India's overzealous anti-dumping response

Business Standard June 17, 2025

For years, several countries, including India, have worried about imports of cheap Chinese goods undermining local industries. These fears have grown in recent months due to rising US-China trade tensions. As of June 16, the US has increased the effective tariff on Chinese imports to 55 percent. The higher costs of selling to the US have raised concerns that China will dump its surplus goods in other markets. In response, many countries, including India, are using trade remedies such as anti-dumping duties (ADDs) to protect themselves. India is now the world’s biggest user of ADDs --- not only against China but also other nations. While dumping is a real risk, India’s heavy use of ADDs can create new problems, and hence, policymakers should apply them carefully.

In international trade, dumping occurs when a country sells goods abroad at prices lower than their fair market value. While the World Trade Organization (WTO) does not consider dumping unfair by default, it allows countries to impose ADDs if the practice causes “material injury” to local industries.

China has been the main target of ADDs, facing about 25 percent of all anti-dumping investigations since it joined the WTO in 2001. India on the other hand, is among a select few developing countries with a long history of liberal use of ADDs. From 1995 to 2023, India initiated over 1,100 investigations – more than the U.S. or EU – targeting not only China but also the EU, Switzerland, South Korea, Japan, and others. In 2024 alone, India launched 47 trade remedy investigations – 37 aimed at Chinese products like aluminium foil, vacuum flasks, and steel.

While in some instances ADDs can help protect local industries, their use comes with several drawbacks.

First, ADDs can raise costs for local industries that use the taxed imports as raw materials, making them less competitive. In March 2024, India imposed a 30 percent ADD on bare printed circuit boards (PCBs) from China and Hong Kong. This raised production costs for IT hardware manufacturers by 1–4 percent. Many of these companies were part of the government’s Production Linked Incentive (PLI) Scheme, and the added costs hurt their profits and global competitiveness, thereby undermining the PLI’s goal of boosting manufacturing and exports. Domestic PCB suppliers were unable to fill the gap due to quality issues, forcing electronics and lighting companies to either absorb the higher costs or pass them on to consumers.

Secondly, ADDs disproportionately hurt Micro, Small, and Medium Enterprises (MSMEs), which already struggle with regulatory compliance. Unlike large firms that can lobby for exemptions, MSMEs are forced to absorb the higher input costs triggered by ADDs or shut down. When India imposed ADDs on jute yarn and fabric from Bangladesh and Nepal in 2017, Indian jute mills benefited temporarily, but the move hurt small packaging and textile businesses. Many of these single-unit plants struggled with supply shortages and rising costs.

Third, ADDs can conflict with broader, national policy objectives. In 2024, India imposed ADDs on solar glass from China to shield local producers, which pushed solar photovoltaic (PV) module prices up by 10–12 percent. This, in turn, drove up project costs by 7–8 percent, forcing developers to renegotiate contracts and postpone major projects – likely impacting India’s clean energy adoption push. In effect, the ADDs made solar power costlier and less appealing for investors, undermining national renewable energy targets.

Finally, frequent and unpredictable imposition of ADDs create uncertainty for businesses and disrupt long-term planning. In the past five years, India has imposed 133 anti-dumping measures on 418 products, many in the chemicals sector. Firms that rely on these chemicals as inputs face constant threat of sudden duties, resulting in price volatility and supply disruptions.

Having said that, China’s unfair trade practices remain a real concern and select instances of dumping put local players at a disadvantage. So what should India do?

Indian policymakers should use ADDs carefully and only when backed by strong evidence. There must be clear proof that goods are being sold below fair value and causing serious harm to key industries where India has a comparative advantage. A cost-benefit analysis should also look at the impact on related sectors. One useful step would be to adopt an Economic Interest Test (EIT), like the UK does. This would help balance the needs of producers, consumers, and downstream industries, and align India with global best practices. It would also prevent a few big companies from misusing ADDs to block imports. In the past three years, over a third of ADD cases were based on complaints from only one or two domestic firms—suggesting they are sometimes used to protect monopolies or duopolies.

