing incentives. All this requires hard work and an appreciation of the trade-offs involved.

Making moralistic claims is easy. But a decent policy outcome can definitely not be delivered in ten minutes.

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India Policy Watch #2: The Churn for Allowing Chinese Investments

Insights on current policy issues in India

—Pranay Kotasthane

Every few weeks, we come across a news item suggesting that the Indian government is reviewing its stance on Chinese FDI. The existing status is that any investment by China (and other countries sharing land borders with India) requires the explicit approval of the Union government. Since every investment decision is to be made on a case-by-case basis, it means that Chinese FDI is effectively banned except in some cases where the companies have managed to secure the government’s approval after long delays.

Now, given the unfavourable geopolitical situation that accompanies a difficult global trade environment, India has been reconsidering this stance for quite some time. Every few months, newspapers carry reports (often quoting anonymous government officials) about a new way forward.

I thought it might make sense to list all these proposals in one place, in descending order of their appearance in the media.

The government department in charge was supposed to decide on this issue by December 31. As of now, it is not clear what its decision is, but the trend seems to be towards relaxing the PN3.

Moreover, the “non-sensitive” sectors definition will be contentious, as many in the government might consider electric vehicles a “strategic sector” when the investment source is Chinese, due to fears over remote kill switches. I personally think such concerns should be addressed through hardware supply chain security mechanisms, not through investment bans.

FWIW, we had proposed a framework to decide what’s strategic and what’s not in edition #267.

HomeWork

Reading and listening recommendations on public policy matters

1. [Puliyabaazi] Our latest episode discusses the many uses of hypocrisy in international relations in the backdrop of the Venezuela kidnappings. The right criticism, in our view, isn’t that the US is hypocritical, but that it has lost the art of doing hypocrisy well enough under Trump.

2. [Post] A nice reader on the origins and ideas central to the ‘Invisible Hand’ hypothesis.

3. [Article] On the compassion vs empathy distinction, check this article by Pranay and Madhav K, Dr. Jagdish Chandra Asthana Could Have Been a Good Policy Analyst.

4. [Post] Pax Silica is back in the news with the US Ambassador saying that India would be invited to join the grouping next month. We had called this in the previous edition.

Course Advertisement: If you’d like to sharpen the ‘anticipating the unintended’ instinct with formal training in policy thinking, the 12-week Graduate Certificate in Public Policy is perfect. Applications for the 43rd GCPP cohort close soon.

India Policy Watch: Listening To Feedback?

Insights on current policy issues in India

—RSJ

The level of India-scepticism among global investors in the last six months is in sharp contrast to the general business sentiment prevailing in India. The global investors have voted with their feet for much of 2025 by reducing the India weightage from the peak of mid-2024. India is now almost half the weight of China. The relative equity performance of India compared to EM indices this year has been terrible (down 26 per cent). We haven’t seen such underperformance in this century. This mood won’t change in a hurry.

Now, we have to be careful not to overread the actions of global investors, who tend to be swayed by sentiment in pursuit of short-term returns. After all, about 18 months back, the same set of investors were writing reports and organising conferences with themes like “India’s decade” or “India in a sweet spot”. I was unsure of that kind of rosy outlook then, as I am of the scepticism prevailing now.

Yet, it makes sense to understand the reason for such sentiment about the India story.

The primary driver of asset allocation calls by global investors in the past year across the markets has been AI and its likely implications for a sector or an economy. India is seen as a net loser on AI. The view is that it is already too late to be in the fray for upstream AI innovation, where China and the US slug it out for dominance, with Korea, Taiwan and Japan (as US allies) cornering some collateral benefits.

The work on developing a sovereign AI stack and a concerted push at developing a semiconductor manufacturing ecosystem are steps in the right direction, but they are seen to be too little, too late. The prevailing view is that India will be a user of AI services, which will mean global big tech will monetise their models and platforms, selling to Indian companies and consumers.

Large-scale automation using such platforms will disrupt Indian IT and process management services, leading to a shrinking workforce and lower intake of fresh graduates into such companies. That will be a serious blow to India's growth story.

The other issue is the perceived lack of intent among Indian policymakers to systematically work to improve India’s manufacturing competitiveness. The continued rise in import duties and QCOs (especially on intermediates, as pointed out in the last edition) in the past six years is seen as an acknowledgement of this weakness. Protectionism of this undirected kind doesn’t lead to building global strengths.

The regulatory cholesterol (the term has caught on), especially around labour laws and their compliance, continues to make doing business difficult for entrepreneurs. The usual question is, after a decade or more of political stability and a clear mandate, why aren’t bigger or bolder reforms being undertaken to unshackle manufacturing?Instead, the trend seems to be towards more protectionism and greater market power concentration, which blunts the global edge for the manufacturers.

Once China went back to normal this year after a couple of years of persecuting entrepreneurs and shooting itself in the foot, the China+1 trend has also lost some steam. China has just announced a trillion dollars of trade surplus for the year. Add to that the enormous capacity on EV and EV adjacent ecosystems that are now generating high-quality and extremely price-competitive cars, batteries and other higher-value-added products, you find it difficult to see why China is again in favour among investors.

Lastly, there were also concerns around areas where India had built some competitive advantage. The speed of EV adoption raises questions on how quickly India’s auto ancillary business will be able to pivot its output. The US duties on textiles, gems, and jewellery are still an overhang. The quality concerns on Indian generics have gotten aggravated in light of recent negative news about the quality standards of these drugs. Additionally, some structural concerns about India persist - the dependence on oil and energy imports and the lack of standardisation on defence machinery in light of an increasingly unfriendly neighbourhood.

The positive news amidst all of this is that the macros seem to indicate a stronger 2026 for the economy. The growth forecast is raised up and the deflationary impact of the last two quarters should be behind us once the system slack is absorbed. The 4 per cent inflation estimate for next year should hold, leading to nominal GDP going back to 11 per cent. Interestingly, the key policy measures taken in the last 6 months (reduction in compliance burden in states, GST revamp, QCO rationalisation) seem to suggest there is a better appreciation of these concerns.

Two other news items this week confirmed this intuition.

