Insights on current policy issues in India

—Pranay Kotasthane

Last week, another fiscal federalism debate surfaced. Naveen Patnaik, former Odisha CM, tweeted that the Mines and Minerals (Development and Regulation) Amendment Bill, 2026, passed by the two houses of Parliament earlier this month, would cause Odisha to lose ₹12,000 crore annually. Another mineral-rich state, Jharkhand, also opposed this move. The Union government soon brought out its side of the story through a Factsheet, and its ministers have been let out to do the defending. Since this technical issue is an important one, more so given the ongoing geopolitics of critical minerals, I am attempting an explainer that spans geopolitics, public finance, and federalism.

A quick disclosure before I begin. My bias is in favour of states having higher and more predictable tax revenue. It is not a bias in favour of states being free to set whatever tax rate they like, whenever they like. For the same reason, I also support GST. Higher revenues and freedom to increase tax rates are not the same demand. One can think states deserve a bigger, steadier share of mining wealth, and also think that the way some states have gone about claiming it (backdated, ad hoc, without notice to investors) has resulted in poor economic outcomes.

With that, let’s try to understand this issue in detail.

Background

For nearly seventy years, mining in India has run on a compromise. The Union allocates mining rights and fixes royalty rates. States collect that royalty and can tax the underlying land or mineral rights within limits. In July 2024, the Supreme Court’s nine-judge bench in Mineral Area Development Authority v. Steel Authority of India upended the “limits” half of that sentence. It held that royalty is a contractual payment, not a tax.

That unlocked for states an older, separate power to raise a lot more revenue from mineral rights and mineral-bearing land. If royalty counted as a tax, Parliament's existing occupation of that field might have blocked any separate state levy running alongside it. But now, states could levy new taxes on land. The Court said the Parliament could restrict this newfound power only where it concerned mineral rights, not land. A follow-up order allowed states to chase arrears going back to April 2005! Welcome back, retrospective taxation.

States moved quickly. Jharkhand introduced a Mineral Bearing Land Cess headed for ₹11,000 crore a year within two years. Odisha built a potential arrears claim exceeding ₹1 lakh crore. Then, earlier this month, Parliament passed the MMDR Amendment Act, which tries to roll back the Supreme Court's 2024 decision.

To help with understanding, I created a mineral tax “supply chain” table using authentic sources. Here is what that looks like. The row marked in red is the bone of contention.

Now we can proceed to the changes brought by the 2026 Act. Alarmed by the 2024 judgment that led states to demand taxes on item 4 in the table going back twenty years, the miners would have petitioned the Union to bring in necessary changes. And given the weaponisation of supply chains, the Union had to act. That’s where this amendment comes in.

According to PRS Legislative Research’s legislative brief on the Act, the new law extends Union government control to “mineral-bearing land,” previously understood as a state land matter. And it bars states from imposing any tax, cess, or levy on mineral rights or mineral-bearing land, based on quantity, value, royalty, or otherwise, except under conditions the Union government prescribes. Dues that hadn’t been paid or recovered before the Act commenced are void. Dues already collected are not refunded. Royalty, auction premiums, and GST continue exactly as before. We can call this selective relaxation.

Just a diversion: this is a gem of a policyWTF. A retrospective taxation is being undone by a selective relaxation, one which is clearly a moral hazard. The Union is saying that if a miner already paid up to the state, it’s their bad luck. But if it hasn’t paid what was due, it will protect them. The effects are pretty similar to what happens when governments distribute loan waivers.

Getting back to the main plot, the Union government’s own factsheet on the Act says nearly 90 per cent of mining revenue already flows to states, so states have little to complain about. That’s true, and also beside the point. That figure is built from royalty (item 1 in the table) and auction premium data (item 3), two revenue streams this Act doesn’t touch. The actual fight is over the much newer stream: the mineral-bearing land tax that MADA opened up in 2024, and that Act now restricts (item 4). The factsheet does not mention the Supreme Court judgment that made this Act necessary in the first place.

So, How Do We Think About This Issue?

The Union’s framing treats this purely as tax simplification. That there were fourteen overlapping levies; some states were pushing land taxes as high as 20 per cent, and unpredictability was discouraging investment. It argued that fixing the multiplicity would get the investment back.

But that’s not the only consideration. Rohit Chandra, who has studied India’s coal sector deeply, opined in the Indian Express that the Act is the latest instance of the decades-long trend of dispossessing states of mineral wealth within their own borders. His strongest point is procedural rather than economic: the Act got five minutes of Lok Sabha debate, forty minutes in the Rajya Sabha, and no standing committee referral despite requests.

He also notes something that doesn’t fit a clean Government vs Opposition story. Several of the states hit hardest are currently aligned with the ruling coalition, which suggests fiscal centralisation as its own goal, not partisan targeting. His implicit fix, borrowed from China’s 1994 reforms, is that centralisation needs a compensating fiscal instrument for the states.

My colleagues at Takshashila, Sarthak Pradhan and Shobhankita Reddy, argue the efficiency case in this blog post. India’s mining levies resemble the pre-GST cascading tax structure, and the rates may already be past their revenue-maximising point. That would explain flat output and rising mineral imports better than any story about state greed. But they explicitly call the loss of state taxing power a source of concern, warn that unilateral action invites more litigation rather than less, and propose a GST-Council-style Minerals Council instead. They also cite CAG audits showing District Mineral Foundation money misspent in Odisha and Chhattisgarh, evidence that simply restoring state discretion isn’t automatically a complete answer either.

An Older Indian Mistake

There’s a domestic precedent for this kind of Union intervention. The 1956 Freight Equalisation Scheme (which we discussed in edition #206) subsidised the long-distance transport of iron, cement, fertiliser and steel so that every state paid the same delivered price regardless of distance from the mine. The stated goal was balanced industrial development. The actual effect, documented decades later by Firth and Liu, was the opposite. It pushed industries using these inputs away from the resource-rich east, Bihar, MP, Odisha and West Bengal, toward the west and south, erasing the locational advantage those states should have had. The damage was invisible for the first ten to fifteen years and only became stark by 1990, close to when the scheme was finally repealed.

The parallel to the MMDR Amendment is quite stark. Both are Union interventions that flatten a natural, geography-based advantage in the name of national uniformity. FES equalised the cost side, paying to erase the transport-cost edge resource states held. This Amendment restricts the revenue side, capping the fiscal edge those same states could draw from taxing their own mineral land. And the affected states are almost the same. It’s the same mineral belt being asked to subsidise the rest of the country for a second time.

What’s the Way Forward?

If we cut through all the legalese, there is a trade-off at the centre: higher economic activity vs fiscal federalism. Predictable, uniform mineral taxation supports economic activity as investment, exploration, and the downstream industries all depend on stable input costs. Tax rate freedom for states supports their ability to capture value from their own endowment on their own terms, without asking Delhi’s permission.

My priority is economic activity. A bigger, faster-growing mineral economy means faster-growing royalty and auction-premium revenue too - the streams that already go mostly to states. States that hold out for unrestricted rate-setting freedom on mineral land risk losing the main income stream itself. That’s the same logic behind supporting GST over unrestricted state VAT-setting. But taking that position means aligning the cognitive map of states that fear losing out.

I can think of three ways to balance these two objectives.

First, a negotiated Minerals Council, modelled on the GST Council, reaches the predictable tax-environment outcome by a slower route: weighted votes, qualified-majority decisions, and states with a seat at the table rather than a consultation exercise. A rate structure states sign on to is harder to litigate, harder for a future government to unilaterally reverse, and therefore more credible to an investor deciding whether to sink capital into a twenty-year mine plan.

Second, compensate the states losing ground, on a fixed clock. A GST-style transition guarantee, a revenue floor pegged to each mineral state’s pre-Amendment trajectory, funded for a fixed number of years while the Council and land cess start generating durable revenue on their own, could be a way out of this mess. Crucially, this compensation needs to come from general Union revenues, not from another cess on minerals, since the existing GST Compensation Cess already taxes coal, meaning Odisha and Jharkhand have already been funding part of the pool that cushioned other states’ GST transition.

Third, fix the two defects that matter regardless of which option above gets picked. The first one is resolving the selective relaxation-moral hazard problem with a uniform settlement, not a payment-date cutoff. The Union can apply one common ratio to every MADA-era claim, paid or unpaid, the way schemes like Vivad Se Vishwas already do. This removes the constitutional exposure and a specific source of investor uncertainty. Secondly, redesigning the land cess as a stable instrument for states is necessary because it is their constitutional right. Assessing it periodically on land classification or value, like ordinary property tax, instead of tying it to extraction volume or mineral price, could be one way forward. This would stop it from generating multi-year retrospective disputes and give states back a durable revenue instrument.

Unless these issues are sorted out, the Union government’s intent is unlikely to translate into the desired outcome of robust mining activity, something India needs desperately in this tough geopolitical environment.

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India Policy Watch #2: What We’ve Got Here Is A Failure To Communicate

Insights on current policy issues in India

—RSJ

Central banks all over are having a communication problem, of late. It is an uncertain world out there with unending wars, shifting geopolitical sands, manic AI investment and, of course, Trump, making any prediction difficult. A central bank whose primary responsibility is price stability cannot have it easy in these times. I hope they aren’t yearning for some mythical good, old days when the central banks had it easy.

Because there was never such a time. Booms, busts, wars and mad kings have always been around. The task of maintaining sanity at the time of a boom, preventing a bust and making the economy boring has always been tough. To make things a bit easier for them (and to limit the possibility of having an egg all over their face), the central bankers have, over the years, evolved a patois of their own. They choose their words carefully, they hedge, and they obfuscate about their intent, and yet, they let the markets read their minds in a tango both perfected over the years.

Through this intricate dance of communication, the central bank would tell you what it was trying to achieve, give you an indication of how it would react when things changed, and then leave markets to do the rest. The government would worry about fiscal issues of spending and taxes. Bond yields and their movement would then let everyone know what investors thought about growth, inflation and the fiscal position. You could disagree about the future and bet against it, but there was a common language in which to have the argument.

But as I said, there is a communication problem afflicting them now.

The US is a good place to begin with to appreciate this. Kevin Warsh, someone who built his reputation as an inflation hawk, came into the Federal Reserve with the support of Trump, who thinks the US interest rate is pegged artificially high. So there was a question hanging over his appointment. Would the new chairman be independent enough to do what he thought was right, even when the White House wanted something else?

Even the harshest critics of Warsh don’t think him to be underqualified for the job. But he has a difficult balancing act to maintain. Do the right thing to ensure price stability while not rubbing Trump on the wrong side. He has therefore chosen an unusual proposition for a central banker. To talk less. Central banks like forward guidance because telling markets in a convoluted manner what they are likely to do reduces uncertainty. Warsh thinks this has gone too far.

The future is difficult to forecast, and in his own words, the financial markets react to the Fed’s comments, and the Fed, in turn, analyses the market to base its outlook for the future, turning this into a “hall-of-mirrors problem”. Better to look at the data, talk in generalities and allow markets to make their own assessment. As he said in his first press conference in July, market participants should “learn to play the ball, not the referee”. This is, of course, not correct because the Fed is a huge market player itself and not some kind of neutral referee alone. The bond yield reacted to his July speech with the curve steepening the most since the last 12 months. But Warsh remained steadfast in his view about the Fed’s communication approach. It will speak less.

His debut Jackson Hole speech on Friday therefore was widely anticipated to toe a similar line. He surprised to a large extent by going back on his earlier commitment to speaking in generalities. He did not provide guidance, however, he did make it clear that inflation is a problem. From CNBC:

“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job ... our mandate ... and our charge to keep.”

Expectations of a rate increase in September went up, and short-term Treasury yields moved higher (the curve flattened).

While Warsh is trying to rework the monetary policy communication, he has not been helped by the Treasury Secretary, who has been on a different trip in the past few weeks. The 30-year Treasury yield has moved to 5.2%, and long-term borrowing costs have risen as investors worry about inflation, the fiscal deficit and the amount of debt that the US government has to issue. The Treasury has decided that it will fight the bond market and try to keep the yield down to help with the cost of interest on a total debt that has now crossed $40 trillion. It has been up to all kinds of unusual moves in the past month, starting with coordinated buying of over $90 billion of Japanese Yen with Euros from its reserves to ensure the Japanese central bank doesn’t sell off US bonds to rescue the Yen from its lowest point in the last 40 years. A further falling Yen risked more downward pressure on other currencies of large EMs, who would have sold more dollars, sloping the yield curve further upwards.

So, Warsh is pontificating on how participants should go by unfiltered and uncorrupted signals coming from the bond market while Bessent is manipulating the same market as much as possible. The Treasury is not just managing liquidity; it is also trying to fix the price. And once a government starts doing that because it does not like the signal coming from the market, it develops a taste for it. This is why you find the phrase fiscal dominance now starting to appear in the media. I would not say that the US has reached a state of fiscal dominance. But the underlying issue is real. Fiscal dominance over monetary policy is a recipe for disaster waiting to happen.

India is facing a less dramatic version of this communication issue.

The press meet after the RBI’s MPC meeting on August 5 suggested that the RBI was not particularly worried about inflation getting out of control. There was a clear dovish tone to the commentary. Growth had held up reasonably well, and the inflation forecast was manageable. The natural conclusion was that the RBI was comfortable waiting for more data before doing anything and the market responded by pushing out a possible rate cut further into the future. I wrote about it here, saying this stance doesn’t make a lot of sense given the variables involved and the spread between the US and India rates, which is the lowest it has been for a long time.

Last week we got the detailed minutes of the MPC meeting. The whole commentary now stood on its head. While all six members had voted to keep the repo rate at 5.25 per cent, the minutes showed a committee that was much more alert to inflation risks than the press conference had suggested. The members had talked about oil prices, the rupee, global uncertainty and the possibility that supply-side inflation could become more persistent. The distinctive tone was that inflation will go beyond 5 per cent and remain sticky. This was a hawkish about-turn in communication that no one saw coming. This hasn’t happened before, where the two-week gap between the MPC meeting and the minutes could completely change the tone of what was being said. The benchmark bond yield moved higher after the minutes, reacting to the revised tone.

Then we had the FCNR(B) communication last week, which makes the same point about communication. The RBI introduced a concessional swap window in June to encourage foreign currency inflows into India. Banks could offer better rates to NRIs bringing FCNR(B) deposits into India because the RBI was effectively taking on the currency risk through the swap facility. The scheme was meant to run until September 30. At the same post-MPC press conference, the Governor was asked whether the RBI was considering closing the facility early. His answer was a clear no. At that point, banks had already mobilised nearly $41 billion under the facility.

Nine days later, the RBI announced that the facility for fresh FCNR(B) mobilisation would close on August 31.

To be sure, the response had been better than expected. By August 21, the total inflow associated with the measures had reached about $73 billion. Perhaps the RBI had achieved what it wanted. But it does beg the question why couldn’t a broad target be set upfront that could have Banks plan better and investors work to that timeline. Policy credibility at the operational level is about being consistent with communication and leaving the element of surprise to a few isolated cases.

The ECLGS 5.0 episode is similar. The government had created a ₹2.55 lakh crore guarantee scheme for MSME lending after the West Asia shock. The scheme was formally available until March 31, 2027, subject to the guarantee allocation being exhausted. The entire amount was used by August 20, and the scheme closed.

Banks were left with loans that had been processed or sanctioned but could not necessarily be disbursed under the guarantee. Again, the government had an entirely valid explanation. The scheme had run out. But many MSME owners who don’t look at the total amount the system has processed (they have other things to worry about) and time their borrowing decisions have been left in the lurch. It is not like the West Asia crisis is resolved already. In fact, I will argue that things will continue to be bad on the crude oil front and eventually the input costs will start hurting MSMEs in India. Many of these companies typically build up their inventory post-monsoon and in preparation for the festive season. That’s when they would have needed working capital support. But that scheme is gone now overnight with a single announcement.

The problem with policy change and communication, both in the US and India, to my mind stems from a similar source. The RBI is dealing with inflation, growth, the rupee, capital flows, banking liquidity, government bond yields and financial stability. Governments everywhere are dealing with energy prices, trade restrictions, geopolitical shocks and elections. The central banks are trying to influence too many variables at the same time because they seem to be compensating for the lack of a coherent fiscal policy that takes hard calls. Monetary policy tools will continue to get more complicated and their communication will get more entangled in trying to help the fiscal.

The recent experience of the central banks should make them wonder that in a world where policymakers cannot predict much, can they keep their hold over monetary policy issues independently and at least make their own rules predictable enough for everyone else to plan?

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Reading and listening recommendations on public policy matters

1. [Book] Fiscal Fables is now available in your neighbourhood bookstore and on Amazon. Buy, read, gift :)

2. [Playground] What if I told you that you have a public finance playground to yourself? You can upload state budget documents, analyse past data, and see where your income tax goes. All this and more is coming up on this portal.

3. [Puliyabaazi] We have an in-depth discussion on whether UPI transactions should be free. Give it a listen.

Insights on current policy issues in India

—RSJ

Here are three different newspaper headlines from the past two weeks for you to read together.

“For1st time in a decade, India to import 10 lakh tonnes of sugar.” (Times of India, Aug 21, 2026)

“Consumers queue up for premium petrol as E20 concerns refuse to die down” (Mint, Aug 21, 2026)

“E20 mileage row: Govt says fuel alone cannot be blamed; cites driving, traffic, maintenance” (Times of India, Aug 15, 2026)

I confess I don’t shop for staples and vegetables at my home, so I had no idea that retail sugar prices had gone up by about 16 per cent in the past month. And India, which for years has had surplus sugar, has now opened a duty-free window for importing one million tonnes of raw sugar until October 31 to manage the impending festive season demand. Exports have been banned, and a series of stockholding restrictions have been placed on wholesale sugar buyers to prevent hoarding.

Mild nostalgia of the 80s crept into me reading all this. Back then I used to carry a ration card and a few textbooks to pass the hours standing in queue to buy sugar from the government “control” stores. Sugar was a “controlled” commodity, and we had a ration of five kgs per household per month or whenever there was stock in that store. What character-building endeavours those were.

India, to remind you, is the world’s second-largest sugar producer, and for much of the past decade the problem for the sugar industry has been surplus production rather than scarcity. So, what has brought us here?

While looking for answers, I also discovered a singular government organisation - the Directorate of Sugar and Vegetable Oils. This hallowed body has this responsibility (as per its website):

”In exercise of powers conferred under the Essential Commodities Act, 1955, Directorate of Sugar & Vegetable Oils monitors the production, sale, export and stock availability of sugar in the country to ensure sufficient availability of sugar for domestic consumption at stable prices. In addition, the Directorate is also a nodal Office to ensure sufficient capacity creation and production of ethanol in the country to meet the target of 20% ethanol blending with petrol by 2025 in India. The Directorate is responsible to implement various orders of the Government of India namely the Sugarcane (Control) Order 1966, the Sugar (Control) Order 1966 and the Sugar Price Control Order 2018.”

Kamaal hai.

After all this monitoring of every single leg of the sugar value chain, we are here! The government tracks acreage, production, recovery rates and stocks of sugarcane and sugar. It regulates pricing across the value chain. This is a commodity where the government is an active participant in the market.

And yet we have runaway sugar prices to deal with.

The immediate explanation offered by the government is an unanticipated drop in production. The government estimates current sugar production at around 30.6 million tonnes, against an earlier estimate of 34.3 million tonnes. This has meant a low opening stock projection for October (when the festive season peak starts) at about 3.5 million tonnes as against the usual 5-6 million tonnes. T

he drop in production volumes is being blamed on poor monsoon, lower recovery from the farms and disease in sugarcane crops in certain states. These are possibly good reasons. Although sugarcane acreage in July was 1.5% higher than in the corresponding period last year, despite deficient rainfall. That doesn’t necessarily mean more production, but it should give us pause before we blame poor rainfall for lower stock estimates.

One possible answer is related to the second and third news headlines that I started with.

India’s E20 programme has meant almost all petrol sold at retail pumps now has 20 per cent ethanol in it. This has created a second large market for sugarcane. The country has invested heavily in distilleries to meet the E20 target, and ethanol production capacity had reached around 1,822 crore litres a year across 499 sites by mid-2025. This is about 600 crore litres in excess of what’s needed for the domestic ethanol blended petrol programme. Sugarcane accounts for around 30-35% of ethanol feedstock, with the remainder coming from maize and rice.

I have written earlier about the E20 programme, its questionable benefits and the illogical move to not offer any real options for customers except to purchase E20 petrol. The underlying logic for imposing E20 petrol is that India imports a large share of its crude oil, and reducing that dependence is a strategic objective. But that should not mean that any solution that does so is a good solution regardless of its other consequences.

It is difficult to argue against the notion that E20 has changed the underlying economics of the sugar market. If the demand for E20 petrol continues to remain strong, since there is no other option available and that gives better realisation to the mills, it will mean more cane being diverted to the distilleries. The government has created an incentive to support higher E20 production and then discovered that players respond to that incentive, which creates a problem elsewhere. This is the old problem of not anticipating the unintended.

But there’s more. Sugar exports have contributed to reducing our trade deficit over the year. In 2021-22, sugar exports exceeded 12 million tonnes. Now we have temporarily banned exports, and we are importing sugar after slashing the 100 per cent duty we had on it (that itself is mind-boggling). The global sugar market has already factored in the absence of Indian sugar for the next few quarters. The international prices had moved from around $474 a tonne at the end of June to $552 on August 20. We will be buying sugar from the international market at a time when global prices are at their recent peak. On the one hand, E20 petrol reduces India’s crude import bill, but it might be leading it to import sugar at much higher prices.

The environmental question of increasing sugarcane acreage to cater to this demand is relevant too. Sugarcane is a water-intensive crop. Clearly, as E20 adoption is complete and we move to higher blends, there will be one of two consequences. Either we will have a sugar shortage for retail consumers as more of it is diverted to ethanol distillation, or there will be more area that will come under sugarcane cultivation. So, the cost of the ethanol blended petrol programme cannot be measured only in litres of imported crude that will be reduced. There are other considerations too, including sugar imported, groundwater being used, land being allocated and other crops or uses being displaced. These costs right now are outside the calculus.

The CEA, V. Anantha Nageswaran, has made the same point in arguing that India should remain at E20 and not move to higher blends until it has “thoroughly costed the food-versus-fuel trade-off”.

Let me bring the other headline into focus now. The government has said that E20 is safe and that fears about engine damage are unfounded. It has pointed to testing across the country and rejected the claims being made about the fuel. Who knows whether those tests are rigorous or not? The automakers have, with remarkable speed, declared their engines are safe with E20 petrol.

