#284 Of Chance, Chalice, and China
Predictions for 2025, Price Controls on Alcohol, Polarisation in the US, and China's anti-India Moves
Prediction Time
— RSJ
There’s a sense of anticipation about 2025. A lot that happened in 2024 seems like setting the stage for the big events to unfold this year. Power changed hands, governments fell, strong leaders were humbled, new wars were started, old wars dragged on, technology like AI and crypto seemed to reach an inflection point, and ever-present volatility became the norm. 2025 stares at us like a loaded gun.
So, what should we expect from it?
Here are my ten somewhat specific predictions for the year:
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. There is a feeling of having won the mandate to shake things up, and every Trump nominee (except the Treasury Secretary) is raring to get started on upending the consensus in Washington. There won’t be as many personnel changes in the cabinet as in his first term, but there will be more chaos. The real change will be how Trump brings back the spoils system and replaces career civil servants with his loyalists. This will happen quicker and in a more intrusive manner than what most people imagine.
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. Most countries have already factored this into their 2025 plans.
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.
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 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.
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. Its domestic economy has stuttered because of slack consumer demand, a sick real estate sector and a demographic dividend that’s now over the hill. China has a real problem on its hands, and its moves will spell desperation in 2025.
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. I expect there will be specific legislation on content production and review on platforms like YouTube and Instagram in India.
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. AI is one hype cycle that will continue to build up because the outcomes will be real.
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. This could be more if GDP growth continues to come under 7 per cent (which it will).
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. The second half of 2025 will be shrill politically.
PolicyWTF: Tipsy-turvy
This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?
— Pranay Kotasthane
Earlier this week, the news that United Breweries Ltd has suspended beer supply to Telangana caught my attention. Particularly, this line from a Business Standard report had me scratching my head:
“Despite our continuous efforts over the past two years, there has been no increase in the base prices offered for our products. This has resulted in escalating losses, making our operations in the State unviable,” United Breweries said in a statement.
If drinking alcohol is a vice, you would think that the government should be happy with higher alcohol prices. The higher the market-determined price, the lesser the demand. But then, as the meme goes, India is not for beginners. Instead, the concerned government department, ironically named Telangana Prohibition & Excise Department, has capped alcohol prices. Let’s try to make sense of this paradox.
Alcohol is a heavily regulated commodity in India, as it should be. However, Indian governments often confuse regulation with government provision. And that’s where the fun starts. State governments in India don’t just control but own critical elements of the alcohol supply chain. In many states, the wholesale procurement of spirits is monopolised by a government-owned company. All alcohol companies must register themselves and sell their spirits to this firm. This wholesale company then sells to retailers. Some states follow the Telangana model, where a single government company—Telangana State Beverages Corporation—monopolises the entire wholesale and retail supply chain. Others, such as Karnataka, have one wholesale government monopolist—the Karnataka State Beverages Corporation Ltd., and many retailers, including the government-owned Mysore Sales International Limited.
Throughout the supply chain, there are multiple opportunities for raising tax and non-tax revenue: the registration fee for manufacturers, the excise duty on production, and the license fee on distributors. In Karnataka, for example, alcohol-related duties alone comprise 11 per cent of the total budget.
This is where the story gets murkier. Because alcohol excise is vital for revenue, state governments want it to be regulated so that they can also extract predictable and stable revenue from it.
That’s where the crazy price controls come in. Governments effectively set the ex-distillery price (what the wholesaler pays the manufacturer), the wholesale price (what retailers pay the wholesaler), and the MRP (what consumers pay retailers). For example, if a bottle's MRP is fixed at ₹700, the retail margin is fixed at ₹100, the wholesaler’s margin is fixed at ₹50, and the excise duty is fixed at ₹300, the ex-distillery price gets automatically fixed at ₹250. Once decided, a manufacturer cannot increase the prices of their products of their own volition, even if their input costs rise. They must wait for the government to revise the prices.
