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Mint
15-06-2025
- Business
- Mint
Ajit Ranade: West Asia's upheaval intensifies India's challenges of geopolitics
Next Story Ajit Ranade The Israel-Iran war will make it harder for New Delhi to navigate global turbulence even as an oil flare-up poses a threat. But it could also spur domestic policy changes—in favour trade diversification, for example—that strengthen our economy. The fallout of the hostilities: Over a hundred people already killed, cities plunged into fear, critical infrastructure damaged and diplomacy left in the rubble. Gift this article The world crossed a dangerous threshold on 13 June. Israel attacked Iran, targeting nuclear facilities, military bases and even residential zones in order to kill top military leaders and nuclear scientists. Israel sees a nuclear-armed Iran as an existential threat and says that Iran's uranium enrichment programme had reached a point where a nuclear weapon was just weeks away. The world crossed a dangerous threshold on 13 June. Israel attacked Iran, targeting nuclear facilities, military bases and even residential zones in order to kill top military leaders and nuclear scientists. Israel sees a nuclear-armed Iran as an existential threat and says that Iran's uranium enrichment programme had reached a point where a nuclear weapon was just weeks away. The enrichment, while in violation of Iran's commitment to complying with nuclear safeguards, as noted recently by the United Nations' watchdog, was still nowhere close to weapons grade, as per US experts. Hence Israel's unprovoked attack was a big shocker. Israel so far had stopped short of full-scale war, preferring sabotage, cyber-attacks and targeted killings. But now Israel has crossed a line of no return for itself, Iran and the world. Iran launched a counter attack with over 200 ballistic missiles. It aimed at more than 150 Israeli targets that included nuclear sites and residential zones. Also Read: Javier Blas: An Israel-Iran war may not rattle the oil market The fallout of the hostilities: 130 people already killed, cities plunged into fear, critical infrastructure damaged and diplomacy left in the rubble. This escalation by Israel into war has upended Middle Eastern geopolitics. What was once a high-stakes diplomatic standoff has now escalated into a military confrontation. This will likely spiral up, notwithstanding global voices for restraint. From a statement of US President Donald Trump, it is obvious that Israel had tacit American support, with all its military might. He has been drawn into making a choice that he would have rather avoided: i.e., choosing between playing peacemaker and backing Israel solidly. On the other hand, all the Gulf states have condemned Israel's strike. But some like Saudi Arabia and the UAE might be quietly relieved at Iran's weakened position. Riyadh is Tehran's rival in a quest for regional dominance. China has stayed pointedly silent. Iran is central to its energy security and infrastructure ambitions for the Belt and Road Initiative, but Israel is also a key technology partner. Maybe China wants to position itself as a non-interventionist peacemaker, striking a contrast with unconditional support by the US for Israel, the aggressor. This Middle East distraction for Washington can work to China's advantage, as it gains manoeuvring space to flex muscle on Taiwan and in the wider Indo-Pacific. Russia had asked for an immediate Security Council meeting and resolution, knowing full well that the US will stonewall it with a veto. Hence its condemnations have lacked force. The Shanghai Cooperation Organization (SCO), of which India is a member, has condemned Israel's attack, but India has carefully distanced itself from the SCO's common statement. Europe is alarmed by Israel, but not sympathetic to Iran, given the latter's record on enrichment. These actions of various international players reveal a global system where major powers are acting increasingly based on narrow transactional interests rather than any shared security architecture. It has injected fresh volatility into an already fragile global order. Israel has America's political, military and diplomatic support, whereas no major power is unequivocally with Iran. At most, it has ambivalent, conditional or weak support from various quarters. Non-state actors that could have aided it, such as Hezbollah and the Houthis, have been weakened. Hence, Tehran's resilience will be tested and it might resort to desperate measures. It has threatened strikes on the military bases of Israel's allies. These include US bases. It has also drawn attention to another