Reinforcing the Anchor: The Next Five Years of Inflation Targeting in India

Reinforcing the Anchor: The Next Five Years of Inflation Targeting in India, Leap Blog, Sep 25, 2025

The unending saga of India's GDP data

Business Standard September 16, 2025

In most countries, GDP data releases are routine. In India, they spark controversy. A decade after the new GDP series was introduced, questions over its credibility remain, leaving both analysts and policymakers unsure about the economy’s true health.

According to the latest data release, the economy grew at a staggering 7.8 percent rate in the April-June quarter of 2025-26, far above the forecasts arrived at by economists based on all the other data available. Unsurprisingly, the release has reignited a wave of skepticism and debate.

There are several issues with the GDP series.

The first problem concerns nominal GDP. For organised manufacturing and services, the NSO (National Statistical Office) relies heavily on firms’ financial filings with the Ministry of Corporate Affairs (MCA), collating data from firms that file regularly, and scaling up those numbers to take account of the firms that haven’t filed. However, many non-filing firms are defunct, loss-making, or mere shell companies that do not produce anything on a regular basis, but serve as conduits to hide profits or circumvent regulations. In such cases, inflating the data from filing firms to cover non-filers risks overstating GDP.

An NSSO (National Sample Survey Office) survey of these MCA firms, conducted in 2016–17, found that nearly a quarter of the 35,000 firms surveyed either refused to share data, had shut down, or were untraceable. Its 2019 report confirmed major gaps in the pool of non-filing firms. Yet these firms continue to be included in GDP estimation. This implies that India’s nominal GDP suffers from measurement issues that can worsen depending on which firms’ are sampled in a given quarter. 

Measuring the unorganised sector is another weak spot. With no fresh data, the NSO extrapolates this sector’s growth from a 2011–12 survey, assuming that it tracks the growth of the private corporate sector. At one point, this assumption seemed reasonable. But the correlation between the unorganised and organised sectors broke down after 2016, when demonetisation, GST, and Covid hit the unorganised sector firms disproportionately harder. This has led to a further upward bias in GDP growth.

Finally, there are serious issues with the GDP deflator. Once the NSO has calculated nominal GDP, it has to convert these figures into real GDP. To do this, it needs to use price indices, so that it can deflate away any increases in nominal GDP that were caused by inflation. This task is simple in concept, but complicated in practice. That’s because the NSO needs to choose an appropriate price index for each of the sectors that go into GDP. Then, it needs to deflate the inputs that go into the production of all these items, separately from the outputs.

Why is all this work necessary? Essentially, because prices do not move together. Take air travel: deflating airline revenues (a nominal figure) by the economy-wide price index does not tell us anything about the real increase in air travel in a quarter. What’s needed instead is a proper measure of ticket prices to capture the real growth in the sector. 

Unfortunately, many of the sectoral deflators in India are not appropriate. The most problematic case is the service sector, the largest sector of the economy, where the wholesale price index (WPI) is used, even though it barely tracks service prices. If instead, in the April-June quarter, this sector had been deflated using the service component of the CPI—which grew at a faster pace than the WPI—the calculated service sector growth would have been far lower than the 9.3 percent recorded.

Another deflator related issue in the first quarter was the divergence between input and output prices. As commodity prices slumped, WPI inflation dropped to 0.3 percent while (output-measuring) CPI inflation stayed near 3 percent. This difference may seem small, but it can have significant distorting effects. This is because cheaper inputs like oil push up manufacturing profits without boosting actual production. The only way to strip out this illusion is through ‘double deflation’—separately deflating inputs and outputs.

Unfortunately, unlike most G20 peers, India doesn’t follow this procedure for bulk of the GDP estimation. Instead, it deflates nominal values only once. Even more problematic, it often uses as its single deflator, the commodity-heavy WPI, which measures the price of inputs. This means nominal gains aren’t stripped out; to the contrary, they get amplified, counted once in rising profits and again through a falling deflator. The result: manufacturing growth gets overstated.

Why does this matter? Because GDP growth is the number everyone watches, especially policymakers. Yet, even as GDP data claims the economy is booming, policymakers have recently rolled out new GST measures to boost demand— an implicit admission that they themselves are not sure whether the economy is really as buoyant as the GDP numbers suggest.

The good news is that the statistics ministry is aware of all these issues and are working on fixes, with a new GDP series due in February 2026. Until then, everyone will need to continue to look at a wide variety of data in order to gauge economic activity.