Now, state governments fear that increasing prices would reduce demand, directly impacting excise duty collection. Hence, they postpone raising the prices for several years. And so they impose a cap on alcohol prices. The situation gets further compounded when the wholesaler refuses to pay even what’s due to the producer. For instance, the Telangana government reportedly owes nearly ₹4000 crore to various alcohol makers. That’s because wholesale is a monopoly, so they don’t need to worry about manufacturers. If one folds up, the wholesale dealer can procure from other manufacturers.
Technically, government procurement can happen without fixing prices. Such a system would allow the government to reasonably regulate the quantity of alcohol while raising reasonable revenue through excise duty collections. In such a system, the manufacturers would be free to update their prices depending on their input costs. Prices would likely be higher, leading to a reduced demand initially, but will create opportunities for newer players to enter the market. Players selling substandard products illegally outside the official government channel will be motivated to sell to the government monopoly instead. As these newer options emerge, the government will again be able to raise the same absolute tax revenue without increasing the rate of taxation.
A better equilibrium is possible. But such is the addiction of state government to alcohol revenues that they don’t want to budge.
P.S.: Don’t miss this 700+ page book where the fixed prices of all alcohol products sold in Karnataka are mentioned clearly. As transparent as vodka.
Global Policy Watch: The Dangers Of Polarisation
Insights on global issues relevant to India
— RSJ
Right-wing is having its moment in the US, and what’s more, it is exerting its newfound power outside its borders. There’s almost a reset on every cultural issue where the dominant discourse of the last decade is being questioned or rolled back. The Democrats don’t know what has hit them as a combination of populist politicians and billionaire entrepreneurs have sucker-punched them on social media. Eventually, the election cycle will get going, and they will have to find a way to counter this, but it will be interesting to see which way they go. Further left or towards the centre? I worry that the performative nature of politics in the age of social media will mean we will see more strident populists on the left gain the upper hand. This will mean further polarisation and weakening of democratic norms that require debate, discussion and consensus to thrive. This polarisation will also be exported out of the US (Musk has already shown the way).
I returned to a book I read a few years back (during the peak Trump 1.0 era) that highlighted the risks of such polarisation and presented scenarios on what a post-Trump era would look like. How Democracies Die by Steven Levitsky and Daniel Ziblatt (2018) is a book that analyses a term in vogue back then—democratic backsliding. Another Trump era in a post-Trump era was not something they had bargained for. But here we are.
Anyway, there’s this extract from the book, which is a useful reminder of what sustains democratic norms. Not institutions but the way we conduct politics.
“Historically, our system of checks and balances has worked pretty well—but not, or not entirely, because of the constitutional system designed by the founders. Democracies work best—and survive longer—where constitutions are reinforced by unwritten democratic norms. Two basic norms have preserved America’s checks and balances in ways we have come to take for granted: mutual toleration, or the understanding that competing parties accept one another as legitimate rivals, and forbearance, or the idea that politicians should exercise restraint in deploying their institutional prerogatives. These two norms undergirded American democracy for most of the twentieth century.
Mutual toleration and institutional forbearance are closely related. Sometimes they reinforce each other. Politicians are more likely to be forbearing when they accept one another as legitimate rivals, and politicians who do not view their rivals as subversive will be less tempted to resort to norm breaking to keep them out of power. Acts of forbearance—for example, a Republican-controlled Senate approving a Democratic president’s Supreme Court pick—will reinforce each party’s belief that the other side is tolerable, promoting a virtuous circle. But the opposite can also occur. The erosion of mutual toleration may motivate politicians to deploy their institutional powers as broadly as they can get away with. When parties view one another as mortal enemies, the stakes of political competition heighten dramatically. Losing ceases to be a routine and accepted part of the political process and instead becomes a full-blown catastrophe. When the perceived cost of losing is sufficiently high, politicians will be tempted to abandon forbearance. Acts of constitutional hardball may then in turn further undermine mutual toleration, reinforcing beliefs that our rivals pose a dangerous threat. The result is politics without guardrails—what political theorist Eric Nelson describes as a “cycle of escalating constitutional brinksmanship.”