But here’s the revealed preference of the customers. Mint reports that the share of premium petrol in sales has risen from around 4% in March to 12-15% at some pumps. Consumers are paying more for higher-octane petrol (which has 20 per cent ethanol) because they believe it will help with concerns around mileage and engine performance under lower-octane E20, which is cheaper.

Consumers are spending more of their own money because their own lived experience and those of people around them don’t convince them of the government’s assurances. It can’t just be perception-based, on which customers are spending real money to safeguard their vehicles from E20. They should be seeing first-hand evidence of mileage calculations and concerns about long-term vehicle performance.

It goes back to my earlier argument on these pages. If E20 is the better product, consumers will buy it. If consumers prefer E10 or ethanol-free petrol and are willing to pay for it, that choice also contains useful information. Instead, India has moved towards a system in which E20 is the default, leaving consumers to trade up to expensive premium fuels. That they are doing so without a lot of protest suggests the government narrative of adopting E20 as a national duty of every Indian is working.

The Brazil comparison, which is brought into this, also deserves a bit more analysis. Brazil’s ethanol programme developed over decades, beginning with the oil shocks of the 1970s, within a different political economy (it was a military dictatorship), a smaller population (with fewer cars), and a different land-use pattern for agriculture. It took them over two decades since then, and that too in a world where alternative energy options were limited. India’s transition has been much faster, while we are simultaneously dealing with food security, water stress, a large and varied vehicle fleet and a sugar industry that is deeply entrenched in the political economy.

Once the immediate sugar stock crisis passes, the government should revisit the assumptions underlying the sugar and ethanol policies together. What is the full cost of the E20 transition? A tonne of sugarcane can become sugar or ethanol. Let the market make the choice based on the trade-offs made by millions of players in that market. Right now, the government is influencing that choice without fully appreciating the trade-offs involved.

This won’t be the last time we will have a sugar crisis on our hands.

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India Policy Watch #2: We Got LLMs

Insights on current policy issues in India

—Pranay Kotasthane

Who says India doesn’t have a sovereign LLM? Not just a national LLM; many Indian states will soon have one each. And Maharashtra is leading this war of Local Language Mandates.

Of all the things that an RTO could do, the Mira-Bhayander RTO investigated whether auto-rickshaw drivers know Marathi. Then the state transport minister roared that auto-rickshaw and taxi drivers must know Marathi. With alacrity, his department began a 105-day campaign (read state-sponsored gundagardi) since May to teach Marathi. And now it has begun enforcing these rules.

See the Kafkaesque details courtesy Indian Express’s Zeeshan Sheikh:

The Transport Department, however, has maintained that the present exercise is about enforcing existing rules. Officials have also distinguished between permits and badges, arguing that Rule 24 applies to badges and that the 2017 judgment did not strike down the language requirement for badges.

The government subsequently made amendments to Rules 4, 78 and 85 to formalise Marathi proficiency as a condition for authorisation, permits and renewals. The draft rules were put out for objections and suggestions.

What happens to those who fail?

Drivers will not lose their licences immediately. Those found lacking the required proficiency will first be given a notice and one month to learn Marathi.

If they fail to comply, their PSV badge and driving licence can be suspended for three months. Repeated violations could result in permanent suspension.

The department is also checking for other irregularities, including allegations that fake domicile certificates were used to obtain permits and badges.

Good ideas travel far. Bad ideas travel further. So I expect many states to copy this idea to launch their own LLMs.

These language training and assessments are just a ruse by incumbents to protect their turf from economic migrants. Making language mandatory for permits and renewals only licenses extortion by local goons and harassment by the state.

Despite the fundamental right guaranteeing the freedom of work, state governments try to get around the spirit of the Constitution in imaginative ways. Linguistic reorganisation on the principle of ‘one language, one state’, rather than the ‘one language, one state’ idea that Ambedkar recommended, has created states that assert monopolistic control over languages. The result is such absurd LLMs.

Despite their absurdity, these rules will find favour amongst ‘locals’, who have also internalised that the primary responsibility for developing their language rests with the state government rather than the society itself. Another case of economic freedoms being sacrificed at the altar of statism.

And I haven't even factored in the time, effort, and tax money that went into these training and assessment efforts. Doesn’t the RTO have other high-priority items to address related to road safety, traffic rules enforcement, and professional driving license tests?

It’s 2026, and we could easily use the other LLM to override our linguistic differences. But then, every state gotta have its LLM.

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Matsyanyaaya: India’s Middle Power AI Strategy

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

Why the Frontier Anxiety Is Overrated

Last week, I participated in a roundtable organised by the Council on Foreign Relations. The thesis I was responding to was that middle powers have no option but to fall in line with either the US or China in the AI era. I was invited to provide an Indian perspective. (Since it was held under the Chatham House Rule, I will stick to what I said.)

The discussion gave me a chance to articulate an Indian perspective on a question consuming the AI policy world: as access to AI models and training hardware becomes more contested, what should countries like India do?

I agreed with the diagnosis that access to frontier AI is becoming more securitised. But I disagreed that it would have disastrous strategic consequences for a country like India. I had five reasons in support of my argument.

1. India sees AI as a general-purpose technology. Value capture will likely happen at the diffusion and deployment layers.

The arms-race framing of AI in the US follows a logic that frontier access is scarce, falling behind is dangerous, and recursive self-improvement will make catch-up impossible for other countries.

But there are actually four distinct ways to frame AI geopolitically: AI as nuclear weapons, AI as a zero-sum arms race, AI as an innovation race, and AI as a general-purpose technology. The framing a country adopts determines the policy instruments it uses. Arms race implies export controls and compute denial. Nuclear weapons framing leads to non-proliferation and hardware monitoring. Innovation race framing creates support for subsidies and ecosystem-building. The GPT framing emphasises diffusion infrastructure and human capital.

India is betting on the fourth frame. Jeffrey Ding’s work has shown that historically, the countries that benefited most from general-purpose technologies were not the ones that invented them. Germany began the chemical revolution, but the US deployed it at scale. No country “won” electricity. Multiple countries found their place in the supply chain and captured value in different ways.

India knows this from its own experience as well. India didn’t build Java, Oracle, SAP, or cloud computing. What India built was the world’s deepest organisational capacity to deploy and integrate technologies invented elsewhere. The result is that India exports more in IT services every year than Saudi Arabia earns from oil.

Further back, the nuclear and space domains tell a similar story. After the nuclear tests in 1974, the world denied India reactor technology. The MTCR restrictions denied India cryogenic engines for the space programme. On both occasions, the prediction was permanent subordination. But India developed credible capability through self-strength backed by diversified partnerships.

The recursive self-improvement hypothesis also needs questioning. Real-world systems—enterprises, government departments, supply chains, defence systems—don’t change easily just because AI exists. The binding constraint for general-purpose technologies is always diffusion because organisations and processes take time to adapt. The question for India is therefore not “how do we get guaranteed access to the best model,” but where India’s place is in the AI supply chain, and how we make ourselves indispensable.

2. The model layer is the most substitutable part of the AI stack, and restricting it doesn’t work.

The “cut off” scenario applies to proprietary API models—where a company in San Francisco can revoke your access with an export control directive. It does not apply to open-weight models running on domestic hardware. Once a firm downloads the weights, no one can un-download them. The tap that can be turned off is the API. The weights are a static file.

But here’s the deeper point. The US has already tried blocking access at a much harder layer—chips. Since 2022, the US has progressively denied China access to frontier GPUs. A100s, H100s, even the downgraded H20. The result was not Chinese subordination. The result was DeepSeek, Qwen, and Kimi. China compensated for weaker chips with algorithmic innovation, engineering efficiency, distillation, and brute-force scaling. The controls restricted one layer, and the other layers adapted.

This was Jensen Huang’s ‘AI is a five-layer stack’ argument in practice. Strength at one layer offset weakness at another. If that’s true for chips, where there are essentially two suppliers globally, it’s even more true for models, where there are a dozen capable options from many different countries. If chip denial produced DeepSeek, why would model denial produce Indian subordination? The model layer is the most substitutable part of the entire stack.

3. The technology trajectory favours abundance in inference, not scarcity.

The compute scarcity argument assumes today’s architecture is permanent. But three things are happening simultaneously.

First, inference is splitting from training. Training frontier models will stay expensive and concentrated. But inference—which is what deployment requires—is moving toward specialised ASICs, custom silicon, and edge devices. Models themselves are getting smaller through distillation, mixture-of-experts, and quantisation. Last year’s frontier capability runs on this year’s commodity hardware.

Second, the empirical pattern is that open-weight models close the gap to the frontier within months, repeatedly. DeepSeek emerged despite chip denial. Llama, Qwen, Mistral—every quarter, the next capable open model arrives.

Third, Sakana AI, a Japanese lab, launched an orchestration model called Fugu. Fugu doesn’t train frontier models. It coordinates other models, routing each task to the right specialist, delegating sub-problems, and verifying outputs. On ten out of eleven major benchmarks, Fugu Ultra matched or exceeded Anthropic’s Fable 5 without training a single frontier model and without even having those restricted models in its pool. Their launch pitch was explicitly about “frontier capability without the risk of export controls.”

Thus, multiple pathways are available to capable and motivated middle powers.

4. India has more leverage than the “cut off” frame suggests—as a market, as a talent pool, and as a deployment workforce.

Middle powers are not supplicants negotiating for access if we were to look at the actual market dynamics.

India’s AI usage of ChatGPT and Claude is among the highest in the world. OpenAI and Anthropic are not doing India a favour by providing access. India is providing them revenue, usage data, and the demand signal their investors need to justify $100 billion valuations. The biggest buyer has leverage too.

And then there’s talent. Most frontier AI labs are building or expanding engineering centres in India. Google’s largest engineering office outside Mountain View is in Bengaluru. If the US were to “cut off” India from frontier models, it would also cut off American firms’ global capability centres. The AI labs need Indian talent at least as much as India needs their models. Where will they find their next 10,000 ML engineers?

At the India-US Forum I attended earlier this year, this point came up in a different way. Those in India’s technology ecosystem insisted that, despite tensions at the political level, existing projects and agreements haven’t been adversely affected. The relationship is more symbiotic than the “cut off” frame suggests. India is not a passive recipient of American AI but a participant in the ecosystem that produces it.

5. The right question is not “how do we avoid being cut off” but “where is India’s leverage point?”

Nobody won electricity, but specific countries found specific leverage points within the supply chain. Switzerland dominated turbine engineering. Sweden dominated high-voltage transmission. Similarly, the Netherlands didn’t win semiconductors. ASML found a single bottleneck, and that one company gives a country of 17 million people more leverage over the chip industry than most countries that manufacture chips.

India needs to find its equivalent. I see three candidates.

The translation layer: Nvidia’s CUDA locks every AI workload to Nvidia GPUs. Indian engineers are among the world’s strongest PyTorch contributors. If India supported open-source projects that let any model run on any GPU—AMD, Intel, Huawei Ascend, Nvidia—that project can become the anti-chokepoint. As inference moves to dozens of specialised chips, this translation layer will become even more valuable.

Sovereign inference chip co-development: India has a growing fabless chip design ecosystem. The opportunity is not to make cutting-edge training GPUs. It’s to co-develop inference-optimised ASICs that run capable models cheaply and at scale. As AI deployment moves to edge devices and domain-specific hardware, this becomes an increasingly large market.

Domain-specific data: Indian agriculture, Indian healthcare, Indian legal corpora, twenty-two official languages: these are datasets no American or Chinese lab can replicate. Fine-tune open-weight models on these, run inference on Indian soil, and we can have practical sovereignty without a government-directed foundation model.

A prediction

I offered a falsifiable prediction. By 2030, if the gap between the best open-weight model and the best proprietary model is still less than six months, and India is capturing significant value in AI enterprise deployment, then the frontier anxiety was premature, and the diffusion frame was correct.

But if frontier access has been formally tiered, India is stuck on N-2 models, and the capability gap has compounding economic effects, then the opposing perspective would have been more prescient.

My bet is on the first.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Idea] Given its importance, we should have a Scientific and Tech Survey of India tabled in the Parliament every year on the lines of the Economic Survey of India.

2. [Tool] If you have a public policy question, use this RAG search tool based on 350+ editions of this newsletter. Type any policy question and get the relevant frameworks and what we've written about it, pulled straight from six years of the archive.

3. [Dashboard] The income tax filing season just finished. If you want to know where your hard-earned money went, check this dashboard by Sarthak Pradhan.

4. [YouTube Show] The next Watching the Wheels episode discusses frameworks to understand the World Disorder. Don’t miss the Infinite Game and the Trivia I Love sections too.

5. [Puliyabaazi] We have a blockbuster episode ft. Gurcharan Das talking about all things freedom.

Insights on current policy issues in India

—RSJ

Happy 80th Independence Day!

Over the years, we have written Independence Day specials with a sense of hope and optimism. We celebrate what has gone right and, for a day, allow ourselves to feel the joy and responsibility of being part of something larger than our everyday lives.

As we remind our readers, we write about India the way we do because we care about India. This time around, I am in a tad more pensive frame of mind as I hear the neighbourhood RWAs blasting “sandese aate hain” and “dil diya hai jaan bhi denge” to arouse patriotic fervour. At 80, what kind of an India are we building? We inherited a nation that was imagined by people who lived in a very different, and difficult, time.

We will hand it over to those who will live in a world we cannot fully appreciate. Bookended between the generations that have gone before and the generations that have not arrived sits both our dharohar and our responsibility. How are we faring on it? I don’t have answers. But I think we might get better at this responsibility if we think about it a bit differently.

1. India is your janini, it is also your child

The easy way out of thinking critically about India is by imagining it as our motherland. Once you have the image of Bharat Mata for our nation, there’s only room for reverence. Of course, there is a lot of merit in such emotional resonance for the nation, especially when it is in peril. But is that the default mode that we should operate in? I suggest that when it comes to thinking about our responsibility, we should think of India as our child as well.

As much as you love your child (perhaps even more than your mother), you are also worried about it and its future. You are not oblivious to your child’s weakness. You notice where the child is falling behind. You worry about whether the child is acquiring the skills needed for the future and how it will cope without you. Is it developing resilience, whether it has enough discipline and curiosity, and whether it has the right blend of confidence and anxiety to do well in the future? You tell the child stories about the family and its history because those root them in their tradition and give them a sense of identity. But you don’t tell the child that because the grandparent was remarkable, the child is going to be remarkable too. The past should provide inspiration, not bragging rights.

We need more of this instinct in how we think about India. We should be able to love the country deeply and still be honest about where it falls short. If someone points out a weakness in your child, your instinct is to find out whether the weakness exists and, if it does, to help the child overcome it. You don’t (or shouldn’t) blame the person for noticing the problem. We will build a better future if we can tolerate criticism of our present. At 80, we should spend more time asking: are our institutions getting better, are our young people learning faster and becoming more capable of dealing with the changes coming our way? The past should give us confidence. But it should also make us more demanding about the future.

So, I don’t mind if we want to sing Vande Mataram before the national anthem for all events. Do whatever floats your boat. But after singing that ode to the nation as your mother, just remember only for a moment that the nation is your child too.

2. The size of our imagination is our strength

A nation is, in Benedict Anderson’s phrase, an imagined community. Most of us will never meet most other Indians. Yet we imagine ourselves as members of the same community and organise our lives around that belief. The founders of our nation had a capacious, all-welcoming imagination of this community. They had to persuade people who often had very little in common in their everyday lives that they belonged to one project. Back in 1947, what did India mean to the many millions living their lives in small villages of various princely states, in deep forests or in provinces ruled by the Raj? Precious little. We had to work to create that big tent and that sense of belonging. And it has been hard work

The progress we have made in living up to that vast imagination is precious.

We can lose it easily. We can become smaller without losing any territory when we narrow that imagination of who belongs to this nation. Once we start administering the purity test and asking whether some Indians are sufficiently Indian, we compromise the imagined community we inherited. The danger with tests of purity is that there is always another test lying in wait. With more exacting standards and willing to exclude another group. This is a never-ending cascade.

We should be vehement in opposing the idea of the “other” within India. The task of nation-building is to continually persuade those who feel left out that the larger community belongs to them as much as it belongs to everyone else. Not to push them out of the community. The Indian project was always to expand that circle of belonging. This expansion isn’t appeasement or a concession to diversity. It is core to preserving the idea of India itself.

3. India: It’s time you got to know her

That used to be the tourism India ad back in the 80s. There is only one way to know India, and that is to go out and see it.

India is beautiful, diverse and full of surprises. Travel around to experience its landscapes, its mountains, forests, rivers and beaches. Learn about it first-hand at historical sites, forts and palaces. Visit its temples, mosques, churches and monasteries to see how messy, complicated and beautiful our past is. Spend time in cities that are not your own and in small towns where most of our fellow Indians live. Meet other Indians as much as you can. Talk to them and listen to what they want from their lives. Ask them what is changing, what is getting better and what remains difficult.

Most of us now get to learn about India second-hand. There are reels, social media posts, WhatsApp messages and algorithms that feed you information about India. Your algorithm may be feeding you an extraordinary amount of information about India without you encountering real India itself. The algorithm will push you deeper into an echo chamber where you find people who agree with you, read the arguments they make and become increasingly certain that those arguments represent reality. We may have made enormous progress (more so in the last 12 years if you so believe), but we still have a lot to learn and a great deal to build. There is little value in thinking we have arrived and that the world now learns from us. Experiencing physical India is the best way of disrupting this certainty. Regular trips to real India, that’s not appearing on your phone, will keep you grounded.

4. Read those who thought about India before us

Over the last 150 years or so, some of the finest Indian minds have spent their lives thinking about what India is and what it should become. Tagore, Gandhi, Ambedkar, Vivekananda, Aurobindo, Nehru, Kosambi, Savarkar, Radhakrishnan, Kakkar and many others approached the question from different perspectives. They were deeply knowledgeable about India’s history, traditions and social structures, while also engaging with modern political philosophy and ideas that were emerging from Europe and elsewhere. These were not deracinated Indians copying the latest intellectual fashion of the day.

They engaged with the question of what defines us. About that common thread, however nebulous at times, that runs through centuries binding us. They debated on what could be carried forward, what needed to change and what had to be rejected. They took India’s inheritance seriously enough to interrogate it.

The Constituent Assembly debates are the most apt example of this. The people who drafted the Constitution were not working in an intellectual vacuum. They knew that they were trying to construct a modern republic on the foundations of an old civilisation. So they debated quite extensively what should be preserved and what should change. In today’s times, we often behave as if these debates never happened and that our ancient culture and tradition were buried by some kind of colonial mindset. Going back and re-reading them will open our eyes and save us a lot of time.

This does not mean that we should accept all their conclusions. We should disagree and challenge their current relevance. But there is a difference between disagreeing with an intellectual tradition after understanding it and rediscovering an argument that has already been made and debated for a hundred years. Before deciding that nobody has thought about a question, it is worth checking whether we have read the people who thought about it most seriously.

5. Where the mind is without fear

The first four points lead, in some ways, to the fifth. If we think of India as something for which we are responsible, if we understand the imagination of the community we have inherited, if we go out and experience the country and if we read the people who have thought deeply about it, then we acquire something that is essential to building a successful nation: the ability to make up our own minds.

We are often given sermons about getting rid of the colonial mindset. Fine, we should do that. But we should think about colonisation of our minds in a broader way. We might have minds that still think based on frames set up by our old colonial masters. How are we sure our minds today aren’t colonised by a particular political thought or an ideological ecosystem which is enveloping us through the surround sound of TV studios, social media, education curriculum changes and complicit social and political institutions?

To be free is to retain the capacity to think for yourself. It is about the courage and patience to listen to people you disagree with. And about changing your mind when presented with evidence that goes against your original position. We should be free to hold our views, express them and debate others with whom we disagree in a manner that moves the nation forward. We should build a society that questions those in power and updates its priors based on facts.

A nation that’s a work in progress

What we do with our freedom is our foremost responsibility. We can celebrate it every year while losing chunks of it because we haven’t paused to think deeply about it. The best we could do this Independence Day is to reflect on this. At 80, India still remains an act of magical imagination that we must all cherish.

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P.S.: One of the most popular editions of this newsletter is #181 We Shall Overcome, an Independence Day special, in which we picked out one defining event of every year of independent India. Worth revisiting if you are looking for a leisurely Sunday read.

India Policy Watch #2: UPI Transaction Fee and its Discontents

Insights on current policy issues in India

—Pranay Kotasthane

This week saw many articles and opinions on whether UPI should remain free. As usual, another public finance issue was discussed without much heed to what that discipline has to say about it. So let’s get to the basics.

The trigger was that the two houses of Parliament passed a bill that, amongst other things, reverses the outright ban on any charges on UPI transactions. Why such a ban was hard-coded into law is a debate for another day. With the amendment, a “UPI and Services Steering Committee” headed by NPCI will decide the nature and threshold of transactions for which a fee might apply. The government put out a press release with three claims: first, UPI will remain free for citizens. Second, there will be no charges on everyday transactions on citizens. And third, any future MDR will be nominal, and only on a limited set of merchant transactions.”

Nevertheless, this began a spate of opinions and articles defending the ban on charging a transaction fee, primarily on the grounds that the benefits of keeping UPI free far outweigh the benefits of allowing firms to raise revenue from transactions. Some argued that government subsidising the UPI infrastructure is justified, while payment service providers and banks should instead focus on making money at layers above the payment layer.

This position got me thinking that in a world where industrial policy is becoming the default policy response across the world, we will have to justify every act of pricing resources according to their nature and scarcity. What’s odd is that this is happening despite a generation that knows more economics than the one before it.

Trace the argument people use, and you can see the sophistication rising even as the conclusions stay wrong. A decade ago, the case for free water and free electricity leaned on a mangled idea of “public goods”, that anything important enough, the reasoning went, should be free, because it’s for the public. That version was easy to puncture, as water and electricity are rivalrous and excludable. There’s nothing “public good” about them in the technical sense. The critique worked, and fewer informed people call these items public goods.

But the argument has come back using other economic ideas. Now the framing is positive externalities and “public infrastructure”. UPI is a network, the argument goes. Networks have massive spillover benefits, i.e., more users make the system more valuable to everyone already on it, so charging anyone for using it is fighting a positive externality.

This evolution, though an improvement, is still wrong. Here’s why.

A positive externality is the gap between what a transaction is worth to the people directly in it and what it’s worth to everyone else who benefits without paying. For example, your COVID-19 vaccination benefits not just you but also the people around you. Similarly, the credit-data trail your UPI payment leaves eventually helps some lender assess some small business. Thus, it is quite correct that such goods will be underprovided left to their own devices.