ADDs should not turn into yet another form of protectionism – a growing trend in India. Instead, policymakers should focus on reforms that enhance competitiveness of local firms, such as better infrastructure, simpler rules, and factor market changes. To boost manufacturing and benefit from trade, India needs to integrate into global supply chains, not retreat from them. This requires using tools like ADDs carefully and selectively.

Supreme Court’s Bhushan Steel Ruling: A Test for India’s Insolvency Regime

Business Standard May 20, 2025

The Supreme Court’s recent decision to liquidate Bhushan Power and Steel Limited (BPSL), five years after its resolution plan was approved and implemented, has sent shockwaves through India’s corporate and financial sectors. By overturning JSW Steel’s takeover of BPSL, the ruling has raised fresh questions about the Insolvency and Bankruptcy Code (IBC) and the institutions responsible for enforcing it.

A Landmark Reversal

In a major reversal, the Supreme Court ruled that the resolution plan for BPSL—approved by the Committee of Creditors and cleared by both the insolvency and the appellate tribunals (National Company Law Tribunal or NCLT and National Company Law Appellate Tribunal or NCLAT)—suffered from procedural lapses and non-compliance with the IBC. The Court found the process fundamentally flawed, ordered the return of payments made by JSW Steel to creditors, and directed BPSL’s liquidation. This decision, coming after years of revival of BPSL, could lead to major losses for creditors, who now risk recovering less through liquidation than under the earlier resolution.

Implications for the IBC

Introduced in 2016, the IBC was hailed as a major financial reform in India. It aimed to unlock capital from failed businesses, improve credit discipline, and enhance resource allocation efficiency. Its success in resolving major bad loans strengthened the financial sector and boosted investor confidence.

However, the Supreme Court’s recent ruling has cast a shadow over its future. By overturning a resolution plan years after completion, the decision has created uncertainty for creditors and investors, raising concerns about the IBC’s effectiveness.

Institutional Failures Exposed

The judgment strongly criticises the institutions involved in the BPSL case. The NCLT and NCLAT, institutions central to the IBC framework, were faulted for approving a flawed resolution plan, while the Committee of Creditors (CoC) was reprimanded for poor judgment and supporting a plan that breached legal timelines and rules. The Resolution Professional (RP) was blamed for delays and legal lapses exposing weak oversight by the Insolvency and Bankruptcy Board of India (IBBI), the regulatory body for IBC.

The Case for Reform

Much of the commentary following the judgment has called for changes to the IBC, but the real problem lies with the institutions enforcing it, not the law itself. The success of the IBC hinges as much on a sound legal framework as on the capability and integrity of its implementing bodies.

Strengthening the NCLT and NCLAT is essential, as they face persistent understaffing, shortage of benches, and limited use of technology. Many judges come from civil courts and may lack expertise in complex commercial cases. Regular training in insolvency law and allowing the use of amicus briefs in complex matters could help improve the quality of their decisions.

The oversight of the RPs by the IBBI also needs urgent reform. Though the board certifies the professionals, its ability to monitor their actions and hold them accountable remains uncertain. Stronger enforcement powers and clearer guidelines are needed to ensure RPs meet their legal and fiduciary responsibilities.

The CoC plays a central role in the resolution process under the IBC. However, the Supreme Court’s criticism highlights a key issue: to what extent should courts review the CoC’s decisions? Since creditors are expected to act in their own commercial interests, their decisions should generally be insulated from judicial scrutiny. While judicial review of procedural lapses is justified, questioning the CoC’s commercial judgment is more problematic, also because there are no clear benchmarks for such assessment. Excessive judicial intervention risks undermining the very foundation of IBC.

Economic Consequences

The economic impact of this judgment is far-reaching. Banks must now return funds received from JSW Steel, leading to higher provisioning and potential losses for them, while JSW Steel itself may struggle to recover its investments in BPSL. The uncertainty triggered by this ruling could make future bidders demand higher risk premiums or avoid distressed assets entirely, further complicating the resolution of bad loans.