lever of high-impact force with a threat to bar the movement of oil through the Strait of Hormuz, from where 20% of the world's oil flows. Meanwhile the Ali Khamenei administration is facing strong opposition at home, which Israel has sought to exploit. Instability in West Asia affects India deeply, for the stakes are immediate and structural. Some 60% of India's crude oil passes through the Strait of Hormuz. We have 8 million citizens in the Gulf region. Oil prices above $100 will worsen inflation, widen the current account deficit, hasten the rupee's fall and strain the fiscal deficit. Last year net inbound foreign direct investment (FDI) was almost negligible. Investors will now adopt a wait- and-watch attitude, thus hurting our growth prospects. New Delhi has to balance its energy security and Chahabar interests in Iran with its tech and defence partnership with Israel. It cannot remain silent on Israel's attack on Iran sovereignty because that would seem like moral abdication. This is the third such conflict where India finds itself locked in a narrow diplomatic navigation route and forced into a tight balancing act. Can New Delhi publicly and strongly condemn Russia in Ukraine? Can it condemn Israel's ongoing treatment of people in Gaza? It has to protect its strategic autonomy, while remaining a credible power with aspirations to UN Security Council membership and great power status. India's response reflects preference for non-alignment and quiet diplomacy. Also Read: Israel's war on Iran to hit Indian workforce India's foremost priority is the domestic economy, given our vulnerability to commodity prices, oil, exchange rates and investment flows. We cannot count on discounted Russian crude, not least because of the likely US reaction. Our free trade agreement with the UK will kick in next year, and a treaty with the US is uncertain. The big rate cut by the Reserve Bank surprised the market, but now in hindsight seems like a great pre-emptive strike. A large monetary stimulus will be useful ahead of signs of economic weakening. There is also massive liquidity injection. Prior to the present conflict, the 2025-26 GDP growth estimate of 6.5% was the lowest in four years. It might get worse, along with world growth, as even the World Bank's Global Economic Prospects points out. India's private sector investment-to-GDP ratio has been stagnating at 10% for a decade. A recent government survey of private sector capital expenditure intentions points to a decline this year. The government will have to keep up public capex to provide a growth impetus, as it has done in the past four years. On FDI, we must think creatively, as we need at least 2% of GDP on a net basis. New Delhi must revisit its stance on Chinese investment to allow it at least in non-sensitive sectors, such as automotive products (especially electric vehicles), infrastructure and renewable energy. Chinese exports can use Indian value chains. In the medium term, we need to diversify our energy sources and export markets. Our services export boom must go beyond Western customers. And, of course, we need a great thrust on building human capital, skilling and research. Paradoxically, the West Asian crisis might be an opportunity for India to emerge stronger with a bigger stature. The author is senior fellow with Pune International Centre. Topics You May Be Interested In Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
Mint
11-06-2025
- Business
- Mint
Manoj Pant: Let's prepare well for negotiations on trade in services
Here are some facts. Today, the share of services in global trade stands at about 25%. More importantly, it is the only category of trade that has expanded at a rapid pace since the financial crisis year of 2008. In recent years, the share of goods in trade has fallen by about 5 percentage points and there has been a corresponding increase in the case of services. This pattern is mirrored in India's case. According to the Economic Survey 2024-25, the share of services in terms of export gross value added (GVA) has increased from around 51% in 2014-15 to around 55% now. Further, it is growth in services trade which has kept India's current account deficit (CAD) at a manageable 2% of GDP. It was the General Agreement of Tariffs and Trade (GATT) that led to a decline in global tariffs. Till recently, except some countries in South Asia, import tariffs were in single digits (before Donald Trump took office in the US). And today, international arguments increasingly revolve around non-tariff barriers (NTBs). Also Read: Services led exports are a mixed blessing for the Indian economy It was a stalemate over NTBs at the