Trump tariff shock: A wakeup call for India as challenges intensify

Business Standard August 19, 2025

In an unexpected development, India now faces a 50 per cent tariff on its goods exports to the United States, a hurdle higher than that of almost any other country in the world. As a result, the government needs to consider how it should respond. While there are political considerations that it will need to take into account, the objective is clear from an economic point of view: Mitigate the damage, so India can return to rapid growth. Unfortunately, this task is complicated because overseas prospects have dimmed even as the domestic economy has been slowing down.

How severe is this tariff shock? Many analysts have argued that its impact will be limited. They point out that goods exports to the US account for only 2 per cent of India’s gross domestic product or GDP, only two-thirds of which will be affected, since pharmaceuticals, electronics, and petroleum products have been exempted.

However, this line of reasoning overlooks the bigger picture. The US is not just India’s largest export market — it is also a critical economic partner. Consequently, the tariff shock will not only affect trade flows — it will rattle investor confidence, disrupt supply chains, and chip away at India’s long-term export competitiveness. The real risk lies in these ripple effects, which extend far beyond the immediate numbers.

To understand why, consider the plight of three types of firms.

The first and the most obvious are global manufacturers. India has been pitching itself as the next global manufacturing hub, especially for firms exporting to the US or diversifying away from China. This was seen as a potential game-changer for India’s growth path. With a young, increasingly skilled workforce and democratic stability, the advantage seemed clear. However, that edge has now been wiped out by a 50 per cent US tariff. Even at the reciprocal 25 per cent imposed on August 7, India would remain less competitive than most of its Asian rivals who face only 19–20 per cent tariffs on their US exports. If this differential persists, India risks losing out on a once-in-a-generation chance to become the world’s manufacturing workshop. 

It’s not only exporters of goods who stand to lose. The impact could extend to services exporters too. Nearly 60 per cent of India’s 1,700-plus Global Capability Centres are US-headquartered. While tariffs don’t directly touch them, worsening US–India relations could make the parent firms wary of expanding here. That would be a serious setback, since services exports have been a cornerstone of India’s post-Covid growth.

Finally, consider domestic manufacturers. They may not export much but many of them rely heavily on foreign inputs. If India even considers imposing retaliatory measures on the US, to add to those imposed earlier on China, it risks stalling their investment plan further. 

The tariff shock therefore threatens to ripple through the entire economy. Added to this, high-frequency data already point to an economic slowdown. Non-food bank credit growth has slipped to 10 per cent from 14 per cent a year ago, merchandise exports rose just 2 per cent in April–June, GST collections slowed to 6 per cent from 11 per cent, passenger vehicle sales have slumped, indicating sluggish urban demand, and the real estate boom of the past few years has stalled, creating a growing stock of unsold homes in major cities. 

In other words, the US tariff shock could not have come at a worse time.

How should India respond? First and foremost, India must resist the temptation to turn inward. Protectionism has never delivered rapid growth —India’s own pre-1991 record proves it, and no other country has succeeded that way. The US may be leaning protectionist now, but India cannot afford to repeat that mistake.

Instead of turning inward, India should help its exporters by deepening trade ties with multiple other countries. The deal with the United Kingdom is a welcome step, while negotiations with the European Union are vital and must be expedited. India should also pursue agreements with East and Southeast Asia, to integrate more firmly into global supply chains. That will mean lowering its tariff and non-tariff barriers, which remain among the highest in Asia. In today’s interconnected world, a strategy of self-sufficiency would be self-defeating.

At the same time, Indian policymakers must move beyond firefighting and implement reforms that unlock India’s growth potential. Reviving private investment, boosting manufacturing competitiveness, and creating jobs at scale will require cutting red tape, simplifying regulations, improving the ease of doing business, and investing in skills and not just physical infrastructure. Recent announcements — such as rationalising goods and services tax (GST) rates and setting up a Reforms Committee — are encouraging, but the real test will lie in the details and, above all, in implementation.

Finally, this setback must not push India into an anti-US stance. Frictions are inevitable in such relationships, but the US remains far too important an economic partner to sideline. India’s long-term objective should be to strengthen, and not weaken, its economic engagement with the US, by negotiating progressively better and more comprehensive trade deals.

In many ways, this could be India’s second 1991 moment. The crisis may not be as visible this time, but the stakes are just as high: the economy is at a crucial crossroads, and any policy misstep now could trap India in lower-middle-income status for decades to come.

What India’s GDP numbers reveal

What India’s GDP Numbers Reveal, Ideas for India, Aug 4, 2025.