But the correction public finance literature prescribes is a subsidy sized to that spillover, at the margin, not a zero price on the whole transaction. Nobody derives “make it fully free” from “has externalities” for any other good in the economy. Vaccines have textbook positive externalities, and India still runs mixed free/priced programmes depending on the vaccine and the income bracket. Water, electricity, and transport—other forms of public infrastructure — are also not free. If we apply this thinking to UPI, even the most generous assumptions about its social benefits do not justify an indefinite blanket exemption for every transaction of every size forever.

I have thus far made a case that some government subsidy for the UPI protocol itself and interoperability (not the transactions) makes sense. But there’s another reason why keeping this subsidy at the bare minimum is a good idea.

The debate on UPI charges is often framed as “how much should the government pay to keep this free”, as if the only question is sizing the cheque. The right question is which arrangement best aligns the incentives of all stakeholders. Here again, public finance literature has a clear answer. Services are best provided when there is a high overlap between those who benefit, those who decide, and those who pay. That’s the logic behind user charges. Water isn’t free because paying for it disciplines consumption by increasing the overlap of the three factors listed above. Electricity works the same way. The exceptions—a subsidised block for the poorest users—are deliberate, bounded departures from the default.

Applying that test to UPI clarifies the picture. The externality-justified piece is funding the protocol layer because the beneficiary there is diffused (all of society gains from a functioning payments backbone). The payer (the exchequer, funded by general taxation) is a reasonable proxy for that diffuse beneficiary.

Alignment breaks when you treat every transaction, forever, as entitled to the same subsidy regardless of who’s making it or how often. Without a way to charge for transactions, payment service providers are already underinvesting in cybersecurity, protocol improvements, resilience, fraud prevention, and next-gen infrastructure. To secure the benefits of these services, it is legitimate to ask merchants to pay a user fee.

There’s another complication the “it’s just a network, marginal cost is zero” crowd has ignored. UPI infrastructure is no longer even non-rivalrous. It increasingly behaves like a congested resource. The system has logged repeated outages tied directly to capacity being overwhelmed. Last year, NPCI was defining peak hours and throttling non-essential API calls specifically to protect the rails from overload. This makes UPI a congestible good, and rationing scarce capacity demands removal of the ban.

Congestion also reopens the switch-monopoly question. The standard defence of NPCI running the only switch treats this as a given: the protocol has to be open and interoperable, so a second switch operator could never recoup the fixed cost of building one, since it can’t lock in any bank that can freely use the incumbent instead. Several proposals to license alternative switches have gone nowhere on roughly this logic.

But that argument conflates two different things—a standardised, open protocol and a single, monopoly switch clearing every message through it. Those don’t have to be the same layer. For instance, the EU’s SEPA Instant Credit Transfer scheme is an open rulebook implemented by multiple competing clearing operators all interoperating through a defined framework between them. Banks pick which clearing operator to connect through, or connect to more than one. The protocol is one, but the switches are many.

A single switch means a single point of failure. Multiple switch operators on the same protocol would spread that load, and would let banks choose which switch to route through based on reliability and service quality, restoring some of the beneficiary-decider-payer overlap that a single subsidised monopoly switch erodes by default. Competition then becomes a tool for funding and discipline.

What this Implies for the UPI Debate

Put the two arguments together and a specific design results. Some subsidy is legitimate—for the protocol, its maintenance, and its improvements. But zero MDR for every transaction indefinitely funded by an incentive scheme that Parliament tops up fails the alignment test. A threshold that exempts small transactions makes sense on cost-recovery grounds.

Above the threshold, the fee should fall on merchant transactions specifically, not peer-to-peer transfers (as the government press release suggests), and it should lean toward a flat per-transaction charge rather than a percentage of value. An ad valorem MDR taxes large transactions hardest, which is exactly where the credit-data and formalisation externality is most valuable. None of this is really about the ₹2,000 crore in the budget, or the ₹10,000-15,000 crore industry wants instead. It's about applying well-known ideas in public finance.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Podcast] In the Independence Day spirit, we were on our favourite podcast —’s The Seen and the Unseen. The three of us discussed some hits and misses of independent India that have shaped our thinking. Give it a listen.

2. [YouTube Show] Over at Watching the Wheels too, we recorded an Independence Day Special, but this one has our wishlist for the future.

3. [Course] We Indians often think that we understand the American politico-economic system, but we really don't. So some folks at Takshashila have put together a course that explains the logic, checks & balances, and the frictions in that system. Check it out.

4. [Dashboard] The folks at WRI India have created a brilliant dashboard for mobility in Indian cities. Worth taking a look.

Insights on current policy issues in India

—RSJ

The Monetary Policy Committee (MPC) met this week and unsurprisingly kept the repo rate unchanged. What surprised me was the continued dovish tone, though the official line was that it was neutral. The Governor played with a straight bat when asked about his view of the economy, mixing the usual optimism with enough caveats for his comments to be interpreted either way. From the press conference:

“Growth, although resilient, is expected to be lower in this financial year. The outlook, however, is hazy because of the uncertainties regarding South’s global trade policy. There is a need for greater clarity to emerge, especially regarding inflation, its path and composition before taking any policy action.

The impact of El Nino on the temporal and spatial distribution of rainfall remains a major risk. Global oil prices have also remained highly volatile, with sharp two-way movements triggered by geopolitical developments, blurring the near-term inflation outlook. While generalised inflation pressures remain modest so far, the risk of second-round effects from higher food, fuel and other input costs translating into broader-based inflation persists.”

I have not written about the economy for a while, but beyond the rate conversation, I was surprised by the accommodative stance. We are still in the early part of a fiscal year that has seen an energy shock, a continued weak rupee and upward-trending global interest rates. So, you would expect the central bank to sound a tad less relaxed about inflation. I mean, yes, it is true that despite the war and accompanying supply chain disruptions and high oil prices, inflation has stayed within bounds so far. The pass-through from higher crude prices to retail prices has been contained, core inflation is below 4 per cent, and there is no price issue pinching the citizens. The RBI expects headline inflation to peak in the next quarter and then ease. Its view is that the recent inflation rise is also a normalisation from a low base last year.

That’s one side of the story though. Monetary policy is supposed to be forward-looking with the objective of price stability. Inflation is expected to average above 5 per cent over the next three quarters. That assumes a somewhat benign global macro and a continued confidence in high crude prices not getting passed on to the wider economy. The other way to look at the stance is through the real policy rate. With one-year-ahead inflation projected at roughly 5.3 per cent and the repo rate at 5.25 per cent, the expected real policy rate is close to zero. The historical average of India’s neutral real rate, depending on the methodology, tends to sit somewhere around 1.4 to 1.8 per cent. At that real rate, the economy is broadly in balance, with monetary policy neither adding to nor taking away from demand. So, a real policy rate around zero is significantly accommodative.

This rate posture is at odds with what we heard from the RBI on growth. So far, the spillovers from the West Asia conflict have been better managed than many expected. The RBI has revised its FY27 growth projection higher, to 6.7 per cent, and high-frequency indicators continue to suggest good momentum rather than any slowdown. First-quarter GDP growth could even come in well above 7 per cent, given the indications. Unless the central bank feels this growth is transient (or maybe not even real), this stance doesn’t make sense.

In that context, I found the emphasis on core inflation by the Governor intriguing. Core inflation gives us an idea about demand-side pressures and the persistence of inflation once the volatile components (fuel and food) are removed. Our inflation-targeting framework was designed around headline CPI for a reason. We should certainly monitor core inflation, but we should be careful about allowing it to become the main measure of inflation simply because it makes the current policy stance easier to defend.

The interest-rate differential between India and the US has narrowed considerably. Global capital flow will come only if, after adjusting for currency, risk and the return available elsewhere, India looks attractive. If we remain an outlier while other EMs continue to raise rates, we will see capital flowing out. We have already seen how much effort is going into keeping dollars coming in. The FCNR deposit arrangement, under which the RBI takes on the currency risk, has attracted around $40 billion already and could double by the time the window closes in September. This has given short-term support to the rupee, but I am not sure we should treat it as a structural solution. When these deposits mature in 3-5 years, we will have the problem of managing the withdrawals.

Right now we seem to be running out of real ideas for making capital want to stay.

There is a steady stream of large IPOs coming through, providing PE investors and founders with an exit through public market funds. There is a good argument that if foreign investors make good money on Indian companies, they will develop greater confidence in Indian entrepreneurs and return with more capital. I am less convinced that this follows automatically. The IPO boom should not be read only as a sign of confidence. It is also an exit mechanism. An investor deciding that India is where they want to deploy their next ten years of capital is betting on the country’s future.

We have spent years talking about ease of doing business. To be sure, there has been real progress in several areas. But investors have a long memory for unpredictability. Just in the past year, we have seen retrospective tax being imposed on gaming companies (we love retrospective policy changes), abrupt regulatory interventions in the insurance sector, public apology sought from social media companies for imagined slights or changing the rules of the game midway that end up helping a couple of domestic conglomerates.

There is a seductive argument that India is now such a large market that global companies need us more than we need them. Therefore, we can afford to throw our weight around. This is a bit of a pipe dream. India is a large market, but for most global technology companies it is still only a small share of global revenue. China is a good example to follow here, where they stayed under the radar till late before they started flexing their muscles.

The better way to create leverage is to make these companies deeply invested in India by building data centres, scaling up GCCs and developing local supply chains. Nothing creates leverage more than billions of dollars of large, immovable investment in India. This is critical because we need foreign capital for every strategic ambition we have. We want to create jobs at a scale that the services economy alone cannot provide. It requires capital that is willing to stay for a long time. Like other pieces I have written of late here, jobs are where this discussion eventually ends up. Over the past four years, we have seen that we can have respectable GDP growth and still not create enough productive employment.

We can keep doing the band-aid stuff to manage the macro metrics. The intent to keep real rates at almost zero to support demand, the RBI support to bring FCNR inflows to support the currency and the song and dance about IPOs providing good exits to foreign investors are all part of this. I am not sure if these are long-term solutions to draw capital into India. That answer lies in doing the hard stuff and I have a feeling (expressed before too), that the PM has given up on this battle. Young Indians are not experiencing GDP growth in the real sense. They experience the reality of fewer quality jobs, their salaries stagnating, of not being able to afford a house as easily as their parents and feeling less hopeful about their lives tomorrow. This frustration, I’m afraid, will get expressed elsewhere, through greater demand for government jobs, subsidies, reservations and other forms of state support.

We need capital that stays and builds things in India.

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Matsyanyaaya: When Will China Block Its Open-weight Models?

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

China’s open-weight models are making waves across the world. Even as their popularity and usage soars, reports suggest that China’s Ministry of Commerce (MofCom) has begun consulting AI firms to restrict the export of models.

Thus, some of us at Takshashila decided to go deep and systematically answer three questions: why is China allowing the export of AI models? Under what conditions might it block the export of open-weight models? And what might these restrictions look like? The full paper is here. What follows is a bloggy version of it.

There are five reasons that can explain why so many open-weight models are being exported out of China. Some of them are complementary while some are mutually exclusive. Here’s a quick survey.

Reason 1: It costs less than it looks

The most straightforward explanation is that Chinese firms are not spending what American labs spend. DeepSeek disclosed in a peer-reviewed Nature article that its R1 reasoning model cost $294,000 to train using 512 Nvidia H800 chips, dramatically below the hundreds of millions spent by US frontier labs.

Two techniques explain the gap. First, distillation. Chinese labs have been accused of industrial-scale training on the outputs of American models, radically compressing R&D costs. Second, architectural efficiency. DeepSeek’s mixture-of-experts architecture, developed under the pressure of US export controls, activates only a fraction of parameters per query.

Reason 2: Geopolitical prestige

Open-weight models are a visible demonstration that China can compete at the AI frontier. DeepSeek’s January 2025 release triggered the largest single-day market cap loss in US stock market history, wiping roughly $1 trillion from tech stocks.

The Chinese Academy of Sciences has institutionalised this view. One paper called for building a national open-source AI ecosystem, arguing that DeepSeek had “raised China’s AI research application level and international influence.” This is the closest thing to an official Chinese articulation of the prestige motive.

Reason 3: Undermining the opponent’s business model

A classic competitive strategy is to commoditise your competitor’s core product. Open-weight models need not be strictly superior; they merely need to be good enough for most commercial applications. Every time a Chinese open-weight model demonstrates competitive performance at lower costs, it compresses the pricing power of American labs.

Reason 4: China can absorb the costs

Even if open-weighting is more expensive than Reason 1 suggests, China’s capacity to mobilise capital for strategic technology is formidable. Since 2014, China’s state-led investment in semiconductors alone has exceeded $150 billion. Provincial governments offer compute vouchers covering 20-50% of cloud computing costs.

The foundational mechanism is financial repression. By maintaining capital controls and a state-dominated banking system, Beijing keeps domestic savings captive within state-owned banks, providing artificially cheap capital. This produces the same overcapacity pattern seen in solar panels and EVs—making Chinese producers the default global suppliers at prices competitors cannot match.

Reason 5: The infrastructure play

The most interesting explanation concerns what happens downstream of model release. Free models accelerate global AI adoption. Global AI adoption drives demand for energy, physical infrastructure, and hardware. China dominates the supply of all three.

Alibaba chairperson Joe Tsai articulated the business logic explicitly: “The way we benefit from open source is that it will drive demand for AI, it will drive training needs, and we see in the future a lot of needs for inference.” Alibaba’s cloud revenue grew 34% year-on-year in the September 2025 quarter, with AI-related revenue posting triple-digit growth, driven by developers building on free Qwen models using Alibaba’s paid cloud infrastructure.

The U.S.-China Economic and Security Review Commission’s “Two Loops” report argues this is “not a second-best adaptation to semiconductor export controls, but a coherent doctrine” combining a digital loop (open-model innovation) with a physical loop (large-scale deployment generating real-world data feeding back into model improvement).

The five explanations are not of equal analytical status. They can be divided into two groups: reasons that rest on assumptions about the same empirical facts but reach different conclusions, and reasons that are complementary.

Reasons 1 and 4 rest on opposing assumptions about how much open-weighting costs. Reason 1 says costs are low enough that open release is rational without state support. Reason 4 says costs may be substantial but absorbable thanks to China’s capital mobilisation infrastructure. Both support open-weighting, but for different reasons. Empirically, both may be partially true: distillation and architectural efficiency reduce costs (supporting Reason 1), but the remaining costs are large enough that subsidised capital environments still matter (supporting Reason 4). Similarly, Reasons 2 and 4 rest on opposing assumptions about intent. Reason 2 posits conscious geopolitical strategy. Reason 4 posits structural overinvestment without any explicit geopolitical aim. They can coexist if state-level actors exploit a structural dynamic they did not create, i.e., Beijing recognises the open-weight wave’s geopolitical utility and amplifies it without having initiated it.

Reasons 3 and 5 are mutually reinforcing. Reason 3 attacks the opponent’s revenue model while Reason 5 builds China’s own. Together, they can form a pincer strategy of compressing American AI labs’ ability to monetise proprietary models while simultaneously capturing value at the infrastructure layer.

Taken together, the five reasons suggest that China’s open-weight strategy is overdetermined, i.e., it is supported by more independent logics than would be necessary to justify it. Strategies with multiple reinforcing rationales tend to be durable. Even if one reason weakens, others remain in force.

When Might Beijing Close the Tap?

The analysis predicts this openness is not permanent. Using a causal loop analysis, we find that three thresholds must be crossed before China shifts to graduated restrictions:

1. Domestic consolidation: The “Hundred Model War” must consolidate to an oligopoly of 5-8 full-stack giants. Beijing can coordinate five firms; it cannot coordinate seven hundred. This threshold is underway.

2. Ecosystem lock-in: Global developers must be deeply integrated with Chinese cloud infrastructure, making switching costly. This requires 12-18 more months of cloud flywheel maturation.

3. Commoditisation saturation: The marginal strategic value of further open releases must approach zero, i.e. non-Chinese labs should independently sustain the commoditisation regardless of China’s contributions. This threshold hasn’t been reached yet.

Combining the three thresholds suggests that graduated restrictions are most likely to begin appearing in late 2028. They might take the form of delayed releases, capability thresholds for licensing, channel-conditioned releases, and tiered access tied to diplomatic alignment.

What does this Mean for India?

For India, this environment presents both opportunity and strategic risk. Indian companies are already switching to Chinese LLMs to contain costs. The strategic imperative is to avoid lock-in to any single source—Chinese or American—while building domestic capacity in applications, industrial data, and domain-specific fine-tuning.

An underrated point is that even if China were to ban exports of its frontier models, the playbook is now public. Chinese firms have shown what can be done, and this strategy cannot be undone even if Beijing changes its stance. The genie is out of the bottle.

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Matsyanyaaya: How Would the Makkah Pact Work?

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

On Thursday, Turkey, Saudi Arabia, and Pakistan signed the Makkah Joint Defence Agreement (MJDA), a trilateral collective-defence pact that declares an armed attack on one to be an attack on all. The Atlantic Council called it an inflexion point in the emerging multipolar order. Iran’s lawmaker Ebrahim Rezaei dismissed it as a “paper agreement.”

This pact is a direct fallout of American actions and non-actions in West Asia. My colleague predicted this five months ago in his Mint column:

“This war is a watershed moment for how the Gulf Cooperation Council (GCC) countries see their security. They can now calculate the actual benefits and costs of the US security umbrella that covers them.

Despite asymmetry in military technology, Iran has been able to impose severe strategic costs on the UAE, Bahrain, Kuwait, Qatar and Saudi Arabia by exploiting economic asymmetry. Even if most Iranian missiles are intercepted above Arab skies, the psychology underpinning the Gulf’s prosperity has been damaged. And even if, as has been reported, the US did not prioritize Israel’s defence over that of the GCC states, the realization that it might do so is not lost on the region’s elite.

We should therefore expect some strategic reorientation, perhaps through a Gulf-led military alliance that might include Egypt, Turkey and Pakistan. The Pakistani military establishment will surely be rubbing its hands in anticipation of the rewards it can secure by offering both military manpower and nuclear weapons.”

With this pact in place, it’s worth analysing how it changes the calculus of other actors in the region. While every collective defence pact makes the same bold promise (we will fight for you), it is incredibly tough to honour that commitment. Pakistan, for example, has not supported Saudi Arabia in its fight against Iran to the extent of a NATO Article 5 partner despite there being a mutual defence agreement between the two states since September 2025. Thus, going beyond what the treaty might say, the reality depends on the network of existing relationships, existing military and economic capabilities, and limits imposed by geography.

Keeping these factors in mind, we built a simple model using Claude. In this model, each MJDA member has relationships with every relevant regional actor—allied, neutral, and adversarial. When a country X attacks MJDA member Y, the remaining members have to weigh their treaty obligation against the cost of fighting X given their own relationship with X, the pressure from X’s allies, and the physical constraints imposed by geography. Running every plausible attack scenario through this calculus, we saw two tiers of credibility emerge.

Tier 1: Iran and Israel

When Iran or Israel attacks any MJDA member, the pact is credible. Neither Iran nor Israel has a positive relationship with any of the three signatories that would create hesitation. Turkey, Saudi Arabia, and Pakistan would all oppose Iran or Israel regardless of MJDA’s existence. This tells us that MJDA adds no independent value in the scenarios it was ostensibly designed to counter. Against Iran, the treaty merely formalises what bilateral interests already support and nothing more.

Tier 2: India-Pakistan Tensions

When India attacks Pakistan, the pact faces a major test. Turkey’s relationship with India is frosty, and the cost of fighting India is low for Ankara. It is likely to accelerate its defence exports to Pakistan.

But Saudi Arabia’s relationship with India is close because of energy trade, a three million-plus Indian diaspora, and a carefully cultivated strategic partnership. Saudi Arabia would be sacrificing something vital to honour the pact.

Thus, in this scenario, Saudi Arabia would find itself in uncertain territory. It might limit its response to diplomatic support in response to the next round of border tensions between India and Pakistan. But if the confrontation escalates, the MJDA, at the margin, would change Saudi behaviour. From Pakistan’s perspective, MJDA serves to lock in Saudi Arabia’s economic commitment and Turkey’s defence commitment against India at a level that the bilateral relationship alone could not guarantee.

Military vs Economic Response

“An attack on one is an attack on all” implies a unified military response. In practice, each MJDA member’s response will be shaped by what it can do, not just what it wants to do.

Saudi Arabia’s military power projection beyond the Gulf is limited, as the Yemen war demonstrated. But its economic leverage over potential attackers—particularly India—is significant. Oil supply, diaspora workers whose remittances are a significant foreign exchange source, and sovereign wealth investment are pressure tools that can come into play. However, each is double-edged, as India has alternative oil sources and Indian diaspora workers are not easy to substitute.

A realistic reading of MJDA is therefore as a differentiated response pact. Turkey provides military capability such as drones and naval power. Saudi Arabia provides economic coercion and financial backing. Pakistan provides nuclear deterrence.

What this Means for India

India does not appear in the MJDA’s text, and Erdogan insisted the pact “is not directed against any country.” Regardless, the India-Pakistan scenario is the one where MJDA has independent analytical bite, i.e., the treaty changes the calculus in ways that pre-existing bilateral relationships do not.

For India, the MJDA formalises a Saudi commitment to Pakistan that makes economic coercion more likely. India’s strategic response should focus on reducing the economic leverage that makes Saudi Arabia’s participation consequential: accelerating energy diversification (solar, nuclear, diversified oil sources), deepening trade relationships with Gulf states that counterbalance Saudi influence (the UAE, Oman), and maintaining a diplomatic posture that makes an India-Pakistan military confrontation unlikely in the first place.

PS: You can see this interactive simulator which lets you run any attack scenario, adjust bilateral warmth scores, set the treaty commitment from “paper tiger” to “ironclad,” and toggle border vulnerability. Play with it and see the impact for yourself.

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Reading and listening recommendations on public policy matters

1. [Fellowship Alert] The Network for Advanced Study Fellowship, offered by the Takshashila Institution, is accepting applications for the 2026-27 cohort. It is designed for those who want to develop serious, sustained work in their field. Fellows work on a research topic of their choice, with structured mentorship from Takshashila scholars and a network of domestic and international subject-matter specialists.

2. [YouTube Show] The next episode of our new show, Watching the Wheels, is up.

3. [Book] Here’s a review of a book that we look forward to reading. ’ In Search of Greater India discusses the idea of civilisational states.

4. [Parliament Committee Watch Alert] The next tranche of parliament standing committee reports is up. Whatever your domain of interest in public policy, there’s always something useful you’ll find in these reports.

5. [Puliyabaazi] The last few years’ economic data shows a rise in employment figures but a fall in productivity. So we've decoding the reasons and implications in the latest episode.