World Trade Organization (WTO) that led many countries to take recourse to regional trading arrangements to expand their trade over the last two decades. This has the advantage of going beyond the WTO in new areas. One of these is trade in services. The General Agreement on Trade in Services (GATS) was based on a 'positive list' approach, where countries only need to make offers when they want to. But this has meant very little forward movement here along the lines of commodity trade negotiations under GATT. Another critical hold-back is the lack of reliable data. Unlike commodities, services have no border restrictions like tariffs, but are constrained by internal regulation that can be complex. For example, trade in infotech services is hampered not only by visa systems (as in the US), but also by other regulatory constraints like data adequacy rules, FDI norms and totalization agreements (to avoid double taxation via social security payments). Nor are these regulatory constraints the same across countries. Also Read: Ajit Ranade: India must diversify its exports of manufactured goods Under the WTO, there was an attempt to create a template for international comparison by clubbing services trade under four heads—or so-called 'modes.' Unfortunately, the 'positive list' approach has meant that GATS has been a non-starter. To cut a long story short, as services trade has increased globally by leaps and bounds, countries are increasingly grappling with the issue of codifying trade in services. As the above discussion indicates, the process will have to begin by recognizing the comparability of services across countries. For example, in educational services, we would need mutual recognition agreements (MRAs) to define comparability of degrees. This is easier said than done. In India, education is on the concurrent list for the Centre and states to legislate on, and regional regulations would also have to be considered. An effort to achieve a degree of international comparability has started with the WTO's classification of services into 12 main sectors and 160 sub-sectors. This was mainly done to allow member countries to categorize their services into four 'modes' under the GATS. However, since these multilateral negotiations have ground to a halt, it is now for countries to take this forward under various free trade agreements (FTAs). The difficulty lies in establishing a single measure (like tariffs in the case of commodities) that could establish restrictiveness of services across countries after MRAs are signed. Also Read: Special trade ties with America aren't India's only export game This is particularly important for India, whose global strength seems to lie in trade in services. Yet, due to all the difficulties listed above for codifying trade in services, India's experience has been unsatisfactory. In 2005, such an attempt was made in the India-Singapore Comprehensive Economic Cooperation Agreement, but there was little progress as the issue of MRAs moved nowhere either in banking or in education. Similarly, in the case of India's trade relations with Asean, it was agreed in 2005 that an agreement on trade in services would follow the deal struck on goods, but so far no discussions have been held with Asean countries on this. Also Read: Will the WTO get crushed under an avalanche of bilateral trade deals? As mentioned earlier, the issue is how to generate a single number to define restrictiveness in services that can form a benchmark for further negotiations on trade in services. There have some attempts by both the Organization for Economic Cooperation and Development and World Bank to create a Services Trade Restrictiveness Index (STRI), but as shown in 'Quantification of Services Trade Restrictions: Some New Results' (Pant and Sugandha, March 2022) published in the Economic and Political Weekly, these indices have serious statistical shortfalls that can lead to a complete reversal of sectoral rankings by trade restrictiveness. Yet, this STRI approach seems to offer a way forward for India to hold talks on market access for services. It could feature in talks underway with the US and EU. The STRI can help begin negotiations on broad sectoral lines before proceeding to granular talks on specific regulatory issues. So far, India has focused on Mode 4 (the movement of natural persons) to enhance trade in services. This effort, however, has largely been a failure. As I have argued before, such a narrow approach seems like too weak an attempt at exploiting India's comparative advantage in services. We need a better researched approach. The author is visiting professor, Shiv Nadar University.
