Director Desk

The reascension of President Donald Trump to the helm of the United States has precipitated a series of economic reverberations, notably impacting India’s financial markets. The imposition of tariffs and the promulgation of protectionist trade policies have engendered a palpable sense of trepidation among investors, culminating in discernible fluctuations within the Indian stock market. In a recent sequence of trading sessions, India’s benchmark indices have exhibited a downward trajectory. The Nifty 50 index experienced a decrement of 0.12%, concluding at 23,045.25, while the BSE Sensex witnessed a decline of 0.16%, settling at 76,171.08. This downturn signifies an aggregate diminution of approximately 3% over a span of six sessions.  Not to forget, the aggregate market capitalisation of companies listed on the Bombay Stock Exchange (BSE) contracted by a staggering ₹9.3 lakh crore, settling in at ₹408.52 lakh crore. Concurrently, small-cap stocks have approached bear market territory, descending 21.4% below their historical zeniths, and the mid-cap index has retracted by 17% from its apex. These perturbations are largely attributable to apprehensions surrounding U.S. tariffs imposed on India and substantial divestments by foreign investors.  The promulgation of tariffs by the U.S. administration has ostensibly catalysed an exodus of Foreign Institutional Investors (FIIs) from the Indian markets. Factors such as a fortifying U.S. dollar, elevated U.S. bond yields, and the overarching ‘America First’ doctrine have collectively impelled FIIs to reallocate their capital. This capital flight has exerted downward pressure on Indian equities, further compounding the prevailing market downturn. The ramifications of President Trump’s policies manifest heterogeneously across various sectors of the Indian economy. The IT and Pharmaceutical sectors, with a substantial reliance on exports to the U.S., confront potential adversities stemming from heightened tariffs and stringent immigration policies. The imposition of elevated tariffs could erode the competitive pricing advantage of Indian IT and pharmaceutical firms in the U.S. market. Moreover, restrictive immigration reforms may impede the mobility of skilled professionals, thereby inflating operational costs for IT enterprises. The U.S. administration’s inclination towards fossil fuels, coupled with prospective tariffs on wind turbines and solar panels, poses hurdles for India’s rising renewable energy sector. Indian companies engaged in green energy initiatives may encounter escalated costs for technology and raw material imports, potentially stymieing the momentum of sustainable energy projects. The imposition of a 25% tariff on steel and aluminum imports by the U.S. has precipitated a 3% decline in India’s metals index. Prominent entities such as Tata Steel and JSW Steel have borne the brunt of this policy, registering significant stock devaluations. Amidst the prevailing economic uncertainties, India’s retail inflation has exhibited a decrement, descending to 4.31%. This development offers a modicum of respite, potentially augmenting consumer purchasing power and creating economic stability. Nevertheless, the overarching apprehensions pertaining to U.S. trade policies continue to cast a shadow over the economic outlook. In response to these multifaceted challenges, it is imperative for India to recalibrate its economic and diplomatic strategies. PM Modi’s just commenced engagements in the US, particularly with President Trump presents a timely opportunity to negotiate trade terms, mitigate tariff-related adversities, and fortify bilateral economic ties. Also, diversifying export markets beyond the U.S. and reinforcing domestic consumption could serve as viable avenues to insulate the Indian economy from external shocks. The resurgence of President Trump’s administration heralds a complex interplay of challenges and opportunities for India’s stock market. A nuanced understanding of these dynamics, coupled with agile policy responses, will be instrumental in navigating the evolving economic landscape.