One, the unconfirmed news that India is looking to expand the scope of the global benchmarking standard of the WHO from vaccines (which it is now compliant with) to medicines. A proposal on this was discussed at the Drug Consultative Committee (DCC) where there was a recommendation to set up a sub-committee to prepare for WHO National Regulation Authority (NRA) assessment.

This mechanism, with a rating scale of 1 to 4, helps identify and address the gaps in the regulatory system with a goal of reaching a level of benchmark performance that’s globally acceptable for a stable, well-functioning and integrated regulatory system. India already has a Maturity level 3 for vaccines under this framework. This move, if true, will be a significant step in the direction of allaying concerns about the safety of Indian drugs in the medium term. This should be picked up with the states with rigour and speed.

The other was a slew of India-focused investment announcements by global tech majors this week. Microsoft will invest $17.5 billion in AI development in India on the back of the $3 billion announced earlier this year. The four-year investment plan will begin from 2026, with the showpiece being a hyperscale data centre in Hyderabad that will go live in 2026. Microsoft will also work on creating a sovereign public cloud for India with the express focus on meeting its data localisation norms.

Almost within 24 hours, Amazon announced a $35 billion investment by 2030 in areas of AI adoption, export growth among MSMEs who are sellers on the Amazon platform by scaling their digital infrastructure and job creation within their ecosystem. Earlier in October, Google had announced a $15 billion investment in India with the plan to set up its largest data centres outside the US.

The almost choreographed sequence of announcements on AI investments in India by these players suggests these players, who are making massive investments upstream on building AI capabilities, are now starting to look for ways to monetise them in future. India remains an open AI market, and they are doing their best to preclude any possibility of this getting closed to them by the impending launch of the sovereign India AI model or any other swadeshi impulse that might keep them out.

India may seem like a potential AI loser at this time to investors, but there’s still an AI services play that may unfold differently (than just job losses because of automation). Maybe the risk of digital colonialisation is overblown (it suits a lot of domestic actors to raise this bogey). Perhaps a more widespread adoption of AI across sectors and a wide swathe of AI-trained resources will actually unlock newer services to export globally.

The best that India can do is to have a clear-headed appraisal of how it is being viewed today and continue to address those concerns through targeted policymaking. The chastening experiences of last year (Trump, Operation Sindoor, resurgent China, underperforming markets) have meant a sense of urgency to get the right things done. It is important for India not to go back to drinking its own kool-aid when good times return (as they might next year). India has a history of disappointing its optimists and its sceptics in equal measure. Hopefully, it’s the turn of the sceptics now.

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Global Policy Watch: US-China Tug of War

Global issues relevant to India

—Pranay Kotasthane

The US-China techno-economic competition has entered another phase, one in which the US is keen to sell to China, while China is going full-on atmanirbhar.

Earlier this week, the Trump administration allowed Nvidia to sell H200, its second-most advanced chip, to Chinese firms in exchange for a 25 per cent hafta. These chips are ideal for training large models. In their absence, Chinese firms have thus far strung together less-advanced domestic chips, smuggled in advanced Nvidia chips, or used AI cloud services located abroad. This makes H200 the most advanced GPU China can access, at least for the next couple of years, until some of its domestic alternatives start producing chips with higher yields.

This move has sparked a debate in the US. The chair of the US House of Representatives’ China committee (a Republican) has questioned the basis of this move. Many American nationalists have argued that the sale of H200 will advance China’s artificial intelligence efforts and accelerate its military modernisation. Nvidia’s own view is that selling into the Chinese market is necessary for its revenue stream, and that products of Chinese firms, such as the Huawei Ascend 910C, are not far behind.

Something similar happened six months ago, when Trump allowed the resumption of sales of a less advanced chip, the H20, to Chinese firms. Back then, we had called it a turning point in technology geopolitics:

In the initial phase of the latest round of heightened technology geopolitics, nation-states were quick to deploy export controls, end-use restrictions, and investment restrictions in the hope that these strategies will prevent their adversaries from catching up. However, countries are now coming to terms with the reality that such controls often end up being counter-productive. The theory is catching up with the practice, and I think we have hit peak technology export controls. By the end of this decade, I predict that blunt technology export controls will go out of fashion, and nation-states will shift to other instruments like attracting talent and screening outgoing investments. We have reached a turning point.

Allowing the sale of H200 only reaffirms this point.

The Chinese government, for good measure, is having its own reservations about whether these chips should be “accepted.” The Geopolitechs substack has an excellent overview of the debate behind the Great Firewall.

Here’s what I make of this trend:

1. As an Indian, the turnaround in technology export controls is welcome. Heightened restrictions due to securitised logics ultimately make it difficult for India to access foundational technologies. Such a logic was behind the Biden administration's AI Diffusion Rules, which essentially rationed AI compute based on the political equations that nation-states enjoyed with the US at the time. We don’t want to be in that territory in the ever-volatile Trump2.0 era.

2. The bottleneck for China’s military modernisation is hardly a consumer-grade AI chip. If DeepSeek could access smuggled Nvidia GPUs, we can assume the PLA already has access to them. The bottlenecks are data integration from various military sources, newer models, and doctrinal changes in force deployment. An Nvidia chip won’t change any of it.

3. Nvidia is projecting that getting Chinese firms addicted to its chips will prevent them from investing in alternatives. That might not work out. The uncertainty around these decisions means that Chinese firms will continue to work on alternatives. In any case, every company has a target on Nvidia’s back because of its valuation.

4. This move again illustrates why the ‘chip war’ metaphor is inadequate to describe semiconductor geopolitics. No country supplies its adversaries with weapons. But then, chips aren’t weapons.

5. The move is a grudging recognition that AI Superintelligence is not happening anytime soon. A few months back, the dominant narrative was that AI is akin to nuclear weapons—get there first at all costs, then deny others from reaching it. A few months later, countries are realising that it’s better to think of AI as a vital, general-purpose technology. Companies want to make money while the party lasts rather than think of themselves as possessors of a Brahmastra that will obliterate opponents. (I heard a version of this argument first from )

For all we know, this move might simply be a result of Trump’s 25 per cent hafta-making. But that’s a question for the American political system to consider. I would rather favour a world in which the US adopts an actual ‘small yard, high fence’ approach against China.