Mint
08-06-2025
- Business
- Mint
The Reserve Bank's leap of faith: A big rate cut is very hard to justify
It's a study in contrasts. About a month to the day, the US Federal Reserve left interest rates unchanged in a wait-and-watch response to the uncertainty about how President Donald Trump's tariffs will raise inflation and/or slow growth, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) saw no merit in waiting for the fog to lift. It cut rates for the third time in a row and by a larger-than-expected 50 basis points to 5.5%. Not content with that, it went in for what many might term an 'overkill,' lowering the cash reserve ratio (CRR), or the amount of bank deposits impounded with RBI, by 100 basis points, which will over the course of this year release an additional ₹2.5 trillion of liquidity into a system already flush with funds. RBI's leap of faith in support of growth, when many would argue that growth is doing quite well by its own projections, is hard to justify. At a time when it is impossible to know for sure whether the price or growth effects of US tariffs will dominate, front-loading action could well be a two-edged sword. The belief (mistaken?) that lower interest rates and surplus liquidity alone will raise growth without reigniting inflation beats logic. And past experience too. Also Read: RBI's policy review: Why this time is truly different So, what has changed since the last meeting in April 2025 that could possibly justify the sea-change to a looser-than-expected (warranted?) monetary policy? The governor's argument is that growth needs support, hence the need to front-load action. Except that the data does not support that view. On the contrary, not only has growth done better than expected, with fourth-quarter (January-March 2025) growth at 7.4% better than RBI's December projection of 7.2%, but the growth projection for 2025-26 has also been left unchanged at 6.5%. The dilemma for the MPC was how it should frame policy when growth is faring better than expected and also inflation (which retail numbers for April suggest is under control). But there is a cloud hanging over both. Sure, the India Meteorological Department's prediction of a good monsoon suggests agriculture will do well. But summer months invariably see an uptick in food inflation. Moreover, it is the temporal and spatial distribution of the rains that affect food prices, not overall precipitation. We have already seen prices of onion and tomato—two of the treacherous TOP (tomato, onion and potato) sub-group that plays havoc with food inflation—edge up. Core inflation (excluding food and fuel) is also up at 4.2%, the highest since September 2023. Also Read: Ajit Ranade: RBI's increasing fiscal support deserves a closer look Meanwhile, the impediments to growth are mainly external—tariff induced—over which RBI has no control. In such a scenario, it might have been better had RBI borrowed one of the principal precepts of bioethics,Primum non nocere, a Latin phrase that means 'first do no harm.' This fundamental principle in healthcare (not out of place when covid is again among us) basically says: 'Given an existing problem, it may be better not to do something, or even to do nothing, than to risk causing more harm than good.' It reminds healthcare personnel to consider the possible harm any intervention might do. And is invoked when debating the use of an intervention that carries an obvious risk of harm but a less certain chance of benefit. Also Read: RBI's ₹2.7 trillion: Many benefits arise from one big beautiful surplus Remember, US gross domestic product (GDP) growth contracted 0.2% during the January-March quarter, even as our GDP grew 7.4%. Despite this hit to US growth and constant bluster from President Trump, who has made his displeasure with Federal Reserve chair Jerome Powell known in no uncertain terms, the Fed opted to bide its time. Wisely so. Powell's statement after the last meeting of the rate-setting Federal Open Markets Committee sets out the logic very clearly. 'We may find ourselves in the challenging scenario in which our dual mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal and the potentially different time horizons over which those respective gaps would be anticipated to close." The MPC resolution does not offer any such reasoning. In the absence of a convincing argument, it is tempting to attribute Friday's policy-rate change to the panel's changed composition. The MPC's newly-inducted deputy governor in charge of monetary policy, unlike her career-central-banker predecessor, is perhaps not an inflation hawk. But then, that would go against the veryraison d'être of entrusting rate decision-making to a committee rather than an individual. Also Read: Mint Quick Edit | An inflation dip enlarges RBI's policy space 'Policy levers," said Governor Sanjay Malhotra, 'are needed to step up the growth momentum." The 'changed growth-inflation dynamic calls for not only continuing with the policy easing but also front-loading the rate cuts to support growth." A bit of a hard sell, given that we claim to be among the world's fastest-growing major economies, with 2025-26 growth projected at 6.5%. Sure, growth remains lower than our aspirations amid a challenging global environment and heightened uncertainty. But aspirations are not to be confused with potential. Wise central banks know the difference. As for uncertainty, in the words of former Fed chair Alan Greenspan, 'Uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape." All the more reason then not to jump the gun, but to cross the river by feeling the stones. There is no great sanctity in timing rate decisions with MPC meetings. For central banks, the motto must always be, 'Better safe than sorry.' The author is a senior journalist and a former central banker.