— Pranay Kotasthane

There is an unending debate on the north-south claims on government money. Every election cycle unmistakably sees a discussion on freebies and corruption. The states and the union continue to have multiple disagreements concerning the Goods and Services Tax. And while Indian cities contribute to the bulk of its GDP, they are perennially begging for money. Finally, every few months, commentators advocate for raising taxes on the wealthy to alleviate income inequality.

Discussions around the topics listed above are now commonplace, yet they often take place without a grasp on public finance concepts, even though this discipline provides a framework to understand the role of government in the economy. One probable reason is that public finance books written in India are academic and dry.

That’s what motivated Sarthak Pradhan and me to write Fiscal Fables. Our aim is to demystify India’s public finances to a general audience. The book explains public finance concepts with the help of relatable stories and examples, and belongs to the same genus as Missing in Action and We, the Citizens.

Here’s an excerpt below.

The Better and Worse Ways of Extracting Your Money

In Terry Pratchett’s celebrated novel Jingo, the benevolent despot of a bankrupt Ankh-Morpork city expresses his dissatisfaction with the city elite thus: ‘Taxation, gentlemen, is very much like dairy farming. The task is to extract the maximum amount of milk with the minimum amount of moo. And I am afraid to say that these days all I get is moo.’ This chapter is about the art and science of that dairy farming.

Come 1 February, and you will see a slew of discussions on the money allocated to new and shiny government schemes. Similarly, traditional books on public finance begin with discussions on government spending. But we thought differently. Shouldn’t a citizen’s guide to public finance, we opined, take off from the point where governments extract money from you? Isn’t that where the khel begins?

This act, euphemistically called ‘raising revenue’, is the lifeline of governments. In colonial India, the idea of raising revenues was so central to governance that the key district-level administrative position was referred to as the ‘collector’. The title has stuck, even though the role has evolved to encompass broader executive and administrative responsibilities.

The Three Sources of Government Revenue

As the introduction explained, governments perform various functions, such as allocating public goods, redistributing incomes and stabilizing macroeconomic conditions. All three require money. Thus, every government, from ancient Rome to modern India, raises revenues through three primary resources: taxes, non-taxes and borrowing.

A tax is a ‘pecuniary burden laid upon individuals or property to support the government, and is a payment exacted by legislative authority’. It is neither a voluntary contribution nor a fee paid in exchange for a specific good or service. Taxes can be imposed on what any entity earns, buys or owns. Personal and corporate income tax fall in the first category. Sales tax and GST fall in the second category. The examples in the third category include property tax, inheritance tax, etc.

Since taxes are mandatory payments, they are a more reliable source of government revenue. Governments can broadly estimate the extent of economic activity in a given year and, consequently, the amount of tax revenues. Further, the number of taxable activities is quite large. The share of taxes in government receipts vindicates its role as the most preferred revenue source. In India, taxes constitute more than 80 per cent of the revenue receipts at both the Union and the state level.

In other words, taxes are the Rahul Dravid of government revenue—reliable and consistent over long periods. No wonder governments love taxes more than the other two sources.

Non-taxes typically refer to fees, fines, dividends from the entities the government owns or other charges the government imposes for specific activities and services. Governments run power facilities to supply electricity at a fee that customers must pay. Such user fees are charged on voluntary transactions.

The government cannot force people to use its services to raise additional revenue. They’re voluntary in the sense that you can avoid them. Don’t speed, don’t pay speeding fines; don’t use the toll road, don’t pay tolls. They are also unpredictable, which is why governments can’t rely on them entirely.

If better options exist outside the government, individuals will opt to avail themselves of the same service from there. As markets tend to be more efficient than governments in allocating goods and services, the scope for user charges to be the most prominent source of revenue is low. This is validated by the usual low share of non-tax revenue in the total government receipts.

However, it is worth mentioning that user fees are an equitable way of raising revenue. Those who presumably benefit most from the public facility pay the most without passing on that burden to someone else.

Another form of non-tax revenue can be receipts from the sale of various natural resources such as minerals, forest products, etc. Some regions, blessed with these resources, generate a large part of their revenue from these resources.

For example, countries in the Arabian Peninsula have large oil reserves and generate significant revenue from selling oil products. However, most regions are not blessed with this kind of natural resource base, and these resources are finite. So, most economies worldwide do not have the luxury of depending on natural resources to meet their expenditure requirements.

The third source of the government’s earnings is borrowing. Borrowing is the credit card of government finance. It lets you spend money that you don’t have right away. But just like your credit card bill, it comes back to haunt you with interest.

Governments borrow domestically from the markets, the central bank and through public savings schemes. Governments also take external loans, such as those from international financial institutions like the World Bank.

Borrowings create future liability for the government. If the borrowed money is not wisely spent, the burden of repayment falls on future generations. Let’s say a government borrows money to pay salaries and wages to its staff or distributes it to non-performing firms; such spending does not generate the revenues needed to service the debt, so the debt will keep growing.

The burgeoning debt burden will have implications for future generations—today’s borrowing transmogrifies into tomorrow’s taxes.

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India Policy Watch: Gen Z Has Checked Out Of The Living Room

Insights on current policy issues in India

—RSJ

I stopped watching Indian TV news channels almost a decade back. This was around the time the term ‘godi media’ (lapdog media) was gaining traction. Field reportage had by then become a thing of the past. All you had was some kind of an actor-anchor who would invite pedestrian spokespersons of political parties and then find ways to corner the opposition voice in such debates.

I briefly got back to watching mainstream TV news on YouTube during the pandemic. It didn’t last long. I distinctly remember the moment I went cold turkey on it. There was some kind of a debate show that I found myself watching in the run-up to West Bengal elections in 2021. I don’t know how, but Tagore and his views on Hindu-Muslim unity came up during the debate. A Bengali bhadralok who seemed to support the idea of Hindu-Muslim unity was invoking Tagore (as I remember it). And in true bhadralok style, he was using ‘Thakur’ (the actual surname) instead of Tagore and talking about how Tagore protested against the partition of Bengal et al. Then out of nowhere, the smug-faced anchor, Aman Chopra, started interrupting this bhadralok whenever he mentioned Thakur with “Tagore boliye’ (translation: call him Tagore).

After a few such interruptions, the gentleman politely told Chopra that Thakur is the actual surname of Tagore. I watched on. Here was the star anchor of one of the biggest TV news channels, debating on Bengal and Tagore with some kind of a subject matter expert, with almost no preparation on the topic except to direct the debate to claim Tagore wasn’t in favour of Hindu-Muslim unity. And on top of it, he tries to correct the expert on Thakur while not even pausing for a moment to consider that he might be wrong. It was way too much chutzpah for me to handle.

But I found myself watching Indian television news again, prompted largely by the student protests that broke out over the past week. I was keen to see how they were being interpreted, having scalped the education minister and sending a strong message to the government about their discontent.

Not much had changed. There were efforts to discredit the protesters with specific emphasis on their abusive language and their anti-national intentions on one hand. On the other hand, the protests, we were told with some gravitas, reflected growing discontent among India’s elites after more than a decade of political continuity at the Centre. Political fatigue was evident, and the BJP will need to reinvent itself. There was no real discussion on where the protests would go from here on. All they were interested in was how the PM would address this in his own inimitable way.

The description, however, did not seem to fit what one was actually seeing on the ground from the independent news channels running on YouTube. The students who appeared in those interviews from Delhi, Mumbai, Patna and several other cities came from families that had invested heavily in education. They were articulate, ambitious and invested in competitive examinations. Calling them elites was a stretch, though.

The real elite in India has checked out of the Indian education system over the past decade. Their children leave for undergraduate education abroad, begin careers outside India or keep those options permanently open. Their engagement with Indian public institutions is negligible. The students filling the streets did not represent the elite. This was the middle-class stock that had committed themselves to succeeding within India. They were protesting because they had chosen to place their bets here.

That difference is important to remember whenever you see another op-ed piece that talks of elite dissatisfaction as the starting point of these protests. If these are merely dissatisfied elites, then the episode will die a natural death after a month or two. If they are instead young Indians who have spent years preparing for opportunities inside the country and have begun questioning whether those opportunities will exist in the form they were promised, then the questions will continue to linger in the air.

That observation reminded me of a very different period. Engineering colleges across much of India through the 1980s and into the early 1990s, outside a handful of elite institutions, were often rough places. Ragging was widespread, and campus violence was common. Frustration frequently spilt over into behaviour that had very little to do with ideology or student politics. Looking back, one possible explanation was that many students knew by the middle of their course that graduation offered no assurance of employment. When young people lose confidence that effort will translate into opportunity, the consequences of present actions begin to matter less.

The transformation that followed the late 90s software boom in the same colleges remains one of the underappreciated social changes in modern India. Campus recruitment spread far beyond a handful of prestigious institutions. Students entered the colleges expecting that a substantial proportion of their batch would receive offers before graduation. Within a relatively short period, the atmosphere on campuses changed. Students who believed they had something waiting for them after graduation behaved with restraint, unlike the students of the past. People protect futures they believe are attainable. They become reckless when the future looks worse than the present. That memory returned while listening to the students who had gathered to protest.

What also struck me while watching television news after so long was the complete stupidity of it all. It is difficult to think of another industry in India where competitors appear so reluctant to distinguish themselves from one another. Competitive markets reward differentiation, and companies search for audiences and profit pools that their rivals have neglected. They experiment with formats, language and positioning constantly to improve their product mix. Indian television news appears to move in the opposite direction. Editorial positions, the structure of debates, the rhythm of prime-time programming - they all seem interchangeable.

Of course, you could say that the channels are only catering to their demand. But I find it incredible that in a nation where the vote share of the winning party barely crosses 40 per cent, the TV news channels have all concluded that the remaining 60 per cent has no interest in their content.

So, one can only surmise that they are serving objectives beyond the business as usual. Almost all media houses are owned by a select set of business conglomerates whose primary interests are in several regulated sectors of the economy. Broadcasting news for them is not a commercial venture that should concern itself with advertising revenue or television ratings. They own news channels to curry favours, influence masses, preserve access or reduce friction with governments. Now that they are so entrenched with this regime, they have a perverse interest in keeping the opposition out of power.

If this is the purpose of these channels, does it really persuade anyone? Television still occupies a place in many Indian homes. I have visited the homes of friends where the news channel stays switched on through the evening. The volume is turned down as the family goes about its evening, with the older lot looking occasionally at the screen that’s filled with what can only be politely described as propaganda.

Yet the youngest in the household are often looking elsewhere. Their information ecosystem flourishes on phones rather than television sets. They consume news through podcasts, YouTube channels, Instagram clips, Reddit forums and messaging platforms. They encounter multiple interpretations of the same event before dinner. Television to them is a relic of the past that is outdated and compromised.

Once such a generational shift occurs, recovering the audience is impossible. Newspapers experienced this transition, and TV now appears to be living through another version of it. The change is not merely technological. A generation accustomed to searching, sharing and arguing across digital platforms is unlikely to return to scheduled debates.

And no matter how hard the older institutions or the previous generations try, they will fail to establish their dominance on these new media. Trying hard will make them look like clowns, as we have seen with such efforts in the past week. The only recourse left for them will be to control the access of the young to these platforms. The recent scrutiny of social media companies, with the government asking Meta executives to fly down to Delhi and continuing debates around content moderation, fits within that broader pattern. Global technology companies, meanwhile, will weigh commercial interests alongside regulatory expectations in every market where they operate. I foresee tighter social media regulations for students on the anvil.

This gap, evident in media consumption, eventually led me to think about a divide that has been building for some time. The generations born between roughly the 1960s and the early 1980s experienced one of the most remarkable periods of economic transformation in Indian history for much of their adult life. They entered adulthood at precisely the moment when India’s economic possibilities expanded. Most built prosperous lives much better than their parents during those decades.

Yet their political outlook was shaped by factors other than economic reform. That included imagined victimhood (historical suppression by Muslim and British invaders), identity politics and a constant reinforcement of the belief that India could be great but for the deep state that’s on the rolls of some combination of global left, Islam and Christian supremacists.

I think some part of the explanation may lie in the way memory develops. People have experienced economic reforms transforming their lives. The economic reforms of 1991 and after needed vision and political acumen that was then sustained by institutional effort. This wasn’t easy. Yet the reform era never acquired a narrative matching the scale of its consequences. Reform by stealth was the preferred mode. Those who steered the reforms preferred to be quiet about how they did it. That absence left space for competing interpretations.

So, the beneficiaries of these reforms, including me, hardly became bhakts of the reforms. Rather, the ulta happened. As incomes rose and Indians travelled more widely, many naturally asked why the country had remained poor for so long. At the same time, events ranging from the Ram Janmabhoomi movement, the Mandal debate to repeated terrorist attacks and the global impact of September 11 reshaped public opinion about identity, appeasement, merit and national interest. These merged into a broader political worldview of my generation, which blamed the Congress for everything, which was then nurtured by the cyber cells.

One of the things I have written about on these pages is why political beliefs are more durable and rigid in people than other belief systems. Unlike religion or caste, which are endowed at birth, people think of their political beliefs as something they have reached through their own observation and reasoning rather than inheritance. Whether that self-perception fully reflects reality matters less than the fact that it becomes part of personal identity. So, I don’t see the generation born between the 60s and 80s changing their political views anytime soon or ever. Gen Z and every new cohort from here on is entering public life under very different conditions. They do not compare present-day India with the licence-permit era because they never lived through it. They compare it with the possibilities they encounter across the world in real time.

For more than a decade, India’s political conversation has played out on a media ecosystem that spoke to the generations shaped by liberalisation, Mandal-Mandir politics and global war on terror. While that continued, another generation was growing up learning about the world through networks rather than institutions. That’s the genie that’s now escaped the bottle. It is not homogeneous and doesn’t speak in one voice. It is too large and fragmented for that. But what’s certain now is that it will approach politics with a fresh set of assumptions. The protests offered a glimpse of that transition. India’s public square will look more like the chaotic mohalla nukkad than the bizarre sets that dot Noida news studios. This is destined.

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Global Policy Watch: When Export Controls Come for the People

Global Issues Relevant to India

— Pranay Kotasthane

The Artificers Act of 1749 in Britain was aimed at punishing “persons convicted of seducing artificers out of the dominions of the crown of Great Britain.” In 1774 and 1782, the British Parliament passed a law making it illegal for textile workers to emigrate. The spinning jenny and the water frame had given Britain a lead in mechanised cotton production, and Parliament understood that machines were useless without the men who knew how to operate them.

Two and a half centuries later, in another wave reminiscent of 18th-century mercantilism, China has converged on the same policy instrument.

On July 31, Premier Li Qiang signed State Council Decree No. 841, the Regulations on Exit and Entry Administration, which comes into effect on September 15. The decree covers everything from visa issuance to travel documents. But the provision that matters for technology geopolitics is Article 4, which states that:

… Citizens who violate export-control or technology import/export rules, potentially endangering national industrial or technological security, may be barred from exit by the State Council’s commerce and other competent departments.

Three features of this provision deserve attention. The trigger is not a proven breach. The standard is “potentially endanger,” a phrase so elastic that its primary function is deterrence rather than prosecution. Second, Article 5 creates a mirror on the entry side: foreign nationals on China’s Unreliable Entity List, countermeasure lists, or Malicious Entity lists can be denied visas altogether. Third, Article 6 requires authorities to notify individuals in writing of the facts, reasons, and legal basis for a denial, except where disclosure “may affect national security.” That exception is broad enough to nullify the rule.

These Regulations formalise practices that had been surfacing in fragments over the past year from China.

In July 2025, we analysed the news reports that Foxconn was recalling its Chinese engineers from its India facilities. Back then, I had called it a self-defeating move; it was like clutching at straws to prevent industrial capacity going abroad. Like the kid who walks away from a cricket game with his bat and ball as he senses an imminent loss, China seems to be trying to prevent the outflow of basic equipment, materials, and ideas.

In June that year, the Wall Street Journal reported that China’s Ministry of Commerce had asked rare-earth companies to submit detailed lists of their technical personnel, including expertise, educational background, and research history. Some staff were subsequently required to surrender their passports to employers or local authorities!

In May 2026, Bloomberg reported that senior AI researchers at Alibaba and DeepSeek working on strategic projects needed government approval before travelling internationally. Around the same time, the Financial Times reported that two executives of the AI startup Manus were summoned to Beijing by NDRC officials and told they could not leave China during the regulatory review of Meta’s proposed acquisition.

Each of these incidents was previously treated as an unverified media allegation. The July 31 Regulations make it clear that this is now an institutionalised strategy. The excellent Geopolitechs Blog describes this as “personnel compliance (are) becoming an integral part of export control compliance programs”.

The regulation reveals a logic that anyone familiar with the history of industrial policy will recognise. Technology geopolitics, for all its focus on machines, materials, and money, runs on people. Chips are designed by engineers. Fabs are operated by technicians. Process recipes live in the heads of the people who developed them. Nation-states can embargo equipment, restrict chemicals, and sanction firms. The hardest channel to control has always been the movement of human beings. China has now placed a formal gate on that channel.

For a foreign firm operating in China, say Applied Materials or ASML’s service operations, the knowledge asymmetry is striking. A company trains Chinese engineers on proprietary tools and processes. Those engineers absorb the firm’s IP and whatever they learn from the local ecosystem. The regulation does nothing to slow that inward flow. What it does is add friction on the outward movement. Now, rotating a Chinese national to headquarters in Santa Clara, posting them to a customer site in Hsinchu, or transferring them to a third-country fab now carries a regulatory risk that did not previously exist in law. The Q&A accompanying the decree repeatedly invokes China’s commitment to “high-standard opening-up.” But a regime that makes technical staff harder to move internationally raises the cost of integrating a China operation into a global R&D network. A firm deciding where to place sensitive work would definitely have to reconsider its decision given these regulations.

For Chinese nationals themselves, the regulation reshapes career incentives. The value of working at a leading foreign semiconductor or AI firm has partly been the international mobility it offers—postings abroad, eventual relocation, and access to global networks. Article 4 puts a discretionary state gate on that mobility, and it applies to the individual regardless of who employs them. If top engineers start calculating that a role at a strategic-tech company raises their personal exit risk, the talent pipeline to such firms narrows. This is a second-order effect the foreign employer cannot solve through compensation.

What this means in reality is that a Chinese engineer working at SMIC or Applied Materials China, or a rare earth extraction/separation/magnet-manufacturing engineer, or an AI/frontier-model researcher almost certainly cannot travel outside China without getting explicit permissions.

For technologies not explicitly in the export control catalogue, such as Tunnel Boring Machines or solar module and electronics assembly, the officials will make a case-by-case call on whether the foreign travel could lead to endangering national security.

There are other unintended consequences too.

Restricting outbound travel for scientific talent reduces leakage risk but also reduces the two-way conference, collaboration, and tacit-knowledge flow that Chinese research has relied on to stay near the frontier. China's talent-attraction architecture also faces an adverse selection problem now, as the researchers most likely to avoid returning are precisely the most mobile, most sought-after ones. Foreign firms would be far more wary of taking strategic functions into China. Finally, enforcing these restrictions might soon spill over into controlling intra-firm communication because a lot of knowledge flow transfers do not need physical travel.

So it’s funny that both the US and China are hell-bent on self-harming actions. Every time the US government comes up with a stupid tariff restriction or export control, China responds to it with another ludicrous move of its own. That’s how mercantilism worked the last time around. Britain tried to keep its spinning jenny advantage by banning workers from leaving. That delayed American industrialisation but couldn’t prevent it. China’s version of this play is backed by digital surveillance infrastructure and an institutional apparatus that George III could not have imagined. This time, the enforcement tools are considerably better, but so are the tools to leak knowledge. In either case, the oldest move in technology geopolitics is back in action.

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1. [Dashboard] Check my colleague Amit Kumar’s China Economic Coercion Tracker to find out if your firm is at risk of falling under China’s new regulations.

2. [Fellowship Alert] The Network for Advanced Study Fellowship, offered by the Takshashila Institution, is accepting applications for the 2026-27 cohort. It is designed for those who want to develop serious, sustained work in their field. Fellows work on a research topic of their choice, with structured mentorship from Takshashila scholars and a network of domestic and international subject-matter specialists.

3. [YouTube Show] The first episode of our new show, Watching the Wheels, is now out. The Main Course section features an excellent reading by on three recent papers related to women’s working and mobility patterns in urban India. DO NOT MISS, and please subscribe to our little channel.

Insights on current policy issues in India

—RSJ

There are many striking images that emerged from the students’ protests this week in Delhi. The one that has stayed with me is that of a policeman, wielding an impressively large lathi, beating a young student lying on the ground who continues filming the act on his phone with a sense of glee.

Either the lathi was deceptively benign despite its size or the student is so delighted about the prospect of how viral the reel will go on Insta that the pain of getting beaten up is momentarily forgotten. More than a century ago, the great satirist, Akbar Allahabadi, had this to say about the power of the newspaper (or the written word) while fighting a disproportionately powerful adversary:

खींचो न कमानों को, न तलवार निकालो

जब तोप मुक़ाबिल हो तो अख़बार निकालो

(Do not string your bows, nor draw out your swords;

When faced against a cannon, bring out a newspaper)

Today's youth have replaced newspapers with reels on Insta. For now, that has confounded the government. The best response they have come up with so far was a late-night vertical video address by the PM. It was meh. I might be overreading this. But a party that pioneered social media dominance through creative messages propagated using an army of paid accounts, influencers and bots is now following a trend (vertical video) that has long been the norm for youngsters. This is a signal of a shift, a change in fashion, that the BJP did not anticipate.

One of the mistakes we make whenever a protest breaks out is to start judging it. Are the protesters right? Is there an ideological coherence among the protesters? Is there an opposition hand? Who is funding it? The mainstream media loves these questions because they divide the country into neat camps within minutes. Politicians welcome them because every side already knows the answer it wants to give. But if one is trying to understand what is actually happening, these are not particularly useful questions. A protest is not the beginning of a political problem. It is usually the point at which a political problem has hurt citizens long enough that a section of society decides the normal mechanisms of democracy are no longer working. By the time students leave their classrooms, spend days on the streets and risk police action, they have already concluded that waiting patiently is unlikely to change very much.

That is how I would look at the student protests that have spread across parts of the country over the past week. The immediate trigger is easy enough to identify. Repeated paper leaks, questions over the integrity of competitive examinations, demands for accountability and calls for the resignation of the Education Minister falling on deaf ears. And then to hear the Chief Justice of India call those up in arms on these issues as cockroaches.

Those are the visible demands, and they deserve answers. But they do not fully explain the intensity of the response. Competitive examinations in India carry an emotional weight that goes far beyond the examination itself. It represents years of preparation, family sacrifice, money spent on coaching and, for many households, the belief that merit remains the surest path towards a better life. When that process appears compromised, the reaction is no longer about one examination. People begin questioning whether the larger promise of fairness still exists.