Outside the semiconductor domain, China is considering export controls on steel. I have earlier argued that only China can make China+1 a reality. In recent months, the idea that China’s trade strategy is leading to zero-sum outcomes has made quite a mark. But that hasn’t made China open to more imports from other countries because its investment-led model rules out that path.

Instead, it is hoping to address some of the external overcapacity concerns through export controls, such as the one on steel. But the moment it does so, a security-insecurity paradox emerges. Nation-states, bruised by the rare-earth controls experience, will interpret the export controls on steel as an early warning that China will deploy them for political purposes yet again. Countries are thus likely to accelerate the efforts to find substitutes and alternative sources for basic materials. All of China’s moves are driving home just one point: diversify now or accept China’s political supremacy later.

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Matsyanyaaya: Pax Silica! Ab Tera Kya Hoga India?

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

The geopolitical wires are buzzing this week with the US State Department’s announcement of the Pax Silica Initiative, a new plan to secure the global silicon supply chain—from critical minerals to AI infrastructure. The inaugural summit will feature close US allies: Japan, South Korea, Singapore, the Netherlands, the UK, Israel, the UAE, and Australia.

The stated goal is to create a “secure, prosperous, and innovation-driven” ecosystem that “reduces coercive dependencies, protects the materials and capabilities foundational to artificial intelligence, and ensures aligned nations can develop and deploy transformative technologies at scale.”

India’s absence from the announced list has sparked much speculation and debate, but a cooler look at the semiconductor landscape suggests there is no cause for alarm just yet. In fact, India’s absence might just be a temporary bargaining tactic in a larger trade game.

Here is why India remains indispensable to any global silicon strategy, whether or not it is at the Pax Silica inaugural summit.

1. Irrespective of which flags fly at the summit, India remains the engine room of the global semiconductor design segment, one of the pillars identified as part of Pax Silica. Nearly every top-25 fabless company by revenue—including the US giants driving this initiative—has a design centre in India. These companies rely on Indian talent for their core IP. Knowledge spillovers into India are structural and inevitable. A diplomatic summit cannot firewall the fact that the chips powering Pax Silica are likely being designed in Bengaluru.

2. India’s hardware game is improving. The narrative that India is “not ready” for a seat at the table ignores the ground reality. Eight OSAT (Outsourced Semiconductor Assembly and Test) plants and one commercial CMOS fab are under active construction. By the time the high-level policy frameworks of Pax Silica actually translate into action, India will already be an operational node in the semiconductor manufacturing supply chain.

3. Kai-fu Lee famously distinguished between “internet AI” and “enterprise AI.” Indian software firms are poised to become the global delivery vehicle for the latter. Furthermore, as one of the largest data markets in the world, India will be a decisive battleground for AI deployment and usage. Any strategy to counter China that ignores the scale of the Indian market and the capability of Indian integrators is, frankly, dead on arrival.

4. If the true goal of Pax Silica is to counter Beijing, the current coalition has glaring holes. Taiwan, the most critical node of global chip manufacturing, is missing. Next, India, the largest potential counter-market and talent pool, is missing. Finally, while the Netherlands and the UK are present, major European economies like France and Germany are notably absent. Without these pillars, the initiative risks being a paper tiger.

5. Why was India excluded? I speculate it is related to the unresolved friction in India-US trade ties. With the American administration singling out India on tariffs, India probably declined to join this grouping until the ridiculous tariff regime is addressed. This feels less like a permanent exclusion and more like a negotiation tactic. India is likely waiting for a better deal before signing on the dotted line.

6. We have seen this movie before. When the US-led Mineral Security Partnership (MSP) was first announced to secure critical mineral supply chains, India was not a founding member. The strategic community panicked then, too. But India joined as the 14th member a year later. Pax Silica will likely follow the same trajectory. The semiconductor firms that rely on India for their Global Capability Centres (GCCs) will ensure that India is eventually brought into the fold.

Right now, the Pax Silica “fact sheet” is heavy on vague announcements but light on executable policy. India should wait, watch, and continue building.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Puliyabaazi] Why and how to discuss complex ideas in Indian languages? Here’s our attempt to answer this question.

2. [Article] Manish Sabharwal lists out the principles for a new regulatory regime in the Indian Express. Music to our ears; hope the government adopts these:

   All licences outside the four areas of national security, public safety, human health and environment will be converted to perpetual self-registration. Everything is permitted till prohibited. Inspections will be random, risk-based and mostly third-party. The Department for Promotion of Industry and Internal Trade’s (DPIIT) decriminalisation principles must be applied to all penal provisions, and punishments must be proportionate. Regulatory changes will occur only after consultation, with sufficient transition time provided, and transitions will be effective on a fixed annual date (say January 1). Filings will be digitised, and regulatory instruments with penal provisions will be restricted to laws and rules. IndiaCode will become the live database with all Acts and rules, and after integration with e-gazette, a single source of truth for all obligations. An annual regulatory impact assessment framework by all central ministries will lead to annual reports on compliance and punishment. [Manish Sabharwal, Indian Express]

3. [Report] The OECD has a terrific new report on Competition in AI Infrastructure.

4. [Journal] The latest edition of the Indian Public Policy Review is out. Subscribe to journal updates below.

   Indian Public Policy Review

   IPPR is a peer-reviewed, online & open-access journal, covering Economics, Political Science, Public Finance, International Relations, Defence Strategy, Science & Technology. Subscribe to this newsletter and get an update on the release of a new issue.

Applications for the 43rd GCPP cohort are now open.

India Policy Watch #1: Grounded

Insights on current policy issues in India

—RSJ

It was not the best week perhaps to have three flights booked on Indigo as I had. As you might have heard (or experienced), Indigo had a serious operational crisis throughout the week as it struggled to manage the new airline crew fatigue regulations, called the Flight Duty Time Limitations (FDTL), that came into effect from November 1.

Broadly, these norms increased the pilots’ weekly rest requirement from 36 hours to 48 hours and reduced the number of permitted night landings from six to two. I’m no aviation expert, but having experienced a few large and disruptive regulatory changes across different sectors, these don’t look too onerous to me in comparison.

There is a direct impact on available crew capacity (back-of-the-envelope calculations suggest about a 10-15 per cent shortfall), which can be managed through a combination of route rationalisation and more hiring. It would mean a short-term financial impact, but that can be managed with price actions over time.