Mint
26-05-2025
- Business
- Mint
RBI's ₹2.7 trillion: Many benefits arise from one big beautiful surplus
On Friday last, the Reserve Bank of India (RBI) announced its decision to transfer a record surplus of nearly ₹2.7 trillion for 2024-25 to the Indian government's coffers. The sum of ₹2,68,590.07 crore transferred is loosely referred to as the central bank's 'annual dividend,' but since it is not a commerce entity, this is actually the 'surplus' of its income over expenditure. It is 27% higher than the previous year's figure, despite an enlarged contingency risk buffer (CRB), as stipulated by the revised Economic Capital Framework (ECF) approved by RBI's Central Board. As against a CRB of 5.5-6.5% laid down by a panel led by former governor Bimal Jalan half a decade ago, the range has been widened to 4.5-7.5% of RBI's balance sheet. Rightly so. Also Read: Ajit Ranade: RBI's increasing fiscal support deserves a closer look That RBI was in the process of reviewing the ECF was known, but few may have expected the upper end to be raised. The CRB comprises three sub-buffers; while the norms were kept steady for credit risk and operational risk, the central bank's buffer for monetary and financial risk was reset at 3.5-6.5% from 4.5%-5.5% earlier. This is entirely in keeping with the principles of prudent central banking. The CRB, as the name suggests, is meant to take care of contingencies. So, from 2018-19 to 2021-22, a period that included an economic slowdown even before the pandemic disruption, RBI maintained its CRB at the 5.5% lower bound as part of its effort to support India's economy. It was upped to 6% for 2022-23 and further to 6.5% for 2023-24. And now, based on its assessment of 'macroeconomic conditions and other factors affecting the balance sheet of RBI," it has been raised to 7.5% for 2024-25. Also Read: Dividend from public sector cos may swell govt coffers by over ₹80,000 cr in FY26, all-time high A detailed analysis of RBI's income, expenditure and sources of surplus will have to await publication of its Annual Report for 2024-25. But it is fair to surmise that, as in the past, the bulk of its earnings last year came from its foreign exchange transactions in support of the rupee. The balance is likely to be from earnings on its holdings of foreign and domestic securities; in the latter case, as a result of open market operations to infuse liquidity into the banking system, which RBI did by buying bonds in cash from banks. The sale of dollars to prop the rupee's rate of exchange turned a 'profit' for it since the dollars sold during the year were acquired earlier at a much lower price. Some back-of-the-envelope math suggests that every dollar sold may have fetched RBI close to ₹6. Given the enlarged scale of its forex operations last fiscal year, its gains would have been substantial. Also Read: Mint Explainer: How RBI's new digital lending rules will impact lenders and borrowers But there is a flip side to this. Given that RBI payouts of such magnitude typically spring from heavy intervention on the rupee's behalf, there's a risk that the other side of the trade-off could get short shrift; a rupee that's too strong dulls the pricing edge of our exports, as the landed prices of Indian goods and services are higher overseas than they'd otherwise be. How best to manage the rupee, though, is a complex question involving various macro variables, so this debate is unlikely to be settled easily. What's doubtless is that the surplus transfer could help the Centre keep its fiscal deficit for 2025-26 within its 4.4%-of-GDP target in an economic scenario where slower growth could hurt its revenues. Both Mint Street and North Block have reason to be pleased with this mega surplus. With multiple benefits arising from it, it's good for the Indian economy.