Any protest movement fairly quickly figures out that the establishment rarely concedes because of the people assembled on the first day. Governments move when the political calculation changes. Every protest is therefore an attempt to increase the political cost of doing nothing. Once one begins looking at protests in those terms, things become clear. The active coordination to ensure the protests spread from one city to another, the desire to seek wider attention through advance publicity about the protests or the plan to recruit adjacent causes and attempt to build a larger coalition. A movement that begins with paper leaks gradually starts talking about unemployment, fairness, accountability and the future of young people. Critics might describe this as the movement losing focus. It is actually the opposite. The larger the coalition, the greater the political cost of ignoring it.

Governments understand this every bit as well as protesters do. Which is why governments across the world, irrespective of ideology, tend to reach for the same set of responses. They negotiate, they reassure, they announce inquiries and promise reforms. At the same time, they question the motives of the organisers and who is funding them (right now mainstream media has everyone from the CIA, China, Soros and Bangladesh in the mix), suggest political interests have attached themselves to the movement, highlight fringe voices (tukde tukde gang) and argue that the issue is being exaggerated. These are not contradictory responses. One attempts to temper public anger. The other attempts to lower public sympathy. Both seek to reduce the political cost that the protesters are trying to create.

The state, however, enters this contest with one big structural advantage. It has time on its side. Protesters, on the other hand, have short-term momentum. Protest politics is a contest between those two. Every protest discovers how difficult it is to sustain momentum. Students have classes and tests. Universities can issue threats to those participating, as they have already done in Delhi. People have jobs and families to manage. Public attention is fickle and shifts elsewhere.

Governments know this perfectly well. If the political cost remains manageable, time usually begins working in their favour. Protesters know this too, which is why every successful movement tries to create periodic moments of performative symbolism that renew attention and keep the issue alive.

The real contest is therefore not between protesters and the government alone. It is over the judgement of millions of citizens who never join a protest but are trying to decide whether the protesters have a point. Governments lose when ordinary people who have no intention of getting out of their homes start stepping out. The success of these protests will depend on the continuous drip of symbolic acts by the protesters and the actions (thoughtful or otherwise) of the government.

As I edit this, the news of Pradhan’s resignation has come through. This would haven’t been easy for the party. Pradhan is an organisation man with deep roots who has been responsible for election campaigns across the east and northeast. But the government realised it can’t brazen its way out of this. It has blinked. This will take some sting out of the protests. Governments can disperse crowds, impose restrictions and outlast particular agitations. But if the underlying dissatisfaction continues to grow, it eventually finds another outlet.

Democracies possess multiple institutions that are meant to absorb disagreement before it reaches the streets. Parliament is the obvious institution. Universities that encourage free thinking and debates are another. Parliamentary committees, civil society, professional bodies and public consultations all perform the same function. They allow difficult questions to be debated before they become confrontations. Eventually there is the judiciary. When those institutions lose credibility, the street inevitably acquires greater political significance.

The discussion around student protests in India eventually goes back to 1974 and the movement led by Jayaprakash Narayan (JP). It is an understandable comparison because that remains the defining example of student unrest contributing to political change. But it is also a comparison that needs to be handled carefully.

By 1974, there was already a JP with enormous moral authority. There were Lohiaite socialists, the Jana Sangh, former Congress leaders with mass appeal who had split from Indira Gandhi in 1969 and several regional formations willing to work together despite deep ideological differences. Congress had governed India for almost three decades and longevity had created fatigue. The opposition still possessed the advantage of novelty because it had not yet been tested nationally. The protests became the spark, but there was already enough political material lying around for that spark to ignite something much larger.

Today’s circumstances are different. The BJP has governed nationally for a little over a decade, not three. That is a long period in politics, but it is still only half the period that Congress had governed before the Emergency. The opposition does not enjoy the advantage of novelty because most major opposition parties have governed somewhere and carry their own baggage into every election. Nor is there a JP-like figure around whom disparate political forces naturally converge. That does not make the present protests unimportant. It simply means that protests and electoral politics solve different problems. One generates status-quo disrupting energy. The other requires organisation, leadership, credibility and an alternative that enough people are willing to trust.

There is, however, one aspect of the present moment that I have written about multiple times earlier too. Every long-serving government eventually discovers that explanations rooted in the failures of previous governments have a limited lifespan. They work for a few years because institutions take time to reform and economies take time to change. But political memory changes with every generation.

Anyone below the age of about thirty-six has never voted in a national election that the BJP did not win. For them, the BJP is not one government among many. It is the government. Congress belongs more to history than memory. Their understanding of India has been shaped almost entirely by the present political era. That cuts both ways. The opposition appears unfamiliar. But it also means the present government increasingly owns both the successes and the failures of the present. Accountability shifts towards those who have governed the recent past because lived experience eventually matters more than historical comparison.

One can see this transition in the anxieties of young Indians. They are worried about what lies beyond the examinations. Employment is no longer as certain as it seemed a decade or two earlier for the educated. Artificial intelligence is changing the nature of work. Global economic conditions have become more uncertain. Families have invested extraordinary amounts in education for guaranteed upward mobility. That confidence has weakened. I don’t have polled data around this, but I sense the current generation of students is less hopeful about their future than any of the previous generations in the past three decades.

The temptation is to ask whether these protests will become another JP movement or whether they will fade away after extracting a few concessions. My instinct is that this is the wrong question. Most protests do not become political revolutions, and governments do not collapse because of one agitation. The more useful question is what these protests reveal about the relationship between citizens and institutions today.

The WhatsApp uncles and aunties generation that have seen the benefits of the two decades after liberalisation are content with their “settled” lives, their garba in Vietnam and their misguided belief about India’s standing going up in the world because of this government. But the reality confronting the Insta generation is that their future isn’t as rosy and the correcting and disciplining mechanism of the political system isn’t working. Nobody listens, and nobody is accountable. The government increasingly announces decisions instead of explaining them. The youth is, not surprisingly, assuming bad faith instead of listening.

That, more than the current protests themselves, should concern us. Democracies become stronger when they create more places where disagreement can be expressed. That is the sign of a confident government. The youth protesting today are calling out the bluff. Governments do not have to accept every demand placed before them, and protesters do not have to be right about every issue they raise. But both sides have an interest in ensuring that the street remains the last place where a disagreement seeks resolution, not the first place where citizens believe anyone will finally listen. Unfortunately, I believe we have reached there.

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Addendum

—Pranay Kotasthane

This was a big week in Indian politics, and I am not equipped to analyse the political implications of these events. What I know is that next week will bring a stream of articles along the lines of a Ravi-Shastri-esque argument: “In the end, it was democracy that won”.

Instead of taking that line, let me offer some frameworks I am using to make sense of what happened.

Framework #1

In the 1970 book Why Men Rebel?, American political scientist Ted Gurr claimed that one of the reasons why people rebel is relative deprivation. The greater the difference between their perception of “what we deserve” and “what we are getting”, the higher their propensity to protest or rebel.

The reference point for “what we deserve” in the current case is well-paying jobs and prosperity. The reference network for this cohort is not local but international and Western, thanks to social media. Moreover, the government’s forceful assertion that India is already a great power also raises people’s expectations.

The perceived levels of “what we are getting” are quite low due to sluggish economic growth, fears of AI taking away jobs, the exam fiasco, and the closure of “exit” opportunities to the West. The gap between these two perceptions—the relative deprivation—is quite high, and hence the protests.

While this model is descriptive, it can also be extended to offer some lessons in politics. According to this framework, the government’s aim should be to reduce the sense of relative deprivation. This can be theoretically achieved in two ways.

One, by making it clear that “what the protestors are getting” is not that bad a deal. This strategy is difficult to execute beyond fixing the most egregious paper leaks. The global economic environment is challenging and the pace of domestic reforms too slow.

Two, by adopting a realist strategy that lowers the protestors’ perception of “what they deserve”. This strategy can backfire: who likes to hear that they don’t deserve the absolute best? But this narrative can be created by acknowledging the economic challenges India faces.

As of now, I cannot visualise pathways to close this gap. While the current round of protests has been called off, another immediate cause could provide the impetus for mobilisation. It will be worth tracking the government’s policy positions targeting this age cohort.

Framework #2

I was intrigued that even those opposing the protests labelled them as Gen Z, a horizontal age-determined collective rather than a vertical group that can be isolated and targeted. Unwittingly, they were conceding that the protestors had created a mass horizontal political identity. Such identities are rare in India, where a deeply held assumption is that the only counter-response to religious majoritarianism is caste mobilisation. One attempt at vertical division can be countered only by another vertical division along a different axis, we are told. But this mobilisation was perhaps the first India-wide movement in the last fifteen years to create and own a new horizontal identity.

Framework #3

The mobilisation seems to be a canonical case of radically networked societies (RNS) in action. Nitin Pai and I define Radically Networked Societies as:

a web of connected individuals, possessing an identity (imagined or real) and motivated by a common immediate cause.

The conceptual framework is illustrated below:

RNS existed in the past, but social media has fundamentally changed the scalability, speed, and depth (the technological aspect), making it easier to bring latent identities and causes to the fore in some cases or to create entirely new causes and identities. What we see today is a clash between contemporary hierarchically ordered states and their radically networked societies. The information flows much faster in a network than in a hierarchical structure. Hence, states are struggling with counter-mobilisation against RNS.

All three factors were at play here.

1. The political cause was the multiple reports of paper leaks and mishandling of evaluations. These were merely the sparks that ignited a tinderbox of long-standing frustrations.

2. The Gen Z identity provided the sociological aspect. The protests are seen as a response to corruption and a lack of economic opportunities for the youth.

3. Instagram provided the scale. There was no single charismatic leader or formal organisational structure directing the demonstrations. Instead, calls to protest and information spread organically across a platform that even this social media-savvy government had ignored. Once the internet was banned, people used Bluetooth-based apps to coordinate and disseminate their message. This decentralised nature made the protests incredibly resilient for the police to suppress.

These three frameworks can help us make sense of the events over the last week. In the absence of a credible opposition, the frustration channelled a new path to the ground. While the mobilisation has ended, the repercussions will continue to play out over the next weeks and months, for the self-correcting mechanisms of the Indian political system are well and alive.

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India Policy Watch #2: Does India Need a Union Education Ministry?

Insights on current policy issues in India

—Pranay Kotasthane

While the current Union Education Minister’s resignation is a welcome development for fixing political accountability, it does not address the deeper questions of education governance. So, let me propose an idea that sounds radical but isn’t: India does not need a Union Education Ministry.

Before dismissing this as anarchist provocation, do consider that many successful federations in the world manage education without anything resembling India’s sprawling central apparatus, and produce better outcomes for it.

The original constitutional design was clear. General education was a State List subject, meaning that states had exclusive legislative power over schools and colleges. The Union’s role was limited to running a handful of central universities (BHU, AMU), governing institutions of technical and scientific education recognised by Parliament as institutions of national importance, coordinating standards in higher education and research (Entry 66 of the Union List), and providing vocational training. The Union Education Ministry existed, but its writ over school education was advisory at best. The Kothari Commission (1964-66) could recommend reforms, but states were free to accept or reject.

That changed during the Emergency. The 42nd Constitutional Amendment of 1976 expanded Entry 25 of the Concurrent List to cover “education, including technical education, medical education and universities.” The Union gained legislative competence over all education, from primary school to postgraduate research.

Fifty years later, we live with the consequences: a Union Ministry that spends over ₹1.39 lakh crore annually, designs centrally sponsored schemes that states have to implement, runs a national testing agency for entrance examinations, and produces national education policies with binding force. Samagra Shiksha Abhiyan alone commands ₹42,100 crore. Yet its national utilisation rate is a dismal 62 per cent. States propose a plan, the Union’s Project Approval Board approves less, it releases less than approved, and states spend less than released. By the time money filters through this chain, over a third of it doesn’t reach classrooms.

The Alternatives

India’s arrangement looks unusual to many federations.

Canada has no federal ministry of education. Education is entirely a provincial responsibility. The Council of Ministers of Education, Canada (CMEC), a voluntary intergovernmental body, coordinates across provinces on standards and credential recognition. It has no binding authority. Despite this, Canada ranked sixth globally in PISA 2022, scoring well above the OECD average in mathematics, reading, and science. The absence of centralised authority has not prevented high or equitable outcomes.

Germany operates under the principle of Kulturhoheit der Länder, whereby each of 16 federal states designs its own school system, sets its own curricula, and employs its own teachers. The federal ministry handles research funding and vocational training frameworks but does not control school curricula or standards. The Kultusministerkonferenz (KMK), a standing conference of state education ministers, ensures voluntary coordination, i.e., it’s essentially a standards body, not a governing ministry.

Even the US, which created a Department of Education only in 1979, treats education as overwhelmingly a state and local affair. States and local governments provide about 90 per cent of K-12 revenues.

NEET Is the Symptom

The consequences of centralisation are not abstract. The National Eligibility cum Entrance Test (NEET) is a direct product of the concurrent list architecture. It is a single centralised examination for medical admissions across the country, designed by a national testing agency, and imposed on states regardless of their preferences.

Tamil Nadu has resisted NEET for a decade, arguing it disadvantages students from rural areas and government schools who did well under the earlier state-level, Class 12 marks-based system. Last week, the TVK government demanded that education be transferred back from the Concurrent to the State List. This is an argument against over-centralisation, which creates a single point of failure.

Some options

The pattern across many federations is that states own education, a lean coordination body sets standards and ensures credential portability, and the centre’s role is limited to research funding, equity-focused transfers, and running a handful of national institutions.

Lest we commit the sin of isomorphic mimicry, we cannot assume that what works in these federations will work here. The context is quite different. Our state governments are no paragons of education, and some will perhaps flounder in the absence of Union supervision. Nevertheless, if we assume a time has arrived when we are serious about decentralisation of education, what are some possible options?

The most ambitious version of this reform would be to dismantle the Union education ministry and replace it with a coordinating and standards authority.

The second option would be to move education back to the State List, restoring the pre-1976 constitutional position. Create a lean National Education Standards Authority—modelled on Canada’s CMEC or Germany’s KMK—for curriculum coordination, credential recognition, and international assessments. Continue running institutions of national importance: IITs, central universities, CBSE and NCERT.

A third, less-radical option would be to replace the centrally sponsored scheme apparatus with larger untied fiscal transfers through the Finance Commission. For states with weak fiscal capacity, run a small number of tied grants targeting specific equity outcomes: learning levels, enrolment gaps, and infrastructure deficits.

Finally, the Union could voluntarily restrain itself, converting its role from legislator-and-scheme-designer to funder-and-standards-setter, which is what the pre-1976 ministry was.

After eighty years of independence and fifty years of the concurrent list experiment, we have enough evidence that the constitutional framers got the design right the first time.

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Reading and listening recommendations on public policy matters

1. [YouTube Show] , , and I are Watching the Wheels. Every week, we will discuss ideas we find interesting, and every episode will have multiple fun segments. Please share, like, and subscribe. We shall keep improving!

2. [Puliyabaazi] In the latest episode, Shivakumar Jolad narrates insights from the past exercises of the national census in India. So not miss it.

3. [Paper] Since there is so much talk about open-weight models, check this paper analysing the potential of open models in the AI economy.

Insights on current policy issues in India

—RSJ

For ordinary citizens of India, democracy means elections. Every few years, they participate in what the media likes to call the dance of democracy. They vote, governments change or survive, political parties celebrate or sulk (or break up spontaneously, like they do these days), television studios discover data science and garish charts, and India moves on to the next pointless ODI cricket match.

We spend very little time thinking about the machinery that makes those elections possible because, for the most part, that machinery has remained stable since Independence. The Census happened every ten years. Electoral rolls were periodically revised with a visit from a tired-looking school teacher assigned the role of a booth-level office (BLO). Constituencies remained frozen after a point. State elections and national elections came at different times. There were arguments over results, but most people rarely gave a second thought to the rules themselves.

This is about to change.

Over the next few years, India will find itself discussing four issues that are usually treated as separate conversations. There is the Special Intensive Revision (SIR) of electoral rolls, which has already become controversial in several states. Then we have the Census, finally being conducted after a gap of sixteen years. There is also the debate over delimitation, which will inevitably follow once the Census is complete. And there is also the misguided clamour for One Nation, One Election, which seeks to synchronise elections across the country.

Of course, each has its own administrative logic. Electoral rolls need updating every few years. We have already delayed the Census, which gathers the core demographic data of the nation, for over 6 years. That can’t be delayed further. Parliamentary constituencies cannot remain frozen in time based on Census data that’s fifty years old. And, some may argue that having big state or national elections scheduled every 9-12 months isn’t helping. Simultaneous elections promise lower costs and fewer interruptions to governance. Business as usual and nothing more to see.

But this is where I will channel my inner Kishore Kumar and sing, “Babu, samjho ishaare”. Look at them with a different lens; each one of these exercises taken together asks a basic question about how representative democracy works. Who gets to vote? How is that right established? Who gets counted? How should representation be divided across the country? How often should governments seek a fresh mandate? These are questions that most democracies settle early in their lives and then revisit only occasionally. India seems to be reopening all of them at roughly the same time. Is it all really needed? And if it is, is this the best way to go about it?

Take the Special Intensive Revision. The Election Commission’s objective, prima facie, makes sense. Electoral rolls should be accurate. Dead voters should be taken out. Duplicate entries should be eliminated. No democracy benefits from inaccurate voter lists. Things get interesting with the process adopted rather than the objective.

Across several states, voters who have participated in election after election are being asked to produce documents to establish their eligibility once again, sometimes requiring records related to their parents or earlier generations. In a country where births were not universally registered until fairly recently, where migration has been constant and where official records remain uneven, this is a much larger exercise than it appears on paper. The individual horror stories that are emerging from people who have gone through this exercise suggest either a lack of any forethought on how this will play out for ordinary citizens or a deliberate attempt to make it difficult for people.

Former Chief Election Commissioner S.Y. Quraishi captured the concern when he argued that the exercise appeared more focused on exclusion than on inclusion. Whether one agrees with his assessment or not, it points to a legitimate question that deserves discussion. In a democracy, where should the burden of proof lie? If someone has voted for decades, should the State have to demonstrate why that person should no longer remain on the rolls, or should the citizen once again establish a right that has already been recognised repeatedly?

To me, it should be with the State. Democracies have to protect both the integrity of electoral rolls and the right of eligible citizens to participate. Those objectives can sometimes pull in different directions, but to make voting citizens with multiple proofs of identity run pillar to post to establish their voting right should be unacceptable.

The debate also exposes another ambiguity that the state seems to be revelling in putting the citizens through. The Election Commission is responsible for preparing and maintaining electoral rolls. It is not the authority that determines citizenship. Yet when voter verification increasingly depends upon proving family lineage or historical residence, the distinction between verifying electoral eligibility and scrutinising citizenship becomes harder for ordinary citizens to understand.

Many people possess voter identity cards, Aadhaar cards, passports, ration cards, tax records and decades of interaction with the State, yet struggle to produce a particular document from fifty years ago that has been made compulsory to feature in the electoral list. The SIR process right now can seem like a Kafkaesque nightmare if you fail to have one key document. The issue is therefore larger than documentation. It is about the relationship between the citizen and the State. At what point does the State presume that a citizen belongs, and at what point does it ask that citizen to prove belonging once again?

That question leads to the Census, because before a democracy decides who votes, it has to decide who counts. The Census is often treated as a statistical exercise and therefore attracts little public attention. In reality, it underpins almost every important decision governments make. Population figures influence fiscal transfers, welfare programmes, infrastructure planning, urban development, reservation policies and eventually political representation itself. After sixteen years without fresh data, India is finally preparing to count itself again. The final census data will be out by 2030. The numbers that emerge will shape public policy for years and will become the foundation for the next major constitutional debate.

That debate is delimitation. For decades, India chose to freeze the distribution of Lok Sabha seats among states because successive governments did not want states that had successfully reduced fertility rates to lose political influence as a consequence of that success. The freeze was always temporary. Once fresh Census data becomes available, the issue will return.

On the face of it, the principle is simple. Democracies are built on political equality. If populations have changed dramatically, representation should reflect those changes. Why should an MP in one state represent substantially fewer citizens than an MP elsewhere?

Yet the simplicity disappears once one considers India’s federal character. States in the South invested heavily in education, healthcare and family planning over several decades and now fear that demographic success could translate into reduced influence in Parliament. States in the North ask an equally reasonable question. Should their citizens continue to have less representation simply because they live in more populous states?

Neither argument is devoid of strong logic. One is rooted in equality among individual citizens. The other is rooted in fairness among the states that constitute the Union. Every federation grapples with this tension in one form or another. India postponed the debate for half a century. It cannot postpone it much longer. But what model should it adopt? How should it balance the debate between equal electoral weight versus fair representation for the states?

We should be using this opportunity to review the delimitation exercise and possibly, redress the flaws that have embedded themselves into our representative democracy. There should be wider consultations on proposals that are already in the mix and a more informed public debate on the alternatives available. But the nature of our polarised polity and the centralised instincts of this government is precluding this. There’s strong suspicion, possibly unjustified, among southern states that the delimitation exercise will leave them worse off in representation.

The proposal for One Nation, One Election completes the chain. Its supporters argue that India spends too much time conducting elections, enforcing the Model Code of Conduct and interrupting governance. Synchronising elections would reduce costs and allow governments to focus on administration rather than campaigning. Critics respond that staggered elections strengthen federalism because they allow voters to judge national and state governments separately and at different moments. The staggered election cycle, as it stands today, allows political parties to shape their political conversations relevant to the state independent of the national mood. It acts as a bulwark for federalism and against further centralising tendencies of the state. Also, I have my own doubts about the argument in favour of administrative efficiency for One Nation, One Election.

The temptation in Indian politics is to reduce every institutional debate to immediate political advantage. I fall for it myself. The government is accused of trying to entrench itself by changing the rules of the game in its favour. The opposition is seen as resisting every reform regardless of merit. There is enough evidence in public life to justify a degree of scepticism about political motives, but that scepticism should not become the entire conversation.

We have always argued on these pages that institutional design deserves a different standard of debate. The rules framed today will shape governments that have not yet been elected and political parties that do not yet exist. The Constituent Assembly understood this well. Its members spent years debating universal adult franchise, federalism, representation and the relationship between citizens and the State, not because they expected perfect answers but because they knew imperfect answers would endure for generations. Those debates were public, exhaustive and often inconclusive until broad agreement emerged. The legitimacy of the institutions that followed came not merely from the text of the Constitution but from the process through which those choices were made.