These regulations were first placed for implementation by the DGCA (the sectoral regulator) about two years ago. Somewhere along the line, both the DGCA and the airlines were happy to drag their feet on this. Multiple extensions were sought and given till the Indian Commercial Pilots Association went to court.

In February this year, the DGCA filed an affidavit at Delhi HC confirming it will roll out the recommendations in two phases on July 1 and November 1. The Delhi HC ruled in April that the respondent (DGCA) is bound by the affidavit and must proceed accordingly. This is a strange case of a regulator delaying its own recommendations and being asked by the Court to do what it has planned to do. All quite curious and not unusual. DGCA has done stranger things before.

Going by the turn of events this week, it is certain that Indigo was still hoping for a reversal of these guidelines and didn’t plan for it. Or, it wagered that as a leader with 60 per cent market share, any disruption to its operation will bring everyone back to the negotiating table. Anyway, a cascading turn of events of winter fog in north India, some software upgrade glitch and a shortage of rested pilots as per new norms meant Indigo cancelled almost a third of their flights through the week.

The reported on-time performance was about 8 per cent as passengers experienced hours of delay across airports in India. The airline could see it coming as it had already seen over 1200 cancellations in November and an on-time performance that dropped to 68 per cent from the usual over 90 per cent.

With about 8 hours of cumulative delays, changes in flights that cost a bomb and the practised patience of a monk, I think I came through the ordeal way better than most others. As I write this, the DGCA has withdrawn its instructions on weekly rest for crew members, while Indigo has requested till February to restore stability.

Indigo runs a very tight ship with a leaner staff, a dense network that prides itself on quick turnaround and a significant number of night flights. It is clear that it is only now beginning to plan for the new regulations. The other two airlines, Air India and Akasa, have their own issues to deal with, including a shortage of aircraft because of new delivery delays, operational issues with Boeing, aircraft grounded for upgrades and a shortage of crew.

It is a remarkable mess in a limited sector of about 3-4 functional domestic airlines, five regulatory bodies that have been around for a while and a full-fledged ministry with a union minister and a minister of state in its ranks.

As expected, the ministry will do a thorough post-mortem of this crisis, where it will blame everyone but itself and the regulators. A high level 4 member committee has already been formed who will submit a report and recommendations to the DGCA whose terms, on the face of it, are to find fault with the airlines and fix responsibility. There will be some pointed criticism of the senior management, few heads will roll, some minimum threshold of on-time performance will be set till Indigo gets it house in order and some reallocations of slots to other airlines will be done to get over this mess. I don’t expect any deeper analysis of underlying causes.

There are three questions to ask beyond this episode which to me is only a symptom of the problem of civil aviation in India.

One, why do we have only four functional domestic airlines, of which two have over 90 per cent market share? For an already large and still underserved market, why such market concentration? We have had multiple airlines go bankrupt in the past two decades, which once had over 30 per cent market share. Were they all inept in managing an airline? Structurally, it is a tough business to run in India. There is a duopoly to contend with while buying or leasing aircraft.

The planning cycle for ordering these planes, getting them delivered and making them operational is long (up to 2-3 years). The ability to anticipate demand in advance and make a large bet is fraught with planning risks. A minor slip-up in the supply and demand equation can saddle an airline with a large debt. Also, these leases, their maintenance contracts and insurance are all paid for in US dollars, which continues to appreciate with INR-denominated revenues.

The cost of flight and ticketing software, the continued power of ticketing agents and websites over customer choices and the unionisation of pilots and crew add to rising operating expenses. The flight pricing is quite elastic, and the customers have a disproportionate share of voice to protest price increases, which gives the DGCA an opportunity to actively monitor them.

Most importantly, in India, the fuel (ATF) rates and taxes are among the highest in the world. The rates are set by the state-run oil majors, which use higher rates here to subsidise other types of fuel. The central excise and state-level VAT (ATF is outside the purview of GST) end up going up to 25-35 per cent of the fuel cost.

India, therefore, has the highest ATF cost to total expense ratio among the large aviation markets in the world at around 35-45 per cent (compared to about 15-20 per cent elsewhere). Even a lean, quick turnaround airline like Indigo spends up to 35 per cent of its total expenses on fuel.

Separately, the airports are now almost a monopoly in India (no surprise there), which further squeezes the airlines on parking slots and rents. There’s no other way to make money in airlines in India than being operationally lean to the point of being emaciated. That can work for maybe two airlines at best and in the most normal of times. But even the slightest change in the business environment or planning misstep can lead to a death spiral, as Jet and Kingfisher Airlines experienced.

Two, it is unclear who questions or measures the effectiveness of the five different regulatory bodies managing civil aviation in India. This was a question we had raised during the unfortunate crash of the Air India Ahmedabad-London flight a few months back.

Most of these bodies swing into action after the event with a slew of random inspections, showcauses and fines (as it happened after the crash), and then there’s nothing more tangible and long-term that assures the customers about air safety.

None of us is wiser six months after that crash on what the real cause was, and what we have learnt from it. The usual response is knee-jerk actions for a few months, followed by, I presume, rent seeking. Even in this case, how difficult is it for a regulator to ask for a detailed scenario planning exercise to be submitted by airlines before the rules come into effect, including stress tests for other operational factors? This is way less complex than stress tests done in other sectors, for instance, in financial services, where the variables are significantly higher and more volatile.

Almost nothing in the list of reasons given by Indigo was unforeseen, so the question is what kind of regulatory plan allows for something to come into effect without asking the basic questions about readiness.

It is easy to throw Indigo under the bus now (deservingly), but what’s the point of having a regulator that can’t even anticipate and plan for possible disruptions that can cripple domestic mobility? If the idea is to have a set of guidelines and then throw it across to the players for implementation by a particular date (with extensions), and then not bother about whether they have implemented it well, then we should all be worried about the numerous safety regulations in the sector and their true adherence. Or, maybe that’s what the DGCA really wanted. Maybe there was no real interest in getting these guidelines implemented till the Delhi HC court forced their hand.