This decision could freeze capital, erode investor confidence, and slow private investment—all key factors crucial for India’s goal of becoming a developed economy by 2047.

Legal issues

The SC’s decision to retrospectively undo an acquisition approved years ago and order liquidation of a now-profitable company is also troubling. While procedural lapses may have occurred, the proportionality of the punishment is debatable. A statute of limitations on judicial intervention in IBC cases could help prevent such reversals. Without it, the risk of the court overturning settled decisions may deter potential bidders from participating in the resolution process.

A Cautionary Tale

In summary, the Supreme Court’s ruling in the BPSL case exposes deep flaws in the IBC’s institutional framework and raises concerns about judicial overreach. To sustain financial sector reforms and attract long-term investment, policymakers must urgently address these issues. Restoring confidence in the IBC requires institutional as well as judicial reforms. Only by building competent, accountable institutions can the IBC’s full potential be realised and the interests of creditors, investors, and the broader economy protected.

Indian banking’s held back by inadequacy of long-term funding

Indian banking’s held back by inadequacy of long-term funding, MoneyControl, April 21, 2025.

India must watch out for GDP growth with third chance at doorstep

Business Standard April 15, 2025

With every passing day, the outcome of the global tariff war grows harder to predict. One thing is clear, though: it will have significant repercussions for India. Policymakers must find ways to limit the damage to growth—and explore how to turn this setback into an opportunity.

It maybe tempting to dismiss the tariff war, given India's predominantly domestically driven economy. Exports to the US make up only 2.3 percent of GDP, and even that may overstate their impact, as products like iPhones that India sends to the US have low domestic value added. Additionally, not all exports would be adversely impacted even if the US imposes a 26 percent tariff. In fact, some analysts believe the impact will be limited, since the tariff proposed for India is lower than those envisaged for China, Vietnam, or Bangladesh—potentially giving India a competitive edge.

This optimism is misplaced. India’s supposed competitive edge may never materialize because other Asian countries could negotiate lower tariffs with the US. It also seems likely that Canada and Mexico will keep their preferential access to the US. This implies that if Indian exports do end up facing a 26 percent tariff, exporters like auto parts manufacturers who compete with Canadian and Mexican producers, will likely lose significant ground in the US market.

Export-oriented services firms in India will also be affected. History shows that when the US economy slows down—which now seems inevitable—American companies delay investments, reducing demand for support from Indian IT firms and Global Capability Centres (GCCs). That is why IT stocks have been among the hardest hit in the recent market downturn.

More importantly, the ramifications of the tariff war go far beyond the difficulties that Indian exporters may face in the American market. An inward turn by the US and rising US-China tensions would weaken the global economy. Indian firms would consequently be hit on multiple fronts—declining global sales and falling prices. And it won’t just affect exporters. Domestic firms would also suffer, as Chinese goods, blocked from the US, flood India and other open markets, thereby cutting into the profits of domestic firms.

Arguably, falling global oil prices—WTI crude has dropped to just over USD 60—will offer some relief. But profits are still likely to fall sharply, as the declining Sensex suggests. In response, Indian businesses will cut investments to conserve cash, and wary households will scale back spending. As a result, all key drivers of the economy—exports, investment, and consumption—are likely to slow down.

That's not all. In times of global uncertainty, foreign investors often pull out of riskier emerging markets like India, moving their money to safer havens. This time, the risk is even greater, as the Reserve Bank of India and the US Federal Reserve appear to be moving in opposite directions. The RBI has already cut rates twice and adopted an accommodative stance, hinting at further rate cuts as GDP growth and inflation rate decline. Meanwhile, US tariffs could drive up prices, limiting the Fed’s ability to lower rates and may even cause the Fed to raise rates. The resultant narrowing interest rate gap between the two countries will put a lot of pressure on the rupee.

How should policymakers respond?