The Union Budget of this year has been a boon for the middle class, specially the salaried class, which felt a wee bit overlooked over the years. Despite the fact, that with about 10 million taxpayers out of a total of 30 million, getting off the tax net, shaving 1 trillion INR off the Indian exchequer’s reserve, the FM has still managed to pare the Fiscal Deficit for the coming fiscal to 4.4% from the RE for the present fiscal of around 4.8%. The basic ingredients behind this fine balancing act are a toned down Capex of Rs 11.2 Lakh crore (1% increase over last fiscal budget), albeit including Grants-in-aid to States, Rs 15 lakh crore; an estimated 14.4% rise in personal income tax from Rs 12.6 lakh crore to Rs 14.4 lakh crore, next fiscal; Corporation tax and GST growth expected to grow by 10%; growth in revenue from Dividend income and profits from PSEs from Rs 2.9 lakh crore to Rs 3.3 lakh crore in FY 25. As such, the economy is well poised on the fiscal consolidation path to keeping the target below the threshold of 4.5% of GDP, as outlined in the Budget 2021. Along with the above, the Budget enjoins the Government to seek to bring down the ‘Debt to GDP’ to about 50% by the end of FY31 (End of the 16th Finance Commission’s term) from 56.1%, projected for FY 26. By the calculations of a few economists, this would dovetail well with a Fiscal Deficit of 3 to 3.3%, coupled with a capex of 3 to 3.5% of GDP. This is the outcome of an admixture of fiscal prudence and development measures undertaken by the Government (with an added dose of infra), that would lay down the edifice of a resilient and growing economy duly buttressed by fiscal buffers, ever ready to face the global and other economic headwinds, going forward. The major takeaway for the salaried class translates to a tax free salary income of up to Rs 12.75 lakh, rebate on annual income up to Rs 12 lakh, as against the extant limit of Rs 7 lakh. As per the rejigged tax slabs, the extent of tax savings would range from Rs 30K to Rs 1.1 lakh, with the highest tax rate being applicable to income above Rs 24 lakh vis-a-vis Rs 15 lakh, at present. Government’s emphasis on revamping the sagging demand growth by strengthening the purchasing power of the middle class is amply borne out by this budget, as also keeping a hawk eye on the Indian economy’s trajectory to a ‘Viksit Bharat” by way of sumptuous allocation of funds to the major sectors like Defence (Rs 4.91 trillion), Rural Development (Rs 2.66 trillion), Agriculture & Allied activities (Rs 1.71 trillion), Education (Rs 1.28 trillion), Health (Rs 98.3 K), Urban Development (Rs 96.7 K), IT & Telecom (Rs 95.2 K), and the list goes on. The Budget FY 25 revolves around 4 major planks of development, viz., Agriculture, Investment, MSME and Exports. Taking cognizance of the dominance of AI, going forward, the Government has come out with an outlay of Rs 500 Crore on the Centres of Excellence in AI for education. Further, the Udan Scheme has been given a fillip to cover 120 new destinations; Jan Vishwas Bill would be introduced to decriminalise 100 provisions in various statutes; FDI limit for insurance increased to 100% from the extant 74%. That said, there are certain facts of concern which engages the Union Government, like a gradual economic slowdown, a markdown in the RE of many crucial economic parameters like Disinvestment, Capex, Corporation tax and Excise duties, to name a few. No wonder, the FM’s stress in the Budget on upliftment of rural economy, MSMEs, boost to investment with Private sector taking a big stride with Government creating an enabling environment and boosting exports to arrest a slide in the balance of trade. Although the Government’s efforts in keeping the overall inflation in check through fiscal and monetary measures cannot be overlooked, yet the food inflation horse needs to be reined in to preempt a gallop – hence the imminent need for that fillip to production with a matching consumer demand! The Budget 2025, therefore, amply deserves to be appreciated, for nothing less than it being a brilliant trapeze act, encapsulating courage, conviction, optimism and astuteness.

The Economic Survey of FY 25 has an underlay of AI, that poses “unprecedented opportunities and significant challenges” for the job market spanning the globe, warranting building of “robust institutions” to alleviate its deleterious impact. India, taking a cue from its past experiences with pathbreaking technological disruptions, understands the importance of robust institutions playing a key role in steering these to ensuring equitable outcomes for the economy. Substantial investments in education and skilling ring fenced by an enabling institutional ecosystem would go a long way in the vibrant workforce adapt to and adopt the new technology that has taken the world by storm. With a services-led economy, and the country boasting of its demographic advantage, the nation is quite rightly besieged by AI’s potential of upending its extant advantages by potential displacement of a massive labour force. An IIM survey exhibits a disturbing prognosis of about 40% of the surveyed employees to the effect that the human skills would be outdone by AI in the next about half a decade. A healthy and robust economic and social infrastructure would greatly contribute to a truly inclusive economic growth in the new world order. With an estimated GDP growth of 6.4% in FY 25 and within a band of 6.3-6.8% in the coming fiscal, against the backdrop of strong economic fundamentals, a robust external account and rigorous adherence to fiscal consolidation path with sustained impetus on private consumption, the GoI’s strategy would revolve around giving impetus to Industries (added push to capital goods sector) bolstered with R&D support, MSMEs, and the requisite infra push to a sustainable upward trajectory in India’s GDP path with a substantial thrust on services and industrial exports, that is a sine qua non for a ‘Viksit Bharat’ by 2047. With a positive outlook on the food inflation front, with a steady core inflation, buttressed by reduced global energy and commodity prices, India looks poised to scale the frontier, despite climate issues and geo political instability. The forex health looks sturdy enough to weather the intermittent capital flight, and can support 90% of its external debt and 10 months of imports, on account of an evolved domestic capital market and steady capital inflows. The formal sector has registered an impressive growth with EPFO subscriptions more than doubling in the 5 year time frame from 2018-19. An issue of concern, however, is the lack of correlation between growth in corporate profits and wages. While profits soared to 22% in FY 24, employment grew by a paltry 1.5%, due to a sharp focus of the corporate sector on cost-cutting through workforce layoff. This flags the issue of rising income inequality, striking at the very foundation of inclusive growth. Overall, a balanced outlook despite global challenges (geo political, commodity and energy prices and trade barriers); there is an urgent need for structural reforms, deregulation of economy, investment uptick, corporate wage growth for a buoyant consumer demand and a sustained infra push for a sustainable growth trajectory of the Indian economy.