Three, the duopoly in civil aviation is a result of an industry structure that has been skewed by high operating costs because of the greed of the state, poor governance and lack of a proper bankruptcy code that led to failed airlines not being revived. This is a sector that doubles every 4-5 years and requires significant planning for capacity on the ground, in the air, crew and support infrastructure.

The regulator has been behind the curve in managing this growth and providing a stable and competitive landscape to the citizens. But this kind of market concentration is now the norm across key physical and information infrastructure sectors in India. Roads, energy, ports, airports, petrochemicals, telecom, TV networks and increasingly the adjacent sectors to these (like cement and machinery) are dominated by one or two players through active facilitation, regulatory capture or perhaps, to be fair, astonishing entrepreneurship on the part of a couple of large conglomerates.

Not just these, the die for market concentration among the same set of players is already cast for emerging infrastructure sectors like green energy, data centres, and defence manufacturing. This should have ideally raised red flags among regulators and other market participants, but a combination of an unbeatable electoral machinery and almost complete control of media narrative has meant such questions aren’t raised by the public.

Even a visible example of the perils of market concentration, like the Indigo crisis, is blamed on the airline rather than the citizens asking fundamental questions about why we are here. This isn’t likely to change soon.

I suspect in a couple of weeks, we will be back to business as usual with a few resignations at Indigo, satisfying everyone. This is the result of turning into a polity where questions are directed at everyone except those who should be responsible for answering them.

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India Policy Watch #2: India’s Rare Earth Strategy is Missing a Trick

Insights on current policy issues in India

—Tannmay Kumarr Baid and Pranay Kotasthane

(This article first appeared in the Hindustan Times’ December 2 edition)

Last week, the Union Cabinet approved the ‘Scheme to Promote Manufacturing of Sintered Rare Earth Permanent Magnets’ with an outlay of ₹7280 crore. The scheme will support several stages of the supply chain — conversion of rare earth oxides to metals, metals to alloys, and alloys to finished magnets.

Though required, this scheme is inadequate from a strategic perspective because it just shifts the import reliance from Chinese magnets to Chinese rare earth oxides. The missing trick is recovering rare earths from end-of-life electronics. These discarded devices can form an essential pillar of supply security.

Competing with China is futile

China controls approximately 70% of global rare earth mining and nearly 90% of refining capacity. This structural dominance was built through decades of state subsidies and a willingness to absorb environmental costs that other countries would not. When Western competitors attempted to enter the market, Chinese state-backed firms flooded markets with underpriced rare earths, forcing rivals into bankruptcy.

For India to compete in traditional mining and refining means fighting China on precisely these terms. Even with massive reserves, in the form of monazite sands, building such refining capacity requires significant capital and an ability to absorb sustained initial losses. Furthermore, any such new plant would remain exposed to volatile prices and Chinese market manipulation, which could quickly make it unviable, unless it is extensively hand-held through purchase guarantees and government subsidies.

India’s Comparative Advantage

That’s where ‘urban mining’ comes in. India is the third-largest generator of electronic waste worldwide, producing between 1.75 and 3.8 million tonnes of e-waste each year. With a growth rate estimated at around 30% annually, this waste is a far richer resource than natural ore. Electronic products contain far higher percentages of rare earth content than most ore deposits. For instance, NdFeB magnets in hard disk drives (HDDs) can contain around 28% REE by mass.

Further, computer equipment comprises roughly 70% of India’s total e-waste. Within this category, HDDs account for about 8% by mass. This yields an annual feed of about 100,000 tonnes of HDDs. Each hard disk contains about 15 grams of rare earth material. This means that the total recoverable mass from hard disks alone reaches roughly 4000 tonnes of magnet material per year, which translates to about 1300 tonnes of rare-earth oxide. While this is not yet enough for complete substitution, it is the only way to increase the rare earth feedstock within a few months.

Air conditioners and electric vehicle batteries are other potential sources with permanent magnets, and therefore a high REE concentration. Unlike mining, which requires new capital investment and lengthy permitting processes, this feedstock already exists within India’s borders.

The Current Failure

Yet, India recovers essentially zero REEs from its e-waste, despite the clear potential. Although official figures state that 43% of Indian e-waste is recycled, this number is stretched and does not reflect the actual value of what is being recycled. A vast, informal network of kabadiwalas dominates the sector, handling an estimated 85-90% of all e-waste. The kabadiwalas offer immediate cash, which is a far more lucrative proposition for most consumers than following a formal recycling process. The issue is that these collectors are not interested in recycling for REEs, as that requires complex chemical processes. Their business is built on recovering easy-to-get metals like gold, silver, copper, and aluminium. They use simple dismantling and acid-burning methods, methods that permanently destroy the rare earths.

Even the small formal recycling sector, which handles only 5-8% of e-waste, largely avoids REEs. REE prices are highly volatile and controlled mainly by China, which makes revenues hard to guarantee. Extracting these minerals also requires specialised, expensive machinery. This is a substantial capital investment involved, which recyclers are unlikely to make without stable returns in the foreseeable future. On top of all this, feedstock is not guaranteed, as formal recyclers must always compete with the informal sector’s offer of immediate cash.

Current policy frameworks have failed to reduce these barriers. The E-Waste (Management) Rules, 2022, follow an Extended Producer Responsibility (EPR) framework. On paper, this system requires producers to meet annual recycling targets by acquiring EPR certificates from formal recyclers. However, the rules create a fundamentally flawed incentive because all recycled materials are treated equally. The rules provide the same credit for one tonne of easy-to-recycle copper as for one tonne of strategically valuable, difficult-to-recycle dysprosium. No rational business would choose the more expensive and complex option.

Recent government interventions also fall short, often because they are not focused on this comparative advantage. An attempt to help was a ₹1500 crore scheme under the National Critical Minerals Mission. This is nowhere near enough, as a single REE recycling plant can cost between ₹1500 and ₹3000 crores. More pointedly, this scheme caps the incentive at just ₹50 crore per entity, which is far too small to spur investment.

Similarly, the newly announced ₹7280 crore PLI scheme for permanent magnet production excludes recycling and focuses only on production using primary minerals. Recycling plugs the gap as it is a domestic raw material for a domestic magnet.