To their credit, Indian authorities have acknowledged the export threat, avoided retaliatory measures and seem to have stepped up trade talks with the US. For these negotiations to succeed—and to benefit India—it is crucial to lower tariff and non-tariff barriers, encouraging reciprocal moves from the US. India should also expedite trade deals with key partners in Europe and Asia. More broadly, it must position itself in the world economy as a reliable trading partner.

Regarding exchange rate movements, the RBI should let the exchange rate move freely, as a weaker rupee could help India’s exports and hence growth, especially if other emerging markets like China, also allow their currencies to depreciate in order to achieve greater export competitiveness. Moreover, any attempt by the RBI to prevent a currency depreciation by selling dollars and buying rupees would tighten domestic liquidity and hinder monetary transmission—an undesirable move when the RBI is trying to support growth through lower rates. Unpredictable foreign exchange interventions can also heighten economic uncertainty.

Less clear, however, is the government's plans to safeguard growth. The government has announced that it is ending the Production-Linked Incentives (PLI) scheme--a sensible decision considering the flaws of the program, but questions remain. How will the government encourage private sector investment? And how does it plan to take advantage of the forthcoming exodus of companies from China?

India has now missed two opportunities to convince firms to Make in India, the first in the 2010s when China began to lose competitiveness in low-tech products and the second more recently, when Chinese political risks started to increase. Unexpectedly, a third golden opportunity has now arrived on our doorstep. This time, we must ensure that we seize it.

What GDP data doesn't show: Structural weakness and real living standards

Business Standard March 18, 2025

The latest GDP data shows India’s economy is recovering, with growth rising from 5.6 percent in July-September to 6.2 percent in October-December, and an estimated 7.6 percent in January-March. At this pace, India is set to become the world’s fourth-largest economy. However, before we start celebrating, we need to examine the economic situation more carefully. Upon doing so, we’ll find significant weaknesses, indicating that substantial policy work remains.

For a start, investment remains too weak to drive rapid growth. In 2024-25, real investment is expected to rise by a mere 6 percent, trailing economic expansion. In contrast, investment during the 2004-2007 boom grew by 15 percent annually, accounting for 40 percent of GDP. Now, it stands at just 33 percent.

Even more concerning, the supposed growth acceleration disappears when considering long-term trends. For 2024-25, growth is expected to be 6.5 percent, significantly lower than the 8.8 percent average post-Covid. This is corroborated by high-frequency indicators, including slower retail sales, declining credit growth, weak corporate earnings, poor goods exports, a drop in net foreign direct investment, and a sharp fall in core inflation.

To understand the current state of the economy, we must look back a few years. Before Covid, growth had fallen below 4 percent, with the economy in poor shape. The unorganized sector struggled due to Demonetisation and poor GST implementation, while the organized sector was still recovering from excessive borrowing during the boom. Many of these issues remain unresolved. However, after Covid, they were less visible because the economy was boosted by several temporary factors.

One such factor was the normalization of activity as people returned to work and households resumed spending after the lockdown. The consumption revival was fuelled by a surge in retail credit, which grew at an annual rate of around 20 percent for several years.

A second factor was the government’s infrastructure push, with spending growing at an average rate of 30 percent between 2021-22 and 2023-24, further boosting the economy.

The most important factor, however, was the rise of a "New Economy." The growth of Global Capability Centres (GCCs) set up by multinational companies led to a remarkable 65 percent increase in service exports over the three years ending in 2023-24. The windfall income of nearly 2 million GCC workers was spent on SUVs and luxury real estate, sparking booms in the auto and construction sectors, with the latter growing in double digits in real terms in the three years ending 2023-24.

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Table: Ranking of select countries based on real GDP per capita

Inflation vs Exchange Rate: RBI’s conflicting objectives

Business Standard February 18, 2025

Since November 2024, the Reserve Bank of India (RBI) has allowed the rupee to weaken against the US dollar, ending the effective peg that it had maintained for nearly two years. However, it has continued to intervene in the foreign exchange (FX) market to limit the rupee’s decline, keeping it the least volatile major currency in Emerging Asia with a modest 3 percent depreciation. This has, however, strained monetary policy and tightened liquidity at a time when the economy is weak and needs support.