Polarization can destroy democratic norms. When socioeconomic, racial, or religious differences give rise to extreme partisanship, in which societies sort themselves into political camps whose worldviews are not just different but mutually exclusive, toleration becomes harder to sustain. Some polarization is healthy—even necessary—for democracy. And indeed, the historical experience of democracies in Western Europe shows us that norms can be sustained even where parties are separated by considerable ideological differences. But when societies grow so deeply divided that parties become wedded to incompatible worldviews, and especially when their members are so socially segregated that they rarely interact, stable partisan rivalries eventually give way to perceptions of mutual threat. As mutual toleration disappears, politicians grow tempted to abandon forbearance and try to win at all costs. This may encourage the rise of antisystem groups that reject democracy’s rules altogether. When that happens, democracy is in trouble.”
It is no different for India.
India Policy Watch: Is China Cheating on India?
Insights on current policy issues in India
—Pranay Kotasthane
There was another major report on China-India economic relations this week. Rest of World reported that China is actively blocking Foxconn’s Chinese employees from visiting Foxconn’s Indian production facilities to halt Apple’s China +1 move.
Journalists Selina Cheng and Viola Zhou explain:
“Foxconn is halting new work rotations for its Chinese employees at its Apple iPhone factories in India, and sending Taiwanese workers instead, according to five people familiar with Foxconn’s operations in India. Shipments of specialized manufacturing equipment meant for India have also been held up in China, the sources told Rest of World.
…
In recent weeks, however, Foxconn’s Chinese employees who were set to travel to India were told to cancel their trips, the sources said. One person said staff who had obtained visas and plane tickets were also stopped from traveling.
Some Chinese employees currently based in India were told they would have to return home before an unspecified date, some of the sources said. The directive was given verbally to staff, one Foxconn employee said.”
This news comes just a couple of months after a much-publicised video in which India’s commerce minister is seen complaining to the German Vice Chancellor that China was blocking exports of Tunnel Boring Machines (TBMs). These Herrenknecht TBMs were assembled in the German construction company’s China facility. The Indian Express confirmed the story later, citing a statement from the company.
These two news items suggest that China is actively blocking India’s manufacturing rise. I am not convinced just yet. None of the items under discussion fall under China’s dual-use export control list. Neither Foxconn’s Chinese engineers nor China-assembled TBMs are indispensable. Blocking these items doesn’t translate into any leverage over India because they are easily substitutable. Taiwanese engineers will easily replace Foxconn’s Chinese engineers. Herrenknecht India is now supplying all its Metro TBMs from their India facility. Thus, my initial reading—pending further evidence—is that we are overestimating the Chinese government’s reach and underestimating Chinese companies' ability to do business with the world. My guess is these delays might be due to customs-related corruption in China.
Nevertheless, we must prepare against an adversary’s capabilities, not its intentions. The repeated appearance of these news items gives enough reason to assume that China might interfere to prevent the transfer of all kinds of technology to India. China’s blocking of the export of talent and materials belonging to foreign companies will only accelerate the China+1 trend. If these reports are accurate, they indicate that China is grasping at the straws. Seen together with the recent export controls imposed on critical minerals, it appears that the antidote to China’s overcapacity is China itself. China’s move towards self-sufficiency and worsening business environment are already pushing foreign companies away. Blocking non-sensitive exports will further isolate the Chinese economy.
The opportunity is India’s to take. The government must undertake the tax, trade, and policy reforms preventing companies from moving their manufacturing to India. Only PLIs won’t do. The push from China exists, but can we pull companies on our side?
HomeWork
Reading and listening recommendations on public policy matters
[Paper] Suman Joshi and Pranay have a working paper on delimitation, which answers a burning question: What Should the Southern States Demand?
[Resource] The new Parliament Digital Library is an underrated resource. The searchability is quite good. You will find speeches and discussions right from the First Lok Sabha. Check it out.
[Book] Sir M Visvesvaraya’s biography, Engineering a Nation, does a great job of contextualising the great technocrat’s contributions to India. It is a perfect gift for engineers and policy enthusiasts alike.
I think even movie tickets price too is controlled in Telangana
RJS prediction on Delhi election result is surprising and interesting.