Charting a Stronger Path

India’s path to REE security lies in a smart, asymmetric policy that builds on its comparative advantage. Urban mining is this niche. It transforms a domestic liability into a strategic asset.

This requires correcting the flawed incentives. The most effective first step would be to reform the EPR rules. Policy must differentiate between materials by providing higher EPR credits for REEs. This would create an immediate, market-based demand and secure the feedstock pipeline.

De-risking private investment is also necessary. This could be done through purchase guarantees or price floors, which would address volatility and incentivise investment. The entire system could be further strengthened by mandating better collection practices.

The goal is not total self-sufficiency, which is neither feasible nor necessary. The goal is to develop a defensible position in one segment of the supply chain that provides strategic leverage and reduces critical dependencies.

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Global Policy Watch: Finding a Frame for China’s Economic Actions

Global issues relevant to India

—Pranay Kotasthane

In edition #302, I characterised China’s economic behaviour as an international market failure.

Low-cost goods, fuelled by China’s distinct investment-led model, one that is prone to overcapacity, have benefited many downstream firms and consumers across the globe. But we cannot ignore that the heavily underpriced goods coming from China have had terrible consequences for firms in capable developing countries. Firms are delicate, complex adaptive structures. Once they are decimated by unfair competition, it’s not easy to rebuild them.

Generally, as countries become richer, they move into higher-value-added functions, vacating the low-end space for poorer countries. That isn’t the case with China, and there is a structural reason for the China shock.

The other effect is that underpriced low-cost Chinese goods suppress the development of substitutes. For instance, because of the extremely low cost of rare earths from China, firms elsewhere didn’t invest in alternatives like rare-earth-free motors, which are less environmentally damaging.

While many countries have woken up to the threat from China, they are responding individually with ineffective instruments, including tariffs, export bans, and increased scrutiny of investments. That’s where framing China’s conduct as an international market failure can help bring countries together and force China to take corrective action.

While this “market failure” framing hasn’t got much traction, a couple of influential articles on this subject make similar points. Robin Harding, in a Financial Times article titled China is Making Trade Impossible, writes:

There is nothing that China wants to import, nothing it does not believe it can make better and cheaper, nothing for which it wants to rely on foreigners a single day longer than it has to. For now, to be sure, China is still a customer for semiconductors, software, commercial aircraft and the most sophisticated kinds of production machinery. But it is a customer like a resident doctor is a student. China is developing all of these goods. Soon it will make them, and export them, itself.

…if China does not want to buy anything from us in trade, then how can we trade with China?

This is not a threat but a simple statement of fact. Workers in Europe, Japan, South Korea and the US need jobs. We do not want our economic development to go into reverse. And even if we did not care, without exports, we will eventually run out of ways to pay China for our imports. In a different context, Beijing policymakers do recognise this: they worry about a devaluation or default on the mountain of dollar assets China has already accepted.

The drag on the rest of the world was well illustrated when Goldman Sachs recently upgraded its forecast for the size of China’s economy in 2035. Normally, a growth upgrade in any country benefits all others: there is more demand, more consumption and more opportunity. Yet in this case, the extra Chinese growth comes from exports, taking markets from other countries. Germany will suffer the most, according to Goldman, with a drag of around 0.3 percentage points on its growth over the next few years. [Robin Harding, FT]

The article provides a good diagnosis of the problem but ends with an almost apologetic recommendation for counter-protectionist actions rather than a clear way forward.

That’s where the next article by Dani Rodrik, the Guru of Industrial Policy, comes in. He argues that China’s exports have three specific negative implications—harming national security, adversely impacting innovation, and causing job losses. Each of them necessitates a separate strategy.

For national security considerations, he argues that there is a case for “small yard, high fence” trade and industrial policies that “protect strategic and defence interests, such as by reducing dependence on critical military supplies and safeguarding sensitive technologies.”

What this approach doesn’t account for is that even if countries define their national security interests narrowly, China doesn’t. When it imposes extensive controls on basic metals, materials, and processes, buying nation-states have no option but to keep expanding the definition of the “small yard, high fence” until it becomes unwieldy, garden-variety industrial policy. This is precisely what is happening with rare earth processing and mining across the US and the world.

On innovation, he acknowledges that ‘China’s exports could undermine innovative capabilities in importing countries, reducing the prospects for future prosperity.’ For this, he recommends policies to encourage investment and innovation in advanced manufacturing segments.

This point is well taken and provides some credence to India’s approach of focusing on semiconductors, artificial intelligence, and electric two-wheelers. This approach also means eschewing the protection of established industries like electric four-wheelers and toys, where China already has a decisive advantage. The trick lies in identifying domains where the potential for innovation spillovers is highest.

On industrial policies to protect jobs, Rodrik says there is little utility in focusing on a manufacturing revival in advanced countries. Recent industrial policies haven’t increased manufacturing’s share in employment, including in China itself. His solution: “A good jobs strategy must focus on services such as care, retail, hospitality and gig work, since these will continue to absorb the bulk of future employment.” Here again, the situation is different for countries like India, where lower labour costs mean that increasing manufacturing’s share in employment is possible, but for the self-imposed constraints and China’s overcapacity.

Finally, this three-fold approach doesn’t discuss the need for plurilateral economic pacts to counter China. Individual actions by countries will help but are insufficient, as China can always find a transhipment hub or another country jolted by Trump’s actions to funnel its overproduction. Major economic powers need a collective economic security plan which builds leverage in domains that China values. An international market failure framing might force countries to think of collective solutions to this global problem.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Podcast] We have a Puliyabaazi with Yamini Aiyar on her book on building state capacity in Delhi’s government schools. This conversation should interest many of you.

2. [Article] Another policy perspective on the IndiGo collapse, by Anupam Manur.

3. [Event] The 16th Emerging Markets Conference is happening next week in Mumbai. Some exciting papers on the big policy questions are lined up for discussion. Passes are on sale here.

4. [Video] This episode on labour code changes is quite good.

Readers of Anticipating the Unintended are eligible for a 10 per cent fee waiver. How to claim it: In the application form, under the question “How did you hear about the GCPP?”, select “Other” and type: I want to learn to anticipate the unintended.