Owing to the protracted Israel-Palestine imbroglio, India finds itself grappling with a host of economic vicissitudes, most notably the inexorable escalation in oil prices, a surge in inflationary pressures, and pronounced volatility in the stock market. These perturbations, exacerbated by an overarching atmosphere of global uncertainty, are beginning to cast long shadows over the contours of India’s financial edifice. India’s energy security remains precariously poised, heavily dependent as it is on the volatile currents of Middle Eastern oil. As of August 2024, a formidable 44.6% of India’s crude oil imports emanate from this region, rendering any disruptions in pivotal maritime corridors such as the Strait of Hormuz or the Red Sea potentially catastrophic. These choke points, which  are narrow channels along widely used global sea routes that are critical to global energy security are not merely geographical features but lifelines of global energy, facilitating the movement of over one-fifth of the world’s oil. A blockade or even the rerouting of tankers via the Cape of Good Hope would significantly elongate transit times and concomitantly escalate transportation costs. Such an upheaval portends a ballooning of India’s oil import bill, with projections for FY 2024-25 placing it between a daunting US $101 billion and US $104 billion, a marked increase from the US $96.1 billion of the preceding fiscal year​. The repercussions of these inflated crude oil prices reverberate directly through India’s inflationary landscape. This will result in substantial price rise across the board with a significant challenge for our  economy and policy makers. With oil imports constituting about 90% of the total domestic demand, with major sourcing from Saudi Arabia, Iraq, the UAE, Russia, USA and Kuwait, the domestic economy is heavily reliant on oil import for its energy requirements. The Reserve Bank of India (RBI), which had previously entertained the possibility of trimming interest rates, now faces a bleak scenario wherein spiralling fuel costs are likely to perpetuate inflationary pressures. From transportation to manufacturing, the escalating costs of fuel ripple across the economy, culminating in heightened consumer prices across an array of goods and services. The stock markets, as ever susceptible to global tremors, have not remained insulated from the escalating conflict. Not even a week ago, on October 3, 2024, the Sensex witnessed a precipitous fall of over 1,700 points, while the Nifty nosedived by 546 points, reflecting investors’ palpable anxiety over the oil-induced inflation spectre. The India VIX, colloquially dubbed the “fear index,” soared by nearly 10%, a stark manifestation of the market’s growing unease. Compounding this turmoil is the exodus of foreign capital from Indian equities, as investors pivot towards ostensibly safer havens such as bonds and gold. This exodus has disproportionately impacted sectors such as real estate, automobiles, energy, and finance, all of which have seen substantial declines across their respective indices. The maritime arteries of India’s trade, particularly through the Red Sea, are now beset by soaring insurance premiums due to the conflict-induced risks. This aggravates shipping costs and jeopardises India’s ability to efficiently export goods to key markets in Europe and North America. With approximately US $120 billion in trade traversing these waters annually, the economic consequences of such disruptions are far from trivial. To be sure, India’s foreign reserves, standing at over $700 billion – a first for the nation, provide some respite in cushioning immediate external shocks. However, should the Middle Eastern conflict persist, it threatens to sap investor confidence and, more alarmingly, derail India’s broader economic trajectory. To sum up, the unfolding Israel-Palestine war has amplified the already considerable vulnerabilities in India’s economic framework. The spectre of surging oil prices, inflationary pressures, stock market volatility, and disrupted trade routes loom large, with the magnitude of their impact hinging largely on the conflict’s duration and the ever-evolving global milieus, with a concurrent fallout on the domestic economic velocity.