India is now approaching another moment when some of those foundational questions are returning. Questions of this scale cannot be treated as routine administrative exercises or settled through technical notifications or diktats alone. There is also a need to be sensitive to the travails of ordinary citizens and their feedback as they navigate these simultaneous exercises questioning citizenship, voting rights and representation. It is also one that deserves to involve many more voices than it does today, because governments come and go, but the rules of the game have a habit of staying around for a very long time.

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Global Policy Watch #1: Confucius in China, but Confusion in America

Global issues relevant to India

—Pranay Kotasthane

This was a big week for AI geopolitics. Which week isn’t, you ask? No really. Some major things happened. On Wednesday, Moonshot AI released Kimi K3, a 2.8-trillion-parameter open-weight model. Independent benchmarks place it narrowly behind Anthropic’s fabled Fable 5 on certain coding-heavy tests. But the kicker is that the full weights will be available for download by July 27. Anyone, anywhere, with enough inference compute can run it on their own servers.

The next day, Xi Jinping made his first-ever in-person appearance at the World Artificial Intelligence Conference in Shanghai. His message was that “AI development should not be a solo performance by a single country, but a symphony of international cooperation.” He announced WAICO (to be read as a Belt and Road Initiative for AI), a 29-country AI cooperation body headquartered in Shanghai, pledged 5,000 AI training spots for developing countries, and positioned China’s open-source models as a public good. Chinese state media framed it as a counter to America’s “AI Iron Curtain.”

Meanwhile, US government policy can be summed up in one word: confusion. I’ve been tracking US policymakers’ positions on Chinese open-weight models, and their arguments cycle through at least four positions.

One: their models have backdoors, ours don’t. This is technically plausible but strategically irrelevant. Open-weight models have the advantage that anyone can audit the weights. If anything, backdoor concerns should be more acute for proprietary models you can’t inspect. The US government demonstrated this rather vividly in June when it ordered Anthropic to pull Fable 5 from global access within days of launch, citing a jailbreak report. The model returned eighteen days later. If closed models are trustworthy because they’re closed, why did the government need to yank one off the market?

Two: China can subsidise this, but we face the “tyranny of the quarterly cycle.” This is the argument of a great power making excuses like a middle power. The depth of American capital across technology readiness levels is its strength, not a weakness. Neither is the claim true. DARPA funded OpenROAD, the open-source chip design toolkit that revolutionised semiconductor layout. RISC-V, now challenging ARM’s dominance, came out of UC Berkeley. Kubernetes, Android, TensorFlow, and Docker are all critical open-source digital infrastructural projects that originated in the US. In fact, the US has been, for decades, the world’s most effective practitioner of open technology as a strategic tool. The complaint that American firms cannot compete because they report quarterly earnings is not an argument about Chinese strength but is an admission of domestic policy failure.

Three: they’re distilling our models, so they’re not playing fair. OpenAI, Microsoft, and Anthropic have all accused Chinese labs of extracting their model outputs to train competitors. Some evidence is suggestive—DeepSeek outputs that identified themselves as ChatGPT, large-scale API extraction detected by Microsoft’s security team. But even if entirely correct, the policy implication is unclear. You cannot un-distil a model. The knowledge is already out. And knowledge distillation is a standard machine learning technique, not an exotic weapon. Treating it as espionage while simultaneously failing to prevent it is not a strategy but mere whining.

Four: export controls will fix it. Three rounds of semiconductor export controls since October 2022 were supposed to deny China the compute for frontier training. DeepSeek emerged anyway. Chinese labs found architectural workarounds, used the below-threshold Nvidia chips, and produced competitive models at a fraction of American costs. And yet, we are moving toward more export controls on advanced AI chips. The medicine is not working, and yet the US is increasing the dosage.

These four arguments form a sequence of rationalisations by a power that senses its advantage slipping.

A confident technological power would not respond this way. It would champion openness and trust its private players to make world-beating products—as it once did. Xi’s WAIC speech—“encouraging openness, collaboration and sharing”—could have been written by an American technology optimist circa 2010. Instead, it was delivered by the leader of a one-party state with an extensive censorship apparatus, to applause from 29 countries. When your response to a competitor’s openness is restriction and secrecy, you signal anxiety and not strength.

The Indian Situation

While Washington debates its stance, Nikkei Asia reported last week that Indian companies are increasingly switching to Chinese LLMs to contain AI costs. Chinese open-weight models cut costs by “an order of magnitude.” And so, this is a market outcome, and it vindicates what I’ve argued in this newsletter before: India’s interests in AI are orthogonal to the US-China framing. Chinese open-weight models are inputs, not threats. India benefits from a multipolar AI supply structure where competition keeps costs down and options open.

PS: A falsifiable prediction. The CPC will impose formal export controls on its frontier open-weight models before January 1, 2028. This could take the form of licensing requirements, delayed releases, parameter-count thresholds, or end-use restrictions. Xi’s WAIC speech was the high-water mark of Chinese AI openness. The Reuters report on Beijing’s meetings with Alibaba, ByteDance, and Z.ai about curbing overseas access is the leading indicator. Openness was the play when Chinese models were catching up. Now that they are competitive, the logic of giving them away collides with the logic of controlling them, especially as AI becomes important for narrative control. Nevertheless, the recommendation for India doesn’t change since there are other open models outside China.

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Global Policy Watch #2: ASML’s Blowout Quarter Is a Geopolitical Signal

Global issues relevant to India

—Pranay Kotasthane

(This post was first published on the Takshashila Blogroll)

ASML reported its second-quarter 2026 results on July 15. Net sales came in at €9.3 billion, well above the consensus estimate of €8.8 billion. Net income was €2.9 billion. Most significantly, the company raised its full-year 2026 guidance to €43-45 billion in revenue, a sharp jump from the €36-40 billion range it had guided just a quarter ago. CEO Christophe Fouquet described order intake as “extremely strong” and announced plans to expand capacity for both EUV and DUV tools by 30 per cent in each of the next two years.

These are impressive numbers. But ASML is also a weathervane for the AI infrastructure story as it is the sole manufacturer of extreme ultraviolet lithography systems and holds a monopoly on the advanced lithography equipment that every GPU used for training requires. Broadly speaking, its order book is thus like a real-time dashboard of two forces: the global AI infrastructure buildout and the US-China semiconductor contest.

At its previous Investor Day talks, the company projected that 5 to 10 per cent of global fab capacity by 2030 will exist because of geopolitics rather than market demand. That is, capacity is being built not because the market needs the chips, but because governments have decided that strategic resilience requires domestic production. Every one of those geopolitically motivated fabs still needs ASML’s machines. Fragmentation, paradoxically, is good for ASML’s top line, at least until the AI bubble lasts or until the next inevitable trough of the semiconductor business cycle arrives.

The China story first. China’s share of ASML’s system sales fell from 36 per cent in Q4 2025 to 19 per cent in Q1 2026. The Q2 earnings call confirmed that China-related business remains at approximately 20 per cent of total net sales for 2026, though that percentage now applies to a significantly higher revenue base than previously expected. Thus, ASML expects to continue selling the N-1 generation DUV machines to China.

Next, these earnings also indicate China’s progress in alternatives to ASML’s much-in-demand machines. It seems that at the EUV level, China is still far behind. The technology required decades of ecosystem development and cross-border collaboration that cannot be easily replicated under sanctions conditions.

At the DUV level, however, the picture is more nuanced. SMEE, the Shanghai-based equipment maker, has delivered early 28nm ArF immersion DUV systems, reportedly designed to avoid any US-origin intellectual property. But it hasn’t been productised yet. SiCarrier, a Huawei-linked entrant, is testing a domestically manufactured immersion DUV tool at SMIC. These are prototype-stage tools, roughly where ASML was in the early 2010s. Even ASML’s EUV took thirteen years to go from a working prototype to a consumer product.

Thus, China’s substitution efforts are not production-ready, and they are not close to matching ASML on throughput, yield, or overlay accuracy. But the direction of travel is clear. For ASML’s long-term earnings trajectory, the key determinant is whether Chinese firms have found substitutes or alternatives.

The next escalation that could impact ASML is not far away. The MATCH Act, currently making its way through the US Congress, would ban not just new DUV lithography sales to China but also the servicing of existing equipment. The servicing piece matters more than the equipment ban. Chipmaking tools degrade rapidly without constant maintenance. If servicing stops, China’s entire installed base of ASML DUV systems becomes a depreciating asset, regardless of whether Chinese firms can eventually build indigenous alternatives.

This brings us to the Netherlands’ position. ASML accounts for roughly a quarter of the total market capitalisation of the Euronext Amsterdam exchange. Together with Shell, these two companies make up nearly 46 per cent of the exchange. The Dutch government has committed €2.5 billion in public infrastructure through its Beethoven project to keep ASML anchored in Veldhoven.

Asking the Netherlands to aggressively restrict ASML’s China business is comparable to asking Saudi Arabia to leave oil in the ground. The Dutch trade minister has explicitly said that the Netherlands opposes the extraterritoriality of the MATCH Act. And yet, the historical pattern is clear that the Netherlands blocked EUV exports from 2019, restricted DUV exports from January 2024, and will likely comply again when forced. The operative word is “forced”, meaning that ASML will follow the letter of US restrictions while creating maximum room to protect its remaining business.

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India Policy Watch #2: The Water Red Herring

Insights on current policy issues in India

—Pranay Kotasthane

Every time India announces a semiconductor assembly plant or a large data centre, a familiar objection makes it to the news: what about the water? These plants, we are told, will drink a parched country dry. Is it really so?

The objection has become a ritual. And like most rituals, it survives on repetition rather than arithmetic. So let us put the numbers together to analyse water consumption in India.

Agriculture consumes close to 90 per cent of all the water used in India, two to three times more than China or Brazil, according to the World Bank. Everything else, every factory, every water filter, every fab and server farm, fights over the remaining tenth. One kilogram of Indian cotton takes around 22,500 litres of water to grow, according to the Water Footprint Network’s estimate. The global average is 10,000 litres/kg of cotton. Similarly, sugarcane and rice are water-guzzling crops, incentivised by a system of MSPs, fair remuneration prices, and state-administered prices.

Now, place the newcomer with this background in mind. A large semiconductor fab draws 38 million litres of water per day, while an average hyperscale data centre consumes about 19 million litres of water every day. That sounds enormous until you compare it with other uses. Across a full year, it is the same as what 500 to 800 hectares of paddy consume in a single season. Punjab alone grows paddy on over three million hectares. So the entire fab, running every hour of every day, amounts to a rounding error.

Moreover, a fab needs ultrapure water, and producing it wastes a little raw water in the making. But withdrawal is not the same as consumption. A modern fab reclaims most of what it takes, treating and reusing two-thirds of it before discharge. Much of a fab’s water returns to the system.

I am not claiming the concern is imaginary. Water problems are local. A fab draws from one basin, one aquifer, one municipal supply, and in a dry year, it can strain that source. Taiwan discovered this in 2021, when a drought forced the island to divert water from farms and left TSMC trucking in supplies. But the answer to a local risk is siting and recycling, not prohibition. Building the fab where water is available, auditing water withdrawals, and making high reuse a condition of approval can solve problems. These are just permitting problems, not blockers.

If agriculture uses nine litres in every ten, then improving farm water efficiency by a couple of percentage points can free up nearly as much as India's entire domestic water consumption.

But we fixate on the fab and a data centre’s water consumption because they are new, visible, and made by firms. The tubewell is old, diffuse, and politically untouchable, spread across millions of voters that no party dares confront.

The demand should never be “build less of the good stuff.” India’s water crisis is a reality, but it is a crisis of allocation and pricing, sitting almost entirely in a farm sector that pays next to nothing for its biggest input. Let’s fix a sliver of that.

P.S.: There are other fairly good reasons to question these investments, especially if the government funding is involved. But water consumption isn’t one of them.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Book] Ameer Shahul’s Vaccine Nation: How Immunization Shaped India makes for interesting reading as it narrates the story of vaccine development in India over the last 150 years. The fact that the rabies vaccine came into being only in 1927 was especially relevant for me (Pranay) because I got bitten by a street dog a week ago! Imagine, just a hundred years ago, there would have been no solution for this.

2. [Survey] Takshashila does an annual survey to assess Indian public opinion on technology geopolitics. This is an anonymous survey with 15 questions and takes about 5 mins. Please give it a try and help us! Link: tinyurl.com/technopolitik

3. [Paper] China’s mercantilist squeeze on developing countries provides much-needed empirical analysis of the impact of Chinese overcapacity on other low-income countries.

Insights on current policy issues in India

—RSJ

A good way of earning public distrust on a policy is to change something that they use every day and telling them they have no other choice. That is where the E20 protests in India started. Most motorists did not wake up one morning determined to debate ethanol blending. They discovered, often after reading reports or conversations with mechanics, that the petrol available at their neighbourhood pump was no longer the petrol they had been buying for years. The government’s response initially has largely been to reassure them that there is nothing to worry about. That may well prove to be true. But reassurance is a poor substitute for choice.

As the protests gathered steam, the government resorted to its favourite trick. This is what the Petroleum and Natural Gas Minister said this week: “Yet, as India accelerated its journey towards greater energy self-reliance, opposition to ethanol blending suddenly intensified. It is worth asking: who benefits if India remains dependent on imported crude oil or batteries.”

Yes, the best way to get people to adopt a policy is to force it upon them and if they protest the lack of choice, label them as part of some sinister lobby that’s working overtime to pull India down. There’s no greater proof needed that this a badly designed policy than this anti-national ploy employed now to counter the dissent.

Yet, it is worth beginning by acknowledging something that many critics of E20 gloss over. India has a genuine strategic problem to solve. Nearly 90 per cent of crude oil that the country consumes comes from overseas, and this means every disruption in West Asia, or a spike in oil prices, or a sudden depreciation of the rupee eventually finds its way into inflation, government finances and household budgets. Reducing this dependence is a sensible policy. Ethanol blending, electric vehicles, compressed biogas, hydrogen and improvements in fuel efficiency are all different ways of addressing the same strategic challenge. The objective is therefore not in question. The question is whether this particular transition has been designed in a way that carries people along rather than expecting them to simply adapt.

Governments have three ways of changing behaviour. They can persuade. They can change incentives. Or they can eliminate an option through bans or diktats. Good policy generally works best in that order because people rarely object to change itself; they object to being denied agency in the process. India could have arrived at exactly the same destination through a different route. Conventional petrol could have remained available during a transition period, priced a little higher to reflect the strategic cost of continued dependence on imported crude. E20 could have been the cheaper alternative. Owners of older vehicles, people who drive long distances and value fuel economy, or simply those who were unconvinced could have paid the premium for conventional petrol. Everyone else would gradually have shifted to E20 because the economics favoured it. As more E20-compatible vehicles entered the fleet, conventional petrol would have become a smaller part of the market before disappearing altogether. That transition would probably have taken a little longer. It would almost certainly have generated far less resentment.

Instead, consumers discovered that in most parts of the country there was effectively no decision left to make. That may well have been administratively convenient. Maintaining parallel supply chains costs money. Petrol pumps need additional storage and distribution becomes more complicated. These are legitimate operational considerations. But they are not reasons to eliminate choice altogether. In any case, the way the ethanol input costs and supply chain works, the E20 blend at this moment costs more than normal petrol. And this isn’t changing any time soon. Governments should use markets to reveal what consumers value. It is bad economics when they choose not to find out.

Much of the public discussion has since become mired in an argument over mileage, engine wear and laboratory testing. Manufacturers point to extensive validation though I have my suspicions on how quickly they have toed the government line. Government ministers cite studies showing that compatible vehicles perform normally. Consumers point to their own experience at the fuel pump and service stations. The evidence will become clearer over time because millions of vehicles operating in real-world conditions provide a better test than any laboratory ever can. But even this misses the central issue. Suppose the government is entirely correct and E20 causes no measurable damage to vehicles. A motorist may still prefer conventional petrol because it delivers better mileage, because he owns an older vehicle, or simply because he is willing to pay more for what he believes is a better product.

There is another part of this story that deserves much greater attention because it illustrates how complicated incentive structures emerge once governments intervene at multiple points in the same market. Much of India’s ethanol continues to come from sugarcane, one of the country’s most water-intensive crops. Surplus rice has also become a source of ethanol. The government procures rice at support prices, stores it at considerable cost and eventually sells excess stocks at a discount to ethanol producers. Taken together, the taxpayers are financing the procurement, storage and discounted disposal before the final product reaches the fuel tank. That should invite the same scrutiny as any other public expenditure. What’s the real cost of this transition, and who is benefiting disproportionately, are legitimate public interest questions. If maize or other feedstocks eventually prove cheaper and more environmentally efficient, policy should move in that direction rather than becoming tied to existing production structures simply because those investments have already been made or there are entrenched political interests.

The government’s response to criticism has also followed a familiar pattern. Questions over implementation have increasingly been answered by defending the objective itself. Nobody seriously disputes that India should reduce its dependence on imported oil. Yet those expressing concerns over the manner in which E20 has been rolled out often find themselves answering a different accusation altogether. Do they want the country to remain dependent on imported crude? That is an unhelpful way to conduct policy debates because it treats disagreement over means as disagreement over ends. Public policy improves when implementation is questioned. It weakens when criticism is dismissed before it is examined.

Transitions of this kind also benefit from a degree of humility. India’s vehicle fleet is remarkably diverse. Newer models are being designed for higher ethanol blends or so we are being told. Older vehicles were built under different assumptions (possibly at best up to E10 petrol). Manufacturers may be confident that compatibility issues have been addressed, but confidence is not a substitute for experience accumulated over years of use across different climates, maintenance practices and driving conditions. A transition period would have allowed consumers, manufacturers and policymakers to learn together. Now that there is only one type of fuel available, every unexpected outcome becomes a policy problem. This issue will continue to simmer as problems of this transition emerge over time.

The E20 controversy will eventually fade as India will continue increasing ethanol blending, and over time the vehicle fleet will adjust accordingly. But the manner in which this transition has unfolded offers a useful lesson about policymaking. Governments often spend enormous amounts of time deciding where they want society to go and surprisingly little time thinking about how people would prefer to get there. The approach to policy implementation determines whether citizens feel they are participants in a national transition or simply expected to accommodate one. The lesson from E20 is that a sensible policy becomes better when its implementation relies more on incentives and less on compulsion. The people don’t need directions from a paternalistic state. They need the state to trust their judgment as they ultimately have to live with the policy.

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Addendum

—Pranay Kotasthane

Sensing the growing public frustration, the government released a 9-point FAQ on the Ethanol Blending Programme on 10th July. True to its form, the press release picked out some straw man arguments and demolished them without addressing the kinds of concerns RSJ raises in his article.

Take, for example, its defence of not offering consumers a choice. Here’s the response:

India runs over one lakh retail outlets through a vast network of refineries, terminals and pipelines. Stocking three separate base fuels nationwide would multiply costs and complicate quality control at every single outlet.

Premium petrol is not a fair comparison. It is a small, additive enhanced product sold at a premium in limited quantities, not a separate nationwide base fuel.

There is also the question of what already exists. Public sector banks have financed close to Rs 1 lakh crore a year in ethanol plants, storage and logistics. Reverting to E10 now would strand this investment and hurt the farmers and entrepreneurs who built it in good faith.

Such a lame excuse, this. Retail outlets already distribute at least two types of fuels—diesel and two variants of petrol. Offering retailers the option to stock a low-ethanol variant is not as difficult a task as this FAQ makes it out to be. Instead, not only has the government introduced a single standard on its oil marketing companies, but it has also imposed it on all private players.

One way to understand the nature of this intervention is to locate it on this framework of “Eight Things All Governments Do” that we use at Takshashila in our public policy courses.

This E20 imposition without transition is a mix of “drastically changing incentives”, “change ownership”, and “do it yourself” without any notice.

Next, the defence that reverting to E10 or lower would hurt the investments already made is an amateurish defence that falls prey to the sunk cost fallacy. I mean, what about the investments that automakers and auto buyers have to make to shift to this new fuel? Don’t they deserve the same courtesy that the government seems to be offering to the farmers and ethanol makers?

Actually, the government did the politics right, even if I disagree with its policy. It correctly sensed that petrol is largely consumed by an unorganised interest group. Learning from the non-response to high taxes on petrol, the government knows that the opposition to anything related to petrol is diffuse and electorally manageable. Thus, it concluded that giving this segment of consumers short shrift is not as combustible as blending diesel with isobutanol or ethanol. The latter might see farmers blocking highways with their tractors, while the former only generates some mildly harsh commentary on social media or on newsletters like this one.

Another disingenuous response was to the question relating to the price of the blended fuel not being any cheaper than petrol:

The Government ensures that farmers receive a fair price for the ethanol supplied under the programme. For example, maize based ethanol is procured at around Rs 71.86 per litre, even before GST, transport, and storage costs are added.

When global crude oil prices are around USD 70 per barrel, producing E20 can cost as much as, or even more than, pure petrol. Ethanol becomes the cheaper option only when crude prices rise sharply, typically to USD 120 to 130 per barrel or higher.

Now, some of you might remember that we had discussed India’s byzantine sugar policy in edition #241:

To balance the interests of cane farmers and sugar mill owners, who are both politically powerful interest groups, the government does another complex juggling act. A union government committee announces a Fair and Remunerative Price (FRP) every season to take the price volatility out of the equation. The FRP is what sugar mills are supposed to pay to the farmers per unit of cane procured. Thus, an increase in FRP hurts their profit margins. Hence, the government also fixes a minimum selling price (MSP) for sale by sugar mills.

But the plot thickens further. Some state governments don’t like the FRP. They announce their State Advised Price (SAP), which is pegged far higher than the FRP. These are states where sugar is widely practised, and hence, its farmers are an even more important political interest group. SAPs are often announced ahead of elections.

So what the government is telling us is that it intends to make no changes to this spectacularly wasteful pricing scheme because it can just afford to pass all costs on to retail consumers instead. How convenient!

And remember, we have not even discussed the second-order implications of incentivising sugar cultivation in a groundwater-stressed country, something we discussed in detail in edition #313.

The government’s tone-deafness on this policy deserves much more criticism, but, more importantly, highlights how easily it can shift the entire burden of energy security onto an unorganised, diffuse, and docile citizenry.

For more, do check out the latest Puliyabaazi, where we discussed some other facets of this issue.

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India Policy Watch: The Wrong Lesson from a Drowning City

Insights on current policy issues in India

—Pranay Kotasthane

Mumbai had its wettest start to July in decades. Over a single week, several parts of the city recorded 200–300 mm of rain in 24 hours, at least 13 people died in the city and its surroundings, and a landslide blocked the newly upgraded Mumbai-Pune Expressway for a few hours. The city received almost all its typical July rainfall within a week.

