#329 Look Ahead

Ten Predictions for 2026, A Claim on China's Geopolitical Leverage Due to Rare Earths, and an Anticipated Pax Silica Plus India

India Policy Watch: Predictions 2026

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.

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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.

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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.

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