To understand how this has happened, we must examine the link between monetary policy, currency management, and liquidity. The rupee weakens (or the dollar strengthens) when dollar supply in the FX market falls short of demand, such as when India's diminishing growth prospects discourage capital inflows. To counter this, the RBI can sell dollars from its FX reserves, preventing or even limiting rupee depreciation. However, it does not give dollars for free; it sells them for rupees. This absorbs rupees from the system, thereby tightening monetary conditions.

The RBI conducts this transaction with banks. When a person asks a bank to exchange Rs 1 lakh for dollars, the bank typically goes to the FX market, finds a seller, and matches the buyer with the seller. In this case, the bank acts as an intermediary, profiting from the spread between the buying and selling rates.

However, when a bank gets dollars from the RBI, the process changes. The bank must provide Rs 1 lakh to pay for the dollars, but its assets mostly consist of loans and government securities. Only a small portion of bank deposits is held at the central bank due to the CRR (cash reserve ratio) mandate. This is what the bank uses to pay the RBI when the latter sells dollars. This means when banks buy dollars from the RBI on a large scale, their balance at the RBI can fall short of requirements, causing their liquidity to tighten.

This is exactly what has been happening. For most of the past few years, the banking system had a healthy liquidity surplus. However, over the past few months, the RBI has sold large amounts of dollars, causing its FX reserves to drop sharply from USD 704 billion in September 2024 to USD 630 billion in January 2025. As a result, domestic banking system liquidity has shrunk, and the system is now in a large deficit, around Rs 1-2 lakh crores.

To address this, the RBI has taken two approaches. On a daily basis, it has been lending funds to the banks. It has also repeatedly engaged in open market purchase operations, buying government securities from banks to replenish their deposits at the RBI. These actions have ensured that banks have the necessary funds to conduct their business. However, this does not mean the RBI’s FX intervention has been without consequences.

This is evident in the graph below, which shows the difference between the weighted average call rate (WACR) and the RBI’s policy repo rate. The WACR reflects banks' borrowing costs in the overnight interbank market. When banks have a liquidity surplus, the WACR goes below the repo rate, resulting in a negative spread. However, as liquidity has tightened, particularly since November 2024, the spread has become positive, indicating that banks facing a cash shortfall have struggled to secure the necessary funds.

Figure 1: Spread between weighted average call rate (WACR) and repo rate (Source: RBI)

This matters because the RBI has now signalled its intention to ease monetary conditions. On February 7, the central bank lowered the repo rate, citing weaker inflationary pressures and slowing growth. However, just days after the cut, the RBI conducted a massive FX intervention to prevent the rupee’s depreciation. Though FX intervention data is released with a lag, anecdotal evidence suggests the RBI sold between USD 7 to 11 billion in only two days. This action tightened monetary conditions and raised the WACR.

In effect, the central bank has been sending mixed signals. Is the RBI truly committed to ease monetary conditions – or not? It is difficult to decipher from its actions.

For banks, the message is clear: as long as the RBI keeps liquidity tight and interbank lending conditions remain strained, they will be hesitant to lower their own interest rates. This reluctance means the RBI's repo rate cut will not get transmitted to the rest of the economy, and the monetary stimulus will fail to materialize. In short, the RBI's exchange rate management strategy is undermining the effectiveness of its monetary policy.

The law mandates that the RBI's primary objective is maintaining price stability, keeping an eye on growth. It does not mention managing the exchange rate. It is time for the central bank to focus on managing inflation and growth, allowing the exchange rate to adjust based on fundamental factors.

Union Budget 2025-26: Many small measures but lacks big ideas

Union Budget 2025-26: Many small measures but lacks big ideas, Ideas for India, Feb 5, 2025.