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India Policy Watch #1: When The Goal Is To Score A Self-Goal

Insights on current policy issues in India

—RSJ

Where are we on the India-US trade deal? For the past couple of months, there have been news reports on the deal being close to the finish line. Interestingly, earlier this month, even Trump seemed to suggest we were close to a deal:

“We’re getting a fair deal, just a fair trade deal,” Trump told reporters in the Oval Office at the swearing-in of his envoy to India, Sergio Gor. “We’re making a deal with India, much different deal than we had in the past.”

Last week, the Union commerce minister Piyush Goyal also indicated that the Bilateral Trade Agreement (BTA) was heading to a closure (HT report):

Speaking at the 22nd Indo-US Economic Summit, organised by the IACC, Goyal sought to minimise concerns about any friction in the relationship. “I don’t see any reason to be very worried. I don’t believe there is any hiatus in the relationship. It continues to be very important, very strategic for both countries, the United States and India,” he stated.

“.. when the deal becomes fair, equitable, balanced, you will hear very good news.”

I also think we are closer than ever before on a deal going by a series of coincidental news reports in November that look like India conceding to various terms the U.S. had placed as preconditions. At the start of the month, Reliance Industries announced it was stopping the import of Russian crude (after stocking up enough inventory, I suspect). The state-run refiners have also halved their imports from Russia in the last month.

Almost sequentially, India announced an agreement with the US to purchase 2.2 million tonnes of LPG every year from 2026. Then came the news about India purchasing over $93 million worth of arms from the US including Javelin anti-tank missiles and Excalibur precision projectiles on the back of a framework agreement signed in October to expand defence ties between the two countries. There may have been other similar steps taken which have gone under the radar or whose announcements will be made in the near future.

As we had written here earlier, the prudent thing for India will be to make the concessions gradually and spread them over time so that it is not seen as bowing to a bully, domestically. Optics are important here.

Separately, I read with interest the almost simultaneous withdrawal of a series of Quality Control Orders (QCOs) by ministries across sectors like chemicals and fertilisers, mining and petrochemicals. These QCOs, totalling to 114, covered raw materials, intermediaries and industrial inputs that go into manufacturing of finished goods by Indian firms.

QCOs, especially on intermediate goods, are just about the worst form of non-tariff trade barriers. Back in 2019-20, India started sliding down the protectionist slope with the Atmanirbhar Bharat initiative. This lead to an increase in import duties across multiple goods in a sharp reversal of trend seen since 1991. This gathered further momentum after the Galwan clashes.

Somewhat under-reported during that time was the exponential rise in QCOs during those years. From about 14 QCOs covering 106 products in 2014, India has now 187 QCOs on over 760 products with about 60 percent of them in intermediate and capital goods. The idea behind this QCO overdrive, on paper, at least, was to help restrict import of lower quality raw materials and intermediates so that Indian manufacturers could churn out high quality finished goods. This made zero sense.

Why do manufacturers, who understand their business the best, need any help from the government in quality control of the raw materials they use from global suppliers? If they don’t like the quality from a particular firm, they can easily shift to another who has better quality to offer. They know their business the best.

This scenario is different from QCOs on finished goods where you could argue that the end consumer (the ordinary Indian citizen) might not be able to discern an inferior quality product and needs to be protected through a robust quality control mechanism.

Or, where there is a clear danger of dumping of finished goods into the Indian market which needs to be controlled though non-tariff barriers like QCOs. But QCOs on intermediates was the State trying to achieve a flawed objective of self-reliance with bad tools. It is the equivalent of shooting yourself in one foot and at the same time scoring a self-goal with the other.

That’s exactly how it panned out. On the back of US tariffs and penalties imposed in June and Trump’s pointed criticism of non-tariff barriers raised by India, the government constituted the Gauba committee in August this year to review the QCOs. What the committee found isn’t surprising at all. It is an educative compendium of terrible unintended consequences of unthoughtful policy making.

First, there is no evidence that suggests there was due diligence done on the domestic manufacturing capacity in these intermediates to see if it could scale up to meet the requirements of the local manufacturers (mostly MSMEs) in the event of foreign vendors not adhering to the QC standards.

Nor was any planned increase in testing capacity taken up with BIS (the accreditation body) to ensure there are no delays in certifying those vendors who were keen to meet the QCO requirements. This is no surprise because why would anyone at BIS be keen on increasing the capacity when the implicit understanding about the objective of QCOs is to restrict imports rather than actually improving quality standards.

If you have any illusions about how seriously Indian labs take quality standards, please read our earlier editions on pharma quality controls. Anyway, because of this lack of planning and short implementation window, we had the familiar spectre of testing bottlenecks, delays in compliance certification and supply chain disruptions impacting the MSMEs output (which was mostly exported) in these sectors. In most of these sectors, India lost market share globally in the past five years.

More interestingly (or worse), in most sectors where the QCOs were introduced, there was already a market power concentration in domestic capacity. The clearest example of this was in the viscose and polyester fibre segment where the QCOs almost made any import almost impossible in a domestic market that’s dominated by two large players (you know who).

In the past 2 years, fibre prices went up by 25-30 percent because of these QCO driven import barriers which pushed the production cost by about 50 per cent. Globally, Indian manufacturers lost market share to cheaper competitors from Southeast Asia. The same story repeated itself for QCOs applied on plastics, electronic components, footwear and polymers.

On balance, the global competitiveness of Indian manufacturers who used these products as inputs for their finished goods went down. And the market power of a few large Indian conglomerates went up who continued to raise prices instead of creating additional capacity in a hurry.

Lastly, there’s limited evidence to suggest the quality of Indian manufacturing went up because we stopped importing substandard intermediates. The local alternatives aren’t necessarily subjected to the same standards and BIS specifications or standards haven’t scaled up. In fact, there are global standards for many of these products that are used and recognised by multiple countries which we should simply align with to make our MSME segment competitive. We don’t need to reinvent the wheel or design QCOs with the express purpose to deter imports.

The withdrawal of this set of QCOs on 114 products is an encouraging step in redressing the impact of a bad policy decision. This still represents only 16 percent of the total product codes affected by the QCO overdrive India went on from 2019.

There’s still a long way to go to eliminate these in other sectors, which are still reeling from the unintended effects. Protectionism is a bad idea at all times, but even if you are forced to resort to it for a brief period because everyone else is doing the same, it must be done with more nuance and calibration.