The criticism that follows such weeks is now a ritual. And within that ritual, one line of attack has become popular that “See, the situation in Mumbai shows that India is building vanity infrastructure like coastal roads, bullet trains, glossy tunnels, but is failing at the basics.” The implication is that we are building too much of the wrong, showy stuff and should redirect our ambitions downward.

This criticism, however satisfying, teaches us exactly the wrong lesson. Worse, it lets governments off the hook by misdiagnosing the failure. Let me explain.

Nothing India is currently building qualifies as “more than needed.” Our per capita infrastructure stock—roads, ports, flyovers, bridges, urban transit, sewerage—remains far below not just rich-country levels but below where China was at a comparable income level. The backlog is so large that almost every project we inaugurate today should have been completed a decade ago. The Mumbai Metro, endlessly derided during construction, now moves lakhs of commuters daily. Similarly, the Atal Setu, the coastal road, and the expressways are all required and should have been built years ago.

Infrastructure has a peculiar property: it is best built ahead of demand, because it is exponentially difficult to change anything in an urban setup. By this standard, India’s problem has never been premature building. It has been perpetual lateness, where building after congestion imposes years of deadweight losses on citizens.

There is also something corrosive buried inside the “stop building fancy things” demand, a soft poverty of low expectations. It asks citizens of a poor country to internalise scarcity as virtue and to believe that a coastal road or a high-speed rail line is somehow above our station. When we frame infrastructure as an indulgence rather than an entitlement, we lower the bar for what the Indian state owes its citizens. Governments are only too happy to oblige—cancelling an ambitious project is far easier than delivering it and the basics. The demand should never be “build less of the good stuff.” At our stage of development, it should be “why are you not building far more, of everything, everywhere?”

The more effective line of questioning is to ask what percentage of government spending goes into providing private or unproductive goods. Across all our governments, the past few years have seen an explosion of untargeted revenue expenditure—cash transfer schemes launched in election years, power subsidies, loan waivers—that is crowding out capital expenditure. Several states now spend more servicing populist commitments than building anything. Maharashtra itself has strained its finances with large welfare-scheme commitments even as its cities’ infrastructure deficits compound. Every rupee locked into a recurring, politically irreversible subsidy is a rupee unavailable for the drains, transmission lines, and transit systems whose absence we then mourn every July.

This is where the citizens’ criticism should be aimed. Not “why is the government building a coastal road”, but “why is the government spending on unproductive transfers while the invisible infrastructure that keeps citizens alive goes unbuilt and unmaintained?” The first criticism gives governments an easy out, while the second demands the hard thing of restructuring expenditure.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Post] How an Oil Refinery Works by is a must-read. Made me wonder, how were Reliance and India able to build the world's largest *and* most complex oil refinery? Why didn't this achievement spill over into other areas of manufacturing?

2. [Magazine] Puliyabaazi Issue #3 is on geopolitics and Indian foreign policy. Check it out.

   

Insights on current policy issues in India

—RSJ

A few weeks ago, users outside the United States who tried to access Anthropic’s Claude Fable 5 and Mythos 5 models were greeted with an unusual message: the models were unavailable. The restrictions did not last long and were subsequently lifted. Most users will probably not remember the episode. Governments and companies, however, should.

The immediate issue was a national security concern in Washington. The larger issue was that a frontier AI model, available globally one day, became unavailable globally the next because the US government had decided that access should be restricted. Whether that decision was justified or not is almost beside the point. What matters is that the episode demonstrated that such a thing is possible.

The world has spent the last few years discussing artificial intelligence largely in terms of capability and competition. Which company has the best model? Which country is ahead? Who will capture the economic value? The Anthropic episode suggests that there is another question that deserves attention: what happens if critical parts of an economy begin to depend on systems whose availability ultimately rests on policy decisions taken in another country?

For much of the past three decades, most countries would not have worried too much about this question. They accepted dependence on American technology because they believed they understood the bargain they were entering into. America built and maintained much of the infrastructure of the modern world. The internet was American, so was the GPS. The dominant software platforms were American. Cloud computing was overwhelmingly American. The world’s financial plumbing sat on American foundations. Countries understood that these arrangements created asymmetries, but they accepted those asymmetries because the provider was viewed as reliable and the rules of the game appeared stable.

This arrangement was never entirely altruistic. American companies and investors profited enormously from their position at the centre of the global economy. Yet for most countries, the bargain worked. That confidence has weakened.

The change did not begin with Donald Trump, although his presidency accelerated it. Export controls have expanded, sanctions have become more frequent, tariffs are now instruments of coercion and alliances are being used to settle scores. The message received by many countries was that American policy had become less predictable and that access to American technology could no longer be regarded as unconditional.

This matters because technology, especially AI, has ceased to be merely technology. It has become infrastructure and a matter of sovereignty. Infrastructure creates dependencies, and dependencies create leverage.

Artificial intelligence sharpens this problem because it is not another software application. It is becoming a layer that will eventually sit across almost every activity in the economy. Governments will use it to process information and administer services. Financial institutions will use it to allocate capital and manage risk. Manufacturers will use it to design products and optimise production. Scientific research will increasingly depend upon it. A large amount of routine cognitive work will eventually be mediated through AI systems. Once a technology acquires this character, access to it ceases to be merely a commercial issue.

We have already seen how, in the last few years, countries dependent on foreign energy and semiconductors can be pressured. Countries relying on foreign intelligence infrastructure can be held to ransom in ways that are difficult to even specify today. The issue is not whether the United States intends to use such leverage. Intentions change with administrations and with circumstances. The issue is that the capability exists.

This explains why the debate around AI sovereignty has become more serious in recent months. Sovereignty in this context does not mean self-sufficiency or digital nationalism. It means preserving a degree of choice and control over systems that are becoming systemically important. A country that cannot function if access to a foreign AI model is interrupted is not sovereign in any meaningful sense in that domain. It has outsourced part of its cognitive infrastructure to another country and to corporations that ultimately remain subject to that country’s laws and political priorities.

France recently decided to replace Palantir within parts of its intelligence apparatus, with French officials arguing that the country could not depend on companies capable of “turning off the tap”. Germany has moved in a similar direction and Spain has discouraged state-controlled firms from entering into new contracts with Palantir. Even in Britain, where reliance on American technology has traditionally attracted little political resistance, there is increasing scrutiny of Palantir’s role in public institutions.

The irony is that Palantir itself has now become one of the loudest voices arguing for AI sovereignty. Its recent narrative emphasises the importance of retaining data, controlling model weights and preserving institutional ownership of knowledge. The argument is not entirely disinterested. The company also sells products designed to operate in sovereign environments and has recently aligned itself with open-weight models and sovereign deployments. Companies often detect shifts in incentives before policymakers do because their commercial interests force them to.

The implications extend well beyond Palantir and even beyond artificial intelligence.

A significant portion of the valuation of several American technology companies rests on the assumption that the rest of the world will continue to build on American platforms and accept the resulting dependencies. SpaceX is perhaps the most obvious example. The investment case around Starlink assumes that governments around the world will permit a privately controlled American company to become an essential part of their communications infrastructure.

That assumption no longer looks as safe as it once did.

If governments have become uncomfortable relying on a foreign company merely to analyse their data, they may become equally uncomfortable relying on a foreign company for communications, navigation or artificial intelligence. They may still conclude that they have little choice. But they will also seek alternatives and diversify dependencies wherever possible.

The economics of artificial intelligence are changing at the same time.

For the last few years, investors have operated with two assumptions. The first is that proprietary frontier models will capture extraordinary economic rents because they possess unique capabilities that everyone will have to use. The second is that the rest of the world will continue to build its digital future on American technological foundations. Both assumptions are under scrutiny or will be soon.

Increasingly capable open-weight models are now available at a fraction of the cost of the leading proprietary systems (almost 1/20th of token cost) and, for many applications, they are becoming good enough. The performance gap remains, but it is no longer large enough to make questions of cost, control and sovereignty irrelevant. A government or company looking at this landscape is likely to ask a straightforward question. If an open model offers most of the capability at a much lower cost and allows greater control over data, deployment and weights, why should critical systems be built on proprietary platforms that may one day become subject to export restrictions or political conditions?

The answer cannot simply be that the proprietary model performs better.

The United States also faces a strategic dilemma. It sees artificial intelligence as a foundational technology and wants to preserve its lead. But every restriction on access creates incentives for others to reduce their dependence and accelerate the development of alternatives. This has happened before. Restrictions on advanced semiconductors encouraged China to invest heavily in its own ecosystem and accelerated the emergence of alternatives to technologies that once appeared unassailable. Similar dynamics may now begin to play out in artificial intelligence.

The challenge for India is more acute.

India is behind the frontier in foundational AI models. It cannot simply wish away that reality. If it wants to deploy artificial intelligence rapidly across government and industry, it will have to rely on foreign systems for the foreseeable future. The best proprietary models are American. The best open-weight models increasingly come from China. Neither option is comfortable.

Dependence on American proprietary models creates strategic exposure to a country that has shown a willingness to use technological dominance as an instrument of policy and whose politics have become less predictable than they once were. Dependence on Chinese models raises a different set of questions around trust, transparency and security. Whether open-weight Chinese models are genuinely open in every relevant sense is something many governments will continue to examine carefully.

India’s problem is therefore that none of the available choices is optimal. The policy challenge is not to eliminate dependence altogether, which may be impossible, but to ensure that no single dependency becomes so deep that it begins to constrain future choices. The objective cannot be complete technological self-sufficiency. Very few countries have the capital, talent and scale to replicate the entire AI stack. But neither can the objective be to maximise short-term access to frontier capabilities while ignoring the long-term consequences of dependence.

Strategic autonomy in the age of artificial intelligence means preserving optionality. It means developing domestic capabilities where possible, building indigenous compute, encouraging open ecosystems where practical, diversifying suppliers and ensuring that critical public infrastructure does not become irrevocably tied to a single foreign provider. It also means not to fall into a trap that India is getting into increasingly, that of “one nation - one X”. This mindset has become infectious in policy circles. But a single platform in this context now looks like a worse idea than before. For example, NPCI, the nodal agency that runs the UPI rail as a monopoly, can be susceptible to cyber attacks, dependence on foreign cloud providers and AI platforms that can be grounded in future by actors sitting outside India on purely geopolitical grounds. The more we opt for such centralisation, the greater our risks.

Until recently, AI sovereignty was largely a talking point for European policymakers and technology strategists. The events of the last few months have made it a practical question for governments and companies everywhere. Countries have worried about dependence on foreign oil, foreign capital and foreign supply chains. They may soon have to think about dependence on foreign intelligence infrastructure in much the same way.

The Anthropic episode will probably be forgotten by most users. Policymakers should not forget it quite so quickly. It highlighted something that had remained largely theoretical until now. Access to advanced AI is not merely a commercial relationship between a provider and a customer. It also creates a strategic relationship between countries. As artificial intelligence becomes embedded in governments, businesses and public infrastructure, that relationship will receive far more scrutiny than it has so far. India will have to act soon on building domestic capabilities and diversifying its choices to avoid being caught in a cleft.

Addendum

— Pranay Kotasthane

I want to add another nuance to RSJ’s excellent analysis. He is right that the framing of AI as infrastructure is no longer theoretical. But I think the current debate makes a mistake by treating all foreign AI models as creating the same kind of dependency. The sovereignty risk posed by proprietary API-based models and open-weight models is fundamentally different. Let me explain.

The Two Risks are not the Same

When a government ministry or a bank builds a workflow on Claude or GPT, every query travels to a server in the US, processed by a company subject to US jurisdiction. The “tap” that RSJ describes—the one that can be turned off—matters because the dependency is continuous. If an export control or sanctions decision were to remove access tomorrow, the workflow would break.

Now consider the alternative. An Indian financial services firm downloads the weights of an open model—say DeepSeek or GLM—and runs inference on GPUs rented from data centre firms in India. What exactly is the sovereignty risk here? The model weights are a static file of parameters sitting on Indian hardware. The data never leaves Indian territory. The Chinese lab that created the model has no ongoing connection to the deployment, no API to revoke, and no kill switch to flip. In a narrow sense, this setup has better data sovereignty properties than using a foreign proprietary API.

This is the counterintuitive finding. From a data-flow perspective, running a Chinese open model on Indian infrastructure can be safer than sending queries to an American proprietary endpoint.

The Distillation Evidence

Part of the reason these Chinese models behave the way they do is how they were built. In June 2026, Anthropic accused Alibaba’s Qwen lab of operating roughly 25,000 fraudulent accounts and generating nearly 29 million conversations with Claude to extract its capabilities—something Anthropic called the largest known distillation attack to date. Earlier in the year, Anthropic had identified similar campaigns by DeepSeek, Moonshot AI, and MiniMax. OpenAI made parallel accusations about DeepSeek.

This matters for the sovereignty debate because the Chinese open-weight models are not entirely indigenous Chinese creations built from the ground up on Chinese data and Chinese design philosophies. They are, to a significant degree, compressed versions of American frontier models. The knowledge within them is substantially of Western origin.

A recent experiment by my colleague Bharath Reddy offers supporting evidence. He tested GLM 5.2 on politically sensitive questions—Tiananmen, Taiwan, Chinese leadership—through two pathways: the native Chinese chat interface and via OpenRouter, a third-party inference provider. The native interface censored and deflected, whereas the same model on OpenRouter produced detailed, balanced, well-cited responses indistinguishable from those of a Western model.

If these models had been fully retrained on Chinese-curated data, one would expect at least some divergence in how sensitive political topics are handled. That the uncensored responses closely mirror Western models is consistent with the distillation evidence. The censorship isn’t in the weights; it’s a compliance layer for domestic Chinese regulation bolted on at the deployment stage.

The Perception Issue

Large Indian firms and regulators are wary of using these open-weight models because they suspect Chinese “backdoors”, even though there is no special backdoor in an open-weight model, which is just a set of billions of weights and biases (parameters). It cannot exfiltrate data. It has no network connection of its own. If inference runs on Indian GPUs in an Indian data centre, the data pipeline is entirely domestic. The Chinese lab is no more “in the loop” than the authors of a textbook are when someone reads their book in another country.

This highlights the perception and compliance risk China’s digital exports face, even when the technical risk is minimal. But it is worth being precise about what we’re worried about. The fear of “Chinese AI” in Indian boardrooms is often a category error: the risk of Chinese hardware (with potential physical backdoors) or Chinese equity (with potential political influence) is being mapped onto Chinese model weights, where the threat model is structurally different.

I don’t want to be glib about this. The security research community has identified concerns around sleeper agents and trojans in neural networks—models that behave normally on standard benchmarks but produce subtly compromised outputs under specific trigger conditions. But this risk is not specific to open-weight models.

The Window for India may not Stay Open

China’s current willingness to let open-weight models flow freely is itself a signal. The Chinese government has a demonstrated pattern of restricting exports when materials become strategically important: gallium, germanium, antimony, and rare earth processing technologies were all freely exported until they weren’t. That open-weight AI models are still being exported without restriction tells us something about how strategically significant Beijing considers the current generation of models.

But models are becoming the primary intermediary through which people interact with information. Today, people use DeepSeek to write code or summarise documents. Tomorrow, they may use it as a primary source of cognition. When that happens, China faces an uncomfortable problem. Its own open models, built with Chinese talent and compute, will become the vehicle through which the world encounters balanced, often unflattering (from Beijing’s perspective) accounts of Tiananmen, Taiwan, Xinjiang, and the Great Leap Forward. Bharath’s experiment shows this is already what happens when deployment-layer censorship is absent.

The Chinese government invests enormous resources in domestic information control. But open-weight exports effectively punch a hole in that project by producing versions of Chinese AI that, once deployed abroad, deliver precisely the narratives that Beijing works to suppress. As long as models are mere tools, this is tolerable. The moment they become information intermediaries at scale, it becomes a strategic problem. A government that censors the domestic internet is unlikely to remain comfortable exporting AI models that undo that censorship for everyone else.

This leads me to a prediction. The most significant marker of exponential AI may not be US export controls on chips but the Chinese government’s stance on open-weight model exports. If these models become truly transformative—capable of meaningfully shaping how hundreds of millions of people understand the world—expect China to restrict their export. And unlike physical goods, model weights cannot be “unexported” once downloaded. Which means any restriction would apply only to future, more capable generations.

The implication for India is that the window of free access to capable open-weight models may not remain open indefinitely. This strengthens rather than weakens the case for building domestic inference infrastructure now. Indian firms should be investing in the capacity to download, fine-tune, and deploy open models while they are freely available, rather than assuming that availability will persist.

Policy Implications

Since the risk profile of open models differs qualitatively from that of proprietary APIs, the policy response should also differ.

First, Indian firms should actively encourage the growth of domestic AI inference infrastructure. The ability to run any model on Indian hardware, without data leaving Indian territory, is a capability worth having. This is where RSJ’s concern about centralisation and “one nation, one X” is most relevant. India needs multiple inference providers, not a single national AI cloud.

Second, regulators should focus on the deployment layer—where data flows, who controls the compute, and what audit trails exist—rather than on the national origin of model weights. A blanket suspicion of cheap Chinese-origin open models is commercially costly. It denies Indian firms access to capable, low-cost models while doing nothing to address the sovereignty risk, which lies in proprietary API dependencies that create continuous exposure to foreign jurisdiction.

Third, there is a timing dimension to this. If China eventually restricts open model exports, India will want to have already built the institutional and infrastructural capacity to absorb whatever is available before the window closes. Fine-tuning capability, evaluation and red-teaming expertise, and domestic compute are all things that take months to build. Starting now is imperative.

Fourth, there is a residual vulnerability that open weights cannot solve. Every GPU that powers inference in India today—whether it is an A100, an H200, or an RTX 6000 — is designed by American firms that might be subject to American export controls. Open weights solve the model-access problem and the data-flow problem. They do not solve the compute supply chain problem. And the only short- to medium-term option available to India here is to be on reasonably good terms with the US by participating in initiatives like Pax Silica. I think that’s not difficult to manage. It doesn’t mean agreeing with the US on all issues, but to keep engaging them as India has done over the last year, despite major provocations.

The sovereignty debate should not treat AI as a monolith. The risks are layered, and the responses must be too. We need to recognise that not all foreign models create the same kind of dependency, and that the cheapest, most accessible models might, in the right deployment configuration, also be the most sovereign.

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Reading and listening recommendations on public policy matters

1. [Paper] The EU CHIPDIPLO initiative has a good industry survey of geopolitical risks in the semiconductor domain over the next five years.

2. [Essay] A terrific Aeon piece on the illegible benefits of AI.

3. [Tracker] With the CG Semi's first assembly line beginning commercial production, 3 OSAT plants in India have now been marked operational on our semiconductor manufacturing tracker. Bonus: We added chip design centres too.

   

Insights on current policy issues in India

—Pranay Kotasthane

Earlier this week, Bloomberg reported that India is about to approve a $370 million investment from Horse Powertrain, a joint venture backed by China’s Geely. Most news outlets view this development as a bellwether for a new modus vivendi between Delhi and Beijing. They are right but for the wrong reasons.

While most observers are closely tracking the policy positions of India, they are missing out on recent developments in China. A new Chinese law—Decree 837, the State Council Regulations on Overseas Investment—takes effect on July 1, 2026, and it gives China sweeping new powers to block, restrict, or review outbound investments. Whether Geely’s India deal survives is less an Indian regulatory question and more a stress test of China’s outward investment controls.

More About the Deal

Horse Powertrain Ltd. is a London-headquartered company created in 2024 as an equal joint venture between Zhejiang Geely Holding Group and Renault SA. Saudi Aramco subsequently took a 10 per cent stake, leaving Geely and Renault each at 45 per cent.

The plan is a phased $370 million investment in Renault’s existing manufacturing plant in Chennai to build strong-hybrid powertrains, which pair a conventional internal combustion engine with high-capacity electric motors and a battery. These would go into Nissan and Renault vehicles sold in India, with preliminary talks underway to supply other automakers too.

From India’s perspective, this would be one of the first major Chinese-linked manufacturing investments cleared since New Delhi changed its border-country investment restrictions earlier this year. India’s willingness to approve Horse Powertrain is being read as a signal that the bilateral thaw with China is real.

But on June 2, 2026, China published Decree No. 837, adopted by the State Council in April and signed by Premier Li Qiang. It comes into force on July 1, 2026.

The law creates a comprehensive framework for regulating how Chinese companies invest abroad. Its scope is broad. Article 2 defines “outward investment” as any activity in which investors within China “directly or indirectly acquire ownership, control, management rights, and other related rights of enterprises or assets in other countries.” The word “indirectly” means Beijing can look through intermediary structures, such as this London-headquartered joint venture in question.

Several provisions bear directly on the Horse Powertrain deal. Article 11 empowers the State Council to classify outward investments as “encouraged, restricted and prohibited” based on national economic needs and the “investment environment and risk levels of relevant countries.”

The implementing rules, which will specify what falls where, haven’t been published yet. Article 13 prohibits investors from exporting or transferring restricted technologies through outward investment, including through “sending technical personnel across borders” or “arranging cross-border training.” Building a hybrid powertrain factory in Chennai inherently involves transferring manufacturing know-how. Article 15 establishes a national security review for overseas investments that “affect or may affect national security.” And Article 5 contains a broad catch-all that investors “shall not endanger China’s national security, or harm national interests and the public interest.”

The penalties under Article 27 are quite serious, and include forced divestiture, confiscation of profits, fines, and bans of one to three years on future outward investment.

What’s Actually Restricted

China maintains a separate, older regime for controlling technology exports: the Catalogue of Technologies Prohibited or Restricted from Export, jointly administered by the Ministry of Commerce and the Ministry of Science and Technology. This catalogue was last revised in December 2023 and updated again in July 2025. It currently lists 23 completely prohibited and 109 restricted technology items.

Here’s what matters for the Geely deal: hybrid powertrain technology does not appear on these lists. Conventional automotive powertrain know-how is, as of today, freely exportable from China.

But there are many grey areas too. The December 2023 revision added LiDAR systems as a restricted technology, but only above specific technical thresholds, targeting autonomous-driving sensors rather than powertrains. The July 2025 update added export restrictions on EV battery technologies, including lithium iron phosphate (LFP) and lithium manganese iron phosphate (LMFP) cathode manufacturing processes, as well as five lithium extraction techniques. Rare earth extraction, processing, and utilisation technology remains outright prohibited from export. For example, “Preparation technology of samarium cobalt, neodymium, and cerium magnets” is outrightly prohibited.

This creates a patchwork of exposure for Horse Powertrain. The core hybrid engine and drivetrain are not restricted. But the battery pack in a strong-hybrid system likely uses LFP or a similar chemistry, and if Horse is transferring any cathode manufacturing IP to India, it now requires an MOFCOM export license. If the electric motors use rare-earth permanent magnets, and the manufacturing process involves proprietary rare-earth processing knowledge, that’s prohibited territory.