Trade war: A second chance for India to attract global manufacturing

Business Standard July 15, 2025

India, like any country, integrates with the world through goods, services, and financial flows. It has done very well in the latter two. Now, it has a chance to emerge as a key player in global goods trade—potentially boosting its slowing GDP growth. The key question is: Can policymakers enable this shift?

Services trade from India has become a major success. From 2005 to 2023, India’s share of global services exports doubled—from under 2 percent to over 4 percent. Over the past decade, services exports grew over 8 percent annually and now make up 44 percent of India’s total exports, well above the global average of 25 percent. At the same time, gradual easing of capital controls has deepened India’s financial integration. Between 2011 and 2023, foreign portfolio inflows rose from $180 billion to $460 billion, with their share of GDP increasing from 11 percent to 14 percent.

In contrast, goods exports have fallen behind. From 2014 to 2024, they grew at just 3 percent annually—down from 17 percent in the previous decade. This slowdown coincided with a rise in protectionism, as average import tariffs doubled from 6 percent in 2013 to 12 percent in 2023.

In contrast to India’s journey, China’s share of global goods exports jumped from 4 percent in 2001 to over 14 percent in 2024. However, its rise hasn’t been without controversy. China has often been accused of violating WTO rules by unfairly supporting its manufacturers with subsidies, tax breaks, and cheap loans. Things got worse from 2017 as China grew more authoritarian. Its strict, nearly three-year long Covid-19 lockdown and the resulting supply chain disruptions exposed the risks of over-reliance on its economy. This raised political concerns in the U.S.—China’s largest export market—and triggered efforts to reduce dependence. The major shift in U.S. trade policy today stems largely from this.

After Covid, global manufacturers adopted a “China+1” strategy, shifting parts of their supply chains to other countries. Vietnam, Thailand, Cambodia, and Malaysia benefited—but India largely missed out due to policy hurdles. From 2017 to 2023, India’s share of global goods exports remained flat at around 1.7–1.8 percent, while tiny Vietnam’s rose from 1.5 to 1.9 percent.

In the latest phase of the trade war, the U.S. has threatened tariffs of 25–40 percent on imports from 16 countries, including Canada, Mexico, and a 30 percent tariff on the EU by August 1. Tariffs on Chinese goods already exceed 30 percent while India continues to face a baseline tariff of only 10 percent.

With rising export costs from many countries, multinationals will keep seeking alternative manufacturing hubs. This gives India another chance to expand its role in global goods trade—a crucial opportunity given that the domestic economy is slowing down. A surge in goods exports could lift overall GDP growth. The key question remains: can Indian policymakers seize this moment? There are two important objectives here: preserving or gaining market access and significantly increasing the share of exports in global manufacturing trade.

Ideally, India would secure a favourable trade deal with the U.S., giving it a strong edge over competitors. If not, it can still benefit from lower tariffs compared to what the other countries are facing now. And regardless of U.S. outcomes, India has the rest of the world to trade with. Progress with the UK and potential talks with the EU offer opportunities. Beyond this, India must integrate into global supply chains through agreements with China and ASEAN, and revive Bilateral Investment Treaties to boost FDI inflows.

Indian policymakers must make manufacturing far more attractive to foreign investors and implement key reforms to ease business hurdles. Despite efforts like Make in India (2014) and the Production Linked Incentive (PLI) scheme (2020), manufacturing’s share of GDP has stayed flat at around 17 percent. Private investment remains weak, and FDI inflows—despite the China+1 trend—fell to just 2.3 percent of capital formation in 2024, down from 8.8 percent in 2020.

This shows that subsidies alone cannot overcome the bureaucratic and regulatory hurdles firms face. Policymakers must simplify and reduce costs for manufacturers—making it easier to acquire land, hire workers, get approvals from ministries, and import raw materials without excessive barriers.

Firms—foreign or domestic—invest more when returns are high and risks are low. In India, however, policy risks remain high due to unpredictable moves like retrospective taxes, increased tariffs, import restrictions, and sudden regulations. To attract investment, India must create a stable, and predictable policy environment, ensure consistency across policies, and relax FDI rules. India also needs a clear, and credible trade policy that lowers tariffs, and removes arbitrary non-tariff barriers like the surge of Quality Control Orders (QCOs) since 2014.

The U.S.-led trade war has reshaped the global economy. Short-term growth may slow as countries adjust, but Indian policymakers must focus on the long term. This is a key chance to grow India’s share in global manufacturing. With the goal to become a developed nation by 2047, missing this opportunity would be costly.

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.