The re-election of Donald Trump as the President of the United States in November, 2024 is a geopolitical event with profound implications for India. As the world’s largest democracy, India has enjoyed a multifaceted relationship with the U.S., and Trump’s return to power signals both challenges and opportunities for India’s economic and strategic trajectory. Through a data-driven lens, the impact of Trump’s policies on India’s debt markets, exports, and geopolitical alliances is poised to reverberate across various sectors. Under Trump’s administration, policies favouring tax cuts, deregulation, and increased borrowing could lead to an escalation in U.S. interest rates. India’s bond market, which witnessed an inflow of $18 billion in foreign portfolio investments (FPI) in FY2023, stands to lose its sheen in the face of a more lucrative U.S. market. This shift would trigger significant capital outflows from India, causing a depreciation of the Indian rupee. In 2023, the rupee averaged ₹82 per U.S. dollar, but Trump’s policies could push it closer and closer to ₹85 per dollar, increasing India’s external debt burden, which stood at $682 billion in June 2024. India’s equity market, the fifth largest globally, may encounter volatility with a possible 15-20% correction in sectors heavily reliant on U.S. exports, such as IT and pharmaceuticals. India’s IT sector, which contributes $194 billion in export revenues, could be hit by potential restrictions on H-1B visas – a policy Trump championed during his first term, with a continued thrust in the second term. India’s trade with the U.S., valued at $128 billion in FY23, might face hurdles under Trump’s protectionist stance. However, his continued emphasis on curbing China’s economic hegemony presents an opportunity for India to emerge as a preferred alternative in global supply chains. Sectors such as electronics manufacturing, which grew at a CAGR of 13%  FY23, are likely to benefit from the relocation of U.S. companies out of China to India, especially under initiatives like the Production Linked Incentive (PLI) scheme. Moreover, India’s pharmaceutical exports to the U.S., valued at over $8.7 billion in FY24, are vulnerable to stricter U.S. Food and Drug Administration (FDA) regulations, which could affect the sector’s profitability. A rise in U.S. tariffs could also adversely impact India’s textiles sector, with the US accounting for approximately 27% of India’s total textiles export in 2023. Trump’s re-election reignites the strategic dimension of the U.S.-India relationship, particularly in countering China’s influence in the Indo-Pacific. The Indo-Pacific region, which accounts for 40% of global GDP, remains critical to India’s maritime and defense strategy. With the U.S.-China trade tensions intensifying, India’s role in the Quadrilateral Security Dialogue (Quad) is expected to gain prominence, bolstering defense ties with the U.S. In FY24, India allocated approximately $75 billion to its defence budget, and with U.S. defence exports to India standing at $20 billion since 2008, Trump’s aggressive stance on China could further solidify Indo-U.S. defence collaboration. However, Trump’s unpredictable foreign policy could challenge India’s delicate balance with Russia, especially concerning energy security. Russia accounted for 42% of India’s crude oil imports between January and September 2024, and any pressure from a Trump-led U.S. on India to reduce its ties with Russia may strain bilateral relations. The return of Donald Trump to the White House heralds a period of economic and geopolitical recalibration for India. While the U.S. market offers opportunities for India’s strategic positioning in global trade and defence, protectionist trade measures and financial volatility may pose significant challenges. India must navigate this evolving landscape with astuteness to safeguard its economic interests while bolstering its global standing as a counterweight to China.

Artificial Intelligence (AI) has emerged as a transformative force, influencing sectors ranging from healthcare to finance. Recognising the profound implications of AI, the European Union (EU) has pioneered a comprehensive regulatory framework – the AI Act – to ensure ethical development and deployment of AI technologies, as mentioned in my last article. This particular article examines the EU’s AI Act and assesses its applicability to India, considering the unique socio-economic and technological landscape of the country. It also explores what mechanisms a few other nations have laid out for AI regulation. In July 2024, the EU enacted the AI Act, marking the first major legal framework for AI regulation globally. The Act categorises AI applications based on a set of risk levels mentioned below:   Unacceptable Risk: AI systems that pose significant threats, such as social scoring by governments, are prohibited. High Risk: Applications in critical sectors like healthcare and transportation are subject to stringent requirements, including transparency, accountability, and human oversight. Limited Risk: Certain AI applications, such as chatbots, must adhere to transparency obligations, ensuring users are aware they are interacting with AI. Minimal Risk: Most AI systems, including video games and spam filters, are exempt from regulatory requirements.   