Mint
25-05-2025
- Business
- Mint
Time to re-imagine Indian manufacturing from the ground up
China's President Xi Jinping has stepped up calls for greater self-reliance in the country's manufacturing sector, reinforcing a strategy that has long unsettled its global trade partners. His latest remarks came less than a week after Beijing and Washington agreed to a 90-day pause in their bilateral trade conflict. The message is unmistakably forward-looking: economic resilience, in Beijing's calculus, will come not from the Chinese economy's openness, but from fortified sovereignty. India must take heed—not to mimic China's model, but to recognize the scale and seriousness with which Beijing is re-setting its industrial ambitions. While much attention has focused on traditional sectors, the scope of China's strategic planning stretches far beyond. Also Read: How a manufacturing boom could help India close the gender gap Programmes such as its Three-Body Computing Constellation, which seeks to process data in space rather than rely exclusively on ground-based infrastructure, and its New Infrastructure initiative, which aims to integrate its space, computing and artificial intelligence (AI) ecosystems into a common architecture, are designed to position China as a nation where manufacturing, data and national capability converge. In this context, India's manufacturing strategy demands nothing less than an overhaul. There is now a clear recognition among global producers that excessive dependence on China is both economically and geopolitically risky. This strategic recalibration has opened a rare window for India. Yet, intent must not be mistaken for preparedness. India's manufacturing sector continues to punch below its potential. Its contribution to GDP has remained stagnant for long, despite repeated policy pronouncements. Structural constraints—cumbersome regulations, poor contract enforcement, fragmented infrastructure and bureaucratic unpredictability—continue to erode investor confidence. Policy instruments like our production-linked incentive (PLI) schemes represent a promising shift in direction, but their results have been patchy. For India to serve as a genuine alternative to China, it must build not only capacity, but also credibility and coherence. The need for stronger manufacturing goes beyond economics. In the emerging global order, manufacturing is a proxy for national resilience and strategic autonomy. India cannot afford to see industrial policy as a narrow economic tool. It must be reframed as a national strategy. Also Read: Ajit Ranade: India must diversify its exports of manufactured goods The challenge is compounded by a fast shifting manufacturing frontier. Advanced manufacturing today is inseparable from frontier technologies—robotics, quantum materials, cyber-physical systems and AI. Nations that fail to integrate these capabilities into their industrial base will find themselves stuck in low-value assembly roles, increasingly expendable in the global value chain. India risks exactly this fate, unless it invests in research and development institutions, translational science and sovereign technology ecosystems that can be scaled up at will. Tariff concessions and free trade agreements, while necessary, cannot compensate for the absence of deep industrial innovation. India's democratic structure makes its path more complex but potentially more durable as well. The country can't mobilize capital and labour through central diktat. We must take a harder route, but one with greater long-term legitimacy and resilience. If we pursue a clear strategy, we can offer the world a unique proposition: a trusted, rules-based and pluralistic manufacturing ecosystem that is open, scalable and anchored in law. Also Read: India can leap from cost competitiveness to innovation-led manufacturing For this to materialize, however, India must abandon incrementalism. Manufacturing must be treated not as just another growth problem to be solved, but as a core aspect of our economic architecture. It is through manufacturing that productivity is unlocked, technological depth is built and strategic heft is earned. While emerging technologies will inevitably displace certain categories of labour, they also offer us an opportunity to re-imagine industrial employment altogether. The future of jobs will not lie in resisting automation, but in preparing the workforce to thrive alongside it. India must therefore invest in building a tech-enabled labour base, redesign vocational training for hybrid skill sets and create adaptive ecosystems where services, innovation and advanced manufacturing co-evolve. Also Read: Madan Sabnavis: Can India's economy count on manufacturing as an engine of growth? Global trade winds may temporarily shift in India's favour, but the ballast must come from within—through the strategic construction of systems that reward efficiency, absorb disruption and scale quality production without surrendering the sector's employment imperative. Historical precedent reinforces the argument. The great powers of the past two centuries—from Industrial-Age Britain and post-war America to contemporary China—built their global influence on a bedrock of industrial strength. This isn't an anachronistic view. Even in this digital age, the ability to design, produce and distribute physical goods at scale remains central to economic progress. Software may be embedding itself in everything, but cannot replace hardware in times of geopolitical rupture. This moment is not just about factory floors. It is about the kind of nation India wants to become. It is a test of whether the country can lead with systems, not slogans. A well-formulated manufacturing strategy would be a statement of intent to shape the future, rather than be shaped by it. The author is a corporate advisor and author of 'Family and Dhanda'
