#343 Overhang
India's Economic Resilience and One Year of Operation Sindoor
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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.
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 Anil Raman 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.
HomeWork
Reading and listening recommendations on public policy matters
[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.
[Article] An opinion piece which casts a doubt on the US-Pakistan bonhomie.
[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.
[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.