#328 There are no Dull Weeks Anymore

Evaluating our predictions for 2025, 250 Years of the Wealth of Nations, The Churn over Chinese Investments, and Empathy vs Compassion - the Gig Work Version

The Year That Was

—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 Vanshika Saraf 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.

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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.

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