The Act also establishes a European Artificial Intelligence Board to oversee implementation and ensure consistent application across member states (European Commission, 2024). India’s engagement with AI regulation has been evolving. In 2018, NITI Aayog, the government’s policy think tank, released the National Strategy for Artificial Intelligence, focusing on sectors like healthcare, agriculture, education, smart cities, and smart mobility. Subsequently, in 2021, NITI Aayog introduced the Principles for Responsible AI, addressing ethical considerations for AI deployment in India. In 2023, the Indian government enacted the Digital Personal Data Protection Act, which addresses some privacy concerns related to AI platforms. The Ministry of Electronics and Information Technology (MeitY) has issued advisories requiring platforms to obtain explicit permission before deploying unreliable AI models and to label AI-generated content, especially those vulnerable to misuse in deepfake technologies. Despite these initiatives, India lacks a comprehensive, AI-specific regulatory framework akin to the EU’s AI Act. The absence of a dedicated AI regulatory body and reliance on existing agencies for AI-related policies indicate a need for a more structured approach. While the EU’s AI Act presents a commendably robust regulatory paradigm, its complete transplantation into the Indian context confronts a constellation of formidable challenges. Foremost among these is India’s vast and heterogeneous populace, which demands a regulatory framework nuanced enough to accommodate regional disparities and the nation’s kaleidoscopic diversity. Moreover, the breakneck pace of AI innovation necessitates a governance structure endowed with the agility to adapt to rapid technological evolution. Equally significant is India’s imperative to cultivate innovation and accelerate economic growth, which may necessitate a more malleable regulatory regime, lest overly rigid rules stifle the burgeoning ecosystem of AI startups. Furthermore, while the Digital Personal Data Protection Act mitigates some privacy concerns, the absence of an overarching and coherent data governance architecture leaves room for improvement in ensuring responsible AI deployment. Finally, the successful enforcement of AI regulations hinges upon India’s ability to bolster its institutional expertise and infrastructure – an endeavour requiring sustained investment and capacity building. The EU’s AI Act represents a pioneering effort in AI regulation, emphasising ethical considerations and public trust. However, India’s unique socio-economic context, technological landscape, and economic priorities necessitate a tailored approach to AI regulation. While adopting the EU model wholesale may not be feasible, India can draw valuable insights from the Act to develop a framework that balances innovation with ethical considerations, ensuring that AI technologies benefit society at large. We must, albeit briefly, also cast our gaze upon the AI regulatory paradigms established across other parts of the globe. It is seldom a misstep to assimilate commendable elements from international frameworks into India’s prospective AI regulatory edifice, whenever it emerges from the labyrinth of deliberation and sees the light of day. The United Kingdom, though yet to unveil a comprehensive AI regulatory framework akin to its continental neighbour, the EU, has made significant strides in this domain. It has instituted the Office for AI, an independent authority within the AI Policy Directorate of the Department for Science, Innovation, and Technology. This body champions a context-sensitive and balanced strategy, leveraging extant sector-specific laws to guide AI governance. In March last year, the UK government unveiled a white paper elucidating its vision for a pro-innovation domestic AI regulatory approach. With over £2.5 billion invested in AI since 2014, Britain stresses the pitfalls of an overzealous and inflexible regulatory posture that risks stifling innovation and impeding AI adoption. Instead, it prioritises regulating AI applications based on their contextual deployment, adopting a judicious calculus of benefits versus risks. To this end, the UK has delineated essential characteristics for its AI regulatory architecture: enabling responsible innovation, maintaining proportionality to avoid undue burdens, fostering trust through risk mitigation, ensuring adaptability to technological evolution, providing clarity for stakeholders, and encouraging collaborative efforts among government, regulators, and industry. These principles aim to regulate AI usage rather than the technology itself, reflecting a nuanced approach. A phased implementation strategy, commencing with regulator discretion and evolving toward statutory obligations, further brings to fore this iterative approach’s adaptability. Indian policymakers can derive two pivotal insights from the British model. First, a context-sensitive, pro-innovation framework can catalyse responsible AI proliferation without hampering innovation, focusing on applications rather than the technology’s architecture. Second, the articulation of cross-sectoral principles, coupled with the flexibility accorded to sector-specific regulators, ensures coherence and dynamism in addressing the evolving AI landscape. Switzerland, in its 2021 position paper, laid the merits of a technology-neutral approach, advocating the judicious adaptation of existing data protection standards. Meanwhile, the United States, despite lacking a unified regulatory framework, boasts over 80 federal guidelines governing AI, reflecting a pragmatic, case-by-case governance ethos that eschews excessive precaution. Canada’s AI and Data Act (AIDA) places a premium on safeguarding human rights, curtailing high-risk AI applications, and promoting responsible innovation – a perspective Indian policymakers would do well to emulate. Intriguingly, Japan’s laissez-faire approach offers yet another paradigm, relying on sector-specific laws such