In any case, the upside of Trump bullying India with a 50 per cent tariff and being tough on non-tariff trade barriers is that it gave voice to MSMEs to raise the issue of QCOs and a positive set of actions thereafter. I hope the empirical evidence that’s now available gets embedded in institutional memory on the sheer stupidity of using QCOs as a tool to improve manufacturing competitiveness.

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India Policy Watch #2: Sir Sir O Sir…*

Insights on current policy issues in India

—Pranay Kotasthane

The Special Intensive Revision (SIR) of electoral rolls has been causing quite a havoc in government schools over the last few weeks. Sample these news snippets:

With 13 of 16 teachers at Mahatma Jyotiba Phule School in Surat deployed as Block Level Officers (BLOs) in the ongoing Special Intensive Revision (SIR) exercise, the parents of children enrolled at the municipal corporation school have raised a complaint.

However, there is unlikely to be relief anytime soon, with the exams for the second semester days away. [Indian Express, November 27]

Or

At the Narayan Das Bangur Memorial Multipurpose School in Kolkata, 13 of 34 teachers have been given BLO duty. Moreover, even the lone Group C staff at the institution has been appointed as a BLO.

Speaking to The Indian Express over the phone, Sanjay Barua, Headmaster, Narayan Das Bangur Memorial Multipurpose School, said, “I’m myself performing the duties of the Group C staff, as I have no other choice. We have got some guest teachers from other schools, and exams are currently underway.” [Indian Express, November 23]

Neither is this use of teachers for miscellaneous purposes restricted to SIR. Just a few weeks ago, the Karnataka government conducted a caste census, which also involved teachers and other government employees. As a result, government and aided schools in Bengaluru were shut for eight days so that teachers could be deployed for surveying. There was no school between the Dasara and Deepavali breaks, leading to losses of 74 class hours in primary schools and 66 in high schools.

Now, it’s not that government teachers are helpless. They are a powerful interest group and are now organising against the rushed-through SIR exercise. But it’s the students and parents, a diffuse interest group, who are the big losers.

It’s an indication of our warped priorities that hurting the educational outcomes of the disadvantaged children is not considered a denial of social justice, while diverting teachers to conduct a caste survey is. In the case of SIR, even the ruse of social justice doesn’t apply.

For an alternative, check what the UIDAI did with Aadhaar enrollment centres. The enrollment drive brought in empanelled agencies that registrars contracted. It’s time for other arms of the government to take this approach as well. Hire empanelled agencies to do surveys instead of forcefully ‘volunteering’ teachers into such tasks. If you treat teachers as casual labour, don’t expect excellent learning outcomes from government schools either.

Apart from their impact on students, these news items also illustrate the arguments Yamini Aiyar makes in her book, Lessons in State Capacity from Delhi’s Schools. The book argues that the frontline educational bureaucracy feels powerless in the face of a Circular Raj enforced from the top, which imposes a ‘very narrow rule-based culture of performance.’ This system forces top-down accountability in a rigid fashion that is dissociated from students’ learning outcomes.

Seen through this lens, the diversion of government teachers’ time and energy to the SIR or caste census is just an extreme form of this top-down accountability. It might get you compliant teachers, but it won’t get you learning outcomes.

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*Song from the movie Sir (1993)

Global Policy Watch: Unlocking Markets for Deep Tech Firms

Global issues relevant to India

—Pranay Kotasthane

This week’s The Economist has a stellar profile of China’s advances in two industries: autonomous vehicles and biotech. The latter is less-discussed and hence merits some attention. Within a decade, China’s drugmakers have moved beyond the low-level equilibrium of generic drugs and are launching new medications at a frantic pace.

Some reasons for success are familiar: a capable workforce, intense domestic competition, regulatory improvements, and the role of foreign returnees. But there’s one additional reason that caught my eye: rules that make it easier for biotech firms to get listed on the Hong Kong stock exchange.

Incidentally, Kiran Mazumdar-Shaw, chairperson of Biocon, also flagged this reform idea a few days back in her Economic Times column:

Hong Kong created a specialised listing regime in 2018 for pre-revenue biotech companies. It allowed companies with no commercial revenues - but strong scientific validation - to access public capital under well-defined safeguards. Many questioned whether retail investors could assess the risks involved. HKEX addressed this with rigorous scientific disclosures, adviser oversight and eligibility conditions linked to professional VC investment.

The results have reshaped the global biotech landscape:

Nearly 30% of all new drugs emerging globally today originate from Chinese biotech companies that grew through HKEX’s listing pathway. Close to 20% of Big Pharma’s in-licensing deals now come from these companies, reflecting global confidence in their science. [Kiran Mazumdar-Shaw, Economic Times, 26 November]

The Indian financial market regulator, SEBI, does have a mechanism to encourage pre-revenue firms, but the listings don’t take place on the main board. The result is that Indian biotech and other deep tech firms with long gestation periods are unable to raise capital from India’s buoyant financial markets. They end up listing on NASDAQ or remain small due to capital constraints.

There are oversight negligence risks in this approach. Fly-by-night firms can swindle unsuspecting retail investors out of their money, eroding confidence in India’s financial markets. Additional protection mechanisms focusing on scientific capabilities will thus have to be put in place.

Another method could be to start with deep-tech domains where India already has a comparative advantage: fabless chip design firms, biotech, and space, before expanding it to other sectors.

Endless hand-wringing about India’s low corporate R&D spend is not enough; we need to dismantle the barriers firms face under Indian conditions. Unlocking financial markets seems like one such idea worth considering.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Event] The 16th Emerging Markets Conference is happening next month in Mumbai. Some exciting papers on the big policy questions are lined up for discussion. Passes are on sale here.

2. [Article] Bhuvana Anand highlights the unfinished business of labour code reform in this excellent Business Standard piece.

3. [Podcast] Check out this Ideas of India episode on education policy featuring Yamini Aiyar.

4. [Podcast] We have a Puliyabaazi with Ornit Shani and Rohit De on their terrific book Assembling India’s Constitution. The book provides a mountain of evidence that ordinary Indians didn’t just receive the Constitution from up above, but actively shaped it. One of the best books we read this year.