In other words, the technology export lists don’t block this deal, but they create tripwires, especially in the battery and motor components that distinguish a “strong hybrid” from a conventional engine.

Why This Matters Beyond One Deal

Decree 837 does something the technology export lists cannot; it controls the investment itself, not just the technology inside it. Article 11’s classification system— encouraged, restricted, prohibited—operates on the destination and the strategic logic of the investment, not on whether any particular component crosses a technical threshold.

This means Beijing could, in principle, restrict Chinese outbound manufacturing investment in countries that restrict Chinese inbound investment, a reciprocity logic that would squarely catch India. It could designate “automotive manufacturing capacity building in geopolitically sensitive markets” as restricted. It could do this without amending the technology export catalogues at all.

Horse Powertrain’s corporate structure is clearly designed to reduce friction on the Indian side. But Article 2’s inclusion of “indirect” investments and Article 33’s coverage of the reinvestment of assets acquired through outward investment mean that Beijing can investigate on the basis of Geely’s 45 per cent ownership stake.

The practical question is whether Beijing wants to use these tools. The deal aligns with China’s stated interest in promoting international industrial cooperation, another goal prominently mentioned in this decree. It involves a joint venture with a major European automaker, not a unilateral Chinese play. And blocking it would undercut the broader diplomatic thaw that both sides have been carefully managing.

Nevertheless, Decree 837 establishes the principle that outward investment from China is now a regulated, reviewable, blockable activity, a counter to what the US, EU, and India have built on the inbound side. If Beijing lets this deal proceed quietly, Decree 837 remains a latent tool that keeps future investors guessing about the red lines. If it intervenes, even with a quiet delay or additional conditions, it signals that outbound investments from China in important technology segments will dry up. Keep watching because the days when China was perceived as a stable business environment are long over.

P.S.: My colleague Amit Kumar has created an excellent China Coercion Tracker. If you are a firm that does business with Chinese entities, it’s worth checking your exposure to three new Chinese decrees that have come into effect last quarter.

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India Policy Watch #2: Delay And Deny?

Insights on current policy issues in India

—RSJ

Every few years, policymakers and the central bank in India rediscover an old truth: currency exchange rates are prices, and nobody ever wins against them.

But that doesn’t stop them from trying.

The exchange rate problem that periodically comes up looks different in each iteration. In 2013, it was the taper tantrum. In 2018, it was crude at an all-time high. In 2022, it was the surge in the dollar and the aftershocks of the pandemic. Today, it is a combination of so many things: expensive oil because of a war and blockade, a resurgent dollar because investment in AI is driving the U.S. economy, higher-for-longer American interest rates despite Trump’s dislike for it and the lowest interest-rate differential between India and the United States for a long, long time. But underlying these shifting circumstances lies the same old question. How much should a central bank spend to resist a weakening currency?

The RBI has not held back on smoothing the rupee’s decline over the last couple of years. The exact number depends on how one adjusts for valuation effects, but it is safe to say that more than a hundred billion dollars have been deployed. The rupee has weakened anyway. The intervention has not prevented depreciation. It has only managed to slow the rate of decline.

The lesson learnt, once again,is important because it goes to the core of what foreign-exchange reserves are for. No central bank, not even one with vast reserves, can consistently resist economic fundamentals. If domestic inflation is higher, if oil prices stay high because there’s no real Iran deal for a while, if the interest-rate differential narrows further and if capital becomes more expensive, the Rupee will continue to depreciate. The purpose of the intervention seems, therefore, not to avoid the fall but to prevent it from becoming disorderly. Does it really help, except, maybe politically, to hold on to some psychological level of the currency?

India’s external position today is not as comfortable as the headline reserve number suggests. The stock of reserves remains large in absolute terms, but relative measures are useful here. Reserves relative to imports, to broad money and to potential portfolio outflows no longer look as strong as they did a decade ago because the economy is not the same size as then. At the same time, the spread between Indian government bonds and US Treasuries has tightened to levels that are unprecedented for India. Investors are being asked to hold Rupee assets for a modest premium over assets that carry no currency risk and virtually no credit risk. Why will there be a demand for Rupee? This artificially low rate also diminishes India’s room for policy manoeuvre.

The math on this is uncomfortable. If inflation is projected to be around 5+ per cent (or more) and the repo rate stands at 5.25 per cent, the ex ante real policy rate is barely positive. For much of the inflation-targeting era, India has been accustomed to a real policy rate of around one to one and a half percentage points. By those standards, monetary policy is no longer obviously restrictive. It is the most accommodating among emerging market economies. The rate hikes that other EMs have undertaken in the past couple of quarters suggest there is a realisation about this elsewhere.

This matters because central banks have choices in how they defend currencies. One approach is to spend reserves, offer swap facilities, encourage foreign-currency deposits and support overseas borrowing. This entire playbook is at work now following the last MPC announcements. Another is to raise interest rates, make domestic assets more attractive and let Rupee and trade deficit find their level. India has chosen the first route so far for reasons that suggest it thinks the current scenario is temporary. There are obvious explanations being offered for this choice. Like, the economy might be slowing because of supply shocks and a clear sign of a bad monsoon. Investment still remains uneven and capex is muted. Policymakers fear that higher rates will choke off credit and damage growth. A sudden depreciation of the rupee would raise imported inflation, worsen the oil bill and create political discomfort. This all makes sense but then there will never be a good time to raise rates in a world as uncertain and an economy as linked to external shocks as India. .

Every policy choice creates second-order consequences. The measures now being employed help buy time. They improve financing conditions on the margin. They do not change the underlying drivers of currency weakness. The experience of the FCNR(B) scheme in 2013 illustrates the point. It was highly successful in stabilising markets during a period of panic. But it did not solve India’s external vulnerabilities in the long run. The assumption embedded in today’s policies is that the present pressures are similarly temporary while they are not.

India cannot spend reserves indefinitely to resist a structural repricing of its currency. Nor can it continually socialise currency risk through public institutions while keeping domestic interest rates artificially low.

At some point, the various policies begin to work against one another. The central bank intervenes in the foreign-exchange market because the currency is weak. It encourages dollar inflows because the reserve position is becoming less comfortable. It absorbs swap risk to attract foreign currency. Yet it maintains low real interest rates that themselves contribute to pressure on the exchange rate. The policies become circular. One intervention creates the need for another. This does not mean the RBI should abandon the rupee to market forces. But there is a difference between using reserves as insurance and using them as a substitute for price adjustment.

If the economy is entering a world of structurally higher oil prices, a stronger dollar and persistently elevated global interest rates, then some combination of rupee depreciation and higher domestic rates may simply be unavoidable. The cost of avoiding that adjustment can become larger than the adjustment itself.

The attempt to preserve growth through low interest rates can end up producing precisely the conditions that require more painful tightening later. Currencies have a way of exposing inconsistencies. They force policymakers to reveal what they truly value and what costs they are willing to bear.

The cheapest way to defend a currency is sometimes to let it fall and raise interest rates a little. Everything else done for too long can become a very expensive attempt to postpone the inevitable.

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Reading and listening recommendations on public policy matters

1. [Puliyabaazi] In our new episode, political scientists Niranjan Sahoo and Ambar Kumar Ghosh speak about the entry barriers created by the rising electoral costs in India. They take us through the entire supply chain of contesting elections in India.

2. [Article] Pooja Mehra and Arpita Mukherjee point out in their Mint article that shifting to paperless trade can reduce trade costs by nearly 25 per cent!

Insights on current policy issues in India

—RSJ

After the instant implosion of TMC following their defeat in the state elections, last week was the turn of six MPs of Shiv Sena (UBT) to discover their love for the BJP. A month back, it was the Rajya Sabha members of AAP. Prior to that, a few BJD members found their moment of truth. And perhaps it has been only a few months since it was the YSR Congress facing the spectre of defection to the BJP.

This has been the story for the past 5 years or so. A faction in a regional party decides that it, rather than the original leadership, represents the “real” party. A government survives because enough elected representatives abandon the party on whose ticket they sought votes only months earlier. Opposition leaders join the BJP and discover in a happy coincidence that the corruption allegations, investigations and raids that had surrounded them for years suddenly cease.

These instances are so familiar now that they no longer raise eyebrows. All that’s left is for Uddhav Thackeray or Mamata Banerjee to join the BJP and blame aliens (or Steven Spielberg) for everything they did in the past. That might make defections newsworthy again.

Taken individually, we have seen this movie before. Indian politics has lived with defections since the early decades of the republic. The phrase “Aaya Ram, Gaya Ram” entered the political vocabulary more than half a century ago. One of the great socio-cultural contributions of Haryana, apart from khap panchayat. Congress governments routinely engineered splits in rival parties in the 70s and 80s. State governments were dismissed under Article 356 so frequently that the Supreme Court eventually intervened to impose limits. The acquisition of rivals is not a BJP invention. Nor is political opportunism a twenty-first-century innovation.

Yet it will be naive to dismiss this mass exodus into the BJP fold as the usual dance of democracy in India. There is a reason why the current trend feels different from the familiar churn of Indian politics.

A useful way of looking at this phenomenon is not to begin with ideology, morality or loyalty. It is to begin with incentives.

Political systems, like economic systems, reward some forms of behaviour and punish others. Politicians respond accordingly. They tend to be highly rational actors with their antenna finely tuned to their incentives, current and future. They understand power, having built their careers in preserving it and then advancing it. Their success depends on this self-preservation instinct. Networks of supporters, local leaders, contractors, donors and workers depend on access to power through it. Any political system eventually produces exactly the behaviour that its incentives encourage.

For most of independent India’s history, the incentives facing a defeated politician were relatively straightforward. Losing power was unpleasant, but it was temporary. The expectation that governments would eventually change remained intact.

Congress looked invincible until it wasn’t. The Janata experiment soared and then collapsed. Congress returned and then lost again. Regional parties broke away from it and fought against it often in collaboration with the BJP. Coalitions became normal because of this splintering. BJP itself spent decades as a marginal force. In the sixty-seven years between Independence and Narendra Modi’s victory in 2014, no serious politician could be confident about who would dominate Indian politics ten years later. That uncertainty acted as a restraint on political behaviour. It acted as a moral thermostat.

A legislator contemplating defection had to weigh immediate rewards against future risks. Joining a rival party could bring a ministerial position or proximity to power. It could also produce electoral punishment if voters viewed the move as a betrayal. Remaining loyal to a weakened party could be painful in the short term but rewarding if the political cycle turned. The future was uncertain enough that both choices carried risks.

What has changed is not merely the balance of power overwhelmingly in favour of the BJP. It is the perception of permanence. A large number of opposition politicians now appear to believe that once their party loses power, especially against the BJP, the path back has become extraordinarily difficult. The BJP enters every election with advantages that no rival currently possesses. Its financial resources dwarf those of competitors. Its organisational machinery reaches deeper into society than any other national party. It benefits from a communications ecosystem that works throughout the year rather than only during election campaigns. It has become exceptionally skilled at converting elections into presidential-style contests centred on Narendra Modi. Even where state leaders matter, the campaign eventually gravitates towards the prime minister.

Alongside these advantages sits a second set of perceptions that are harder to quantify but impossible to ignore. Opposition parties can see that institutions expected to function as neutral referees no longer inspire confidence. The Election Commission has eroded its credibility over the last few years. Investigative agencies led by the ED and CBI are seen as extensions of political strategy. The judiciary has a record of going along with the arguments of the party in power more often than not. State machinery is more responsive to the needs of incumbency than a democracy should permit.

This belief of BJP invincibility is no longer based on ordinary field work of karyakrtas or the policies of the government. It now rests on the BJP’s will to power and the drive it has to subvert any existing norms to achieve it. This may not be proven. But politics runs as much on perceptions as realities, and this perception itself is changing behaviour. Politicians do not make decisions based on constitutional theory. They weigh their options based on what they believe is likely to happen next.

And what many of them believe is that losing power now carries costs far beyond losing office. The ordinary voter sees a politician losing a ministerial bungalow or a government vehicle. Politicians contend with the real consequences. They see investigative agencies examining decisions taken years ago, their associates receiving summons, and their businesses facing scrutiny. They see financial supporters becoming nervous as they come under the scanner. Local administrators and police immediately become unavailable or hostile. In India, governance is so opaque and discretionary that very few people who have exercised power for long periods emerge entirely untouched. Some may be guilty of serious corruption. Others may have merely signed files that can later become the subject of inquiry. Many inhabit the grey zone that has always existed between political patronage and outright criminality. The mere prospect of a prolonged investigation for the past is often punishment enough.

Back in time, there was a kind of honour system among the thieves. Since political power was seen to be transient, those who came into power would only go after other politicians who had committed egregious crimes. The run-of-the-mill political graft was ignored as a quid pro quo for the future when you might lose power, and the shoe would be on the other foot. This meant most politicians could breathe easy while sitting in opposition ranks. This honour system is gone now because the BJP today doesn’t fear the prospect of being out of power. There is no fear that those it is persecuting now might in turn become persecutors themselves. This is a double whammy for democracy. Those out of power know they can’t rest easy and soon decide to crossover to the BJP and get a respite. And those in the BJP have the incentive to wield power and its spoils arbitrarily.

Public choice economists have spent decades studying how institutions shape behaviour. Their central insight is that individuals generally adapt to incentives rather than abstract ideals. Democratic systems work because the incentives of politicians and the interests of voters are aligned often enough to produce accountability. A donor deciding where to place political contributions notices which party is rigging the system to be permanently ascendant. A bureaucrat deciding on challenging a controversial order notices where power is concentrated and turns compliant. Capital deciding which relationships matter and how to invest for the next decade notices the same thing. Journalists, regulators, police officers, judges and local administrators are all influenced, consciously or otherwise, by expectations about where authority will reside in the future. None of this requires conspiracy. It emerges naturally from incentives.

The cumulative effect is the gradual formation of a single-party system.

Such systems do not resemble the third-world dictatorships of the twentieth century. Opposition parties continue to exist, and elections take place periodically. The media remains free optically, and critics continue to speak. The institutions of democracy remain standing on paper. What changes is the expectation from these. Opposition parties cease to be viewed as governments-in-waiting and increasingly come to be viewed as temporary holding areas for politicians who have not yet made their peace with the ruling establishment.

Winning elections is what political parties are supposed to do. That is not a cause for concern. The concern lies in the possibility that repeated electoral victories, combined with financial dominance, institutional influence, control over narrative formation and aggressive use of state power against rivals, are creating conditions in which political actors increasingly doubt that power can change hands in any meaningful sense. As I have written before on these pages, democracy rests on a simple proposition. Those who lose today must believe they have a fair chance of winning tomorrow. The health of the system depends less on the confidence of the winners than on the confidence of the losers.

The stream of defections flowing through Indian politics is therefore worth examining. Most are ordinary politicians responding to the incentives before them. The larger question is why those incentives now point so consistently in one direction. The route to a one-party state need not pass through the suspension of democracy. It can happen like it is now in India. A slow buildup of incentives that make participation outside the dominant party less attractive, dangerous and, eventually, less rational.

That journey is well underway in India, as seen in the choices the opposition politicians are making when nobody is voting.

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Matsyanyaaya: India-US Dynamics

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

Earlier this week, I attended the ninth edition of the excellent India-US Forum, which is convened by the Ananta Centre in partnership with India’s external affairs ministry. It brings together government and non-government folks from both sides to discuss ideas for developing the partnership. A brainchild of the current external affairs minister, it was launched when he was India’s foreign secretary to foster linkages between the two countries.

Given the recent potholes in this relationship, I was interested to find out what Delhi thinks about the US partnership. The discussions are held under the Chatham House Rule, which means attendees are free to share the information received without attributing it to any person. What follows are some impressions that I collected from the discussions.

The word “trust” was mentioned a lot. Most of us suffer from a recency bias, so it wasn’t surprising that many speakers used the recent Fable5 denial and the US attack leading to the death of the Indian seafarers as the backdrop to their remarks. A few years ago, the Biden Administration’s AI Diffusion Rules chip rationing rules had similarly set the tone for many conversations that followed.

While recognising the complications introduced by these actions, the Indian side appeared to view them as symptoms of a changing US, rather than as actions specifically aimed at India. The one red flag clearly raised was American actions during and after Operation Sindoor vis-à-vis Pakistan.

As for the American side, the officials continued to reassure that India was a crucial partner for American interests. A $20.5 billion investment commitment by Indian firms into the US as part of the SelectUSA initiative seems to have created “good vibes” about India. It was said that a Quad Leaders Summit might happen in India soon.

It was suggested that the recent name change of the Indo-Pacific Command to the older Pacific Command was largely due to domestic politics in the US, and that PACOM was a callback to far happier times for the US defence establishment (read Cold War). The message was that a partnership with India would become even more important to an American stance focused on the Pacific. There was hope that the US Trade Representative, Jamieson Greer’s visit to Delhi next week would help resolve the last few troublesome aspects of the trade deal between the two countries.

The American non-governmental participants, like the rest of us, seemed perplexed at times by the shifting positions of the US government. While there was the usual cordiality and mutual connections on both sides, I personally felt that the tensions over the last two years had sucked out some of the warmth and comfort of the relationship. The conversations were more transactional and frequently drifted towards India’s strengths and weaknesses rather than focusing on the far tougher questions about ideas for advancing the India-US relationship.

Those in the Indian technology ecosystem insisted that, despite the tensions at the political level, existing projects and agreements haven’t been adversely affected. The concerns over GE404 delays or Fable5 and Mythos model denials didn’t seem to be top of mind for most technology and defence tech players from India. On defence cooperation, persistent surveillance, data sharing, special forces training, electromagnetic spectrum dominance, and logistical dominance were listed as the five areas of possible cooperation.

Overall, the sense I got was that India is not currently looking at coercive options of the kind I mentioned in the previous edition. The mood rather seems to be to continue engaging a transactional US in a business-like manner, to prevent it from erecting new barriers going forward.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Dashboard] Critical Minerals Lists are in fashion. But most of them are so long that they make little sense from a policy lens. So, and have put together a dashboard that classifies critical elements into six groups based on supply, demand, and technological parameters. Each of these groups requires a different policy approach, which they also outline. Check it out.

2. [Paper] There is an important debate in the pages of the Indian Express on Indian Inc.’s lacklustre R&D credentials. The Chief Economic Advisor, Anantha Nageswaran, and Naushad Forbes both make compelling arguments. This is precisely the question that Sarthak and Pranay tackled in this August 2024 paper, India’s Climb up the Innovation Ladder: Policy Enablers and Impediments.

Insights on current policy issues in India

—RSJ

This chart in The Economist last week caught my eye. The data wasn’t a surprise, but the way it was framed (Subcontinental Scandinavia) did make me pause.

We have written a lot in the past about how having a young, working-age population is an advantage for a nation, contrary to the usual claims in India about population being a problem. As the chart above shows, we have taken the ‘population is a problem’ too far, too soon. We have gone from a Total Fertility Rate (TFR) of 3 to 2 in under 12 years; possibly the fastest such transition in the past century. Most of the developed economies of today took more than half a century for a similar drop. We have reached a TFR of under 2 now at a per capita of about US$3000, while such levels were reached by other economies at more than US$15,000.

Except Japan and China, who were at similar levels of per capita as us but then set a scorching pace of economic growth of above 8 per cent (in USD terms) for almost 25 years. Given the current trend of TFR in India and life expectancy, India will have a median age of 40 years by 2050 (give or take a couple of years) from the current median of 30. That’s the threshold median age when economic growth slows down considerably, as past data has shown. This might be worsened by the adoption of technology and AI in the economy. To put it simply, India has about 25 years to go from a $3000 per capita “lower-middle” economy to a $15,000 per capita “upper-middle” economy. This will need an 8 per cent dollar-denominated CAGR for the next 25 years. I don’t want to be a pessimist, but this looks improbable. It is almost certain that India will grow old before it gets rich.

Uniquely, as the data shows, India has taken the trappings of an advanced economy like smaller families, female literacy (girls consistently outperform boys in tests) and women participation in household decision making, while simultaneously going down on female participation in the labour force. Part of it can be explained by the historic trend across the world - when a society comes out of abject poverty, female participation in the workforce reduces till it hits a bottom and then begins to rise as the society gets richer. In India, this upward move isn’t happening (or happening fast enough). So, we have a situation of TFR falling rapidly, women’s health parameters and infant mortality getting better, but the economy is not benefiting from an increase in female labour force participation.

This issue has not yet entered public discussion with sufficient urgency. Population is still a happy punching bag for politicians for India’s ills, with the added advantage of demonising the Muslim community for contributing to it. The data, of course, suggests no such correlation. For most of the past two decades, policymakers, investors and economists have taken comfort in the idea that India possessed a long runway of demographic advantage. While much of the developed world was ageing, India remained young. This demographic dividend became one of the central assumptions underlying projections of sustained high growth and rising prosperity.

Economies create growth through some combination of labour, capital and productivity. India can certainly invest more capital. It can improve productivity through technology, infrastructure and better institutions. But the labour component of the growth equation is important because it is somewhat finite in a cycle. The labour force growth itself slows as fertility declines. So, quite simply, India has to find ways to invest in and increase labour participation in productive assets before time runs out. The largest untapped source of labour available to the Indian economy today is not hidden in some remote geography or waiting to be unlocked by a new industrial policy. It already exists within the country’s educated population. It consists of millions of women who have acquired skills, education and aspirations but remain outside productive paid employment.

By many social indicators, India has made extraordinary progress on gender metrics. The latest Women and Men in India report (2025) published by MOSPI documents changes that would have seemed improbable a generation ago. Women now have a higher gross enrolment ratio in higher education than men, with female enrolment standing at 30.2 compared with 28.9 for males. Gender gaps in school enrolment have narrowed dramatically. Women are entering professional education in larger numbers. The number of women in managerial positions has more than doubled over the past decade. Household conditions have improved significantly through electrification, LPG penetration, better housing and improved access to water. Fertility has fallen, family sizes have become smaller, and women are spending more years in education than ever before.

In many respects, Indian society has become considerably less restrictive than it was even twenty years ago. Families across income groups are investing in their daughters in ways that would have been unusual for previous generations. The idea that women should receive higher education is no longer unusual across large parts of the country. Parents who once viewed education primarily as a means of improving marriage prospects increasingly view it as an investment in capability and opportunity. Yet the labour market has failed to keep pace with these social changes.

Official data shows female labour force participation reaching around 40 per cent in recent years, an improvement from earlier levels and a statistic that the government understandably highlights. But this is dressing up the reality. Male labour force participation remains close to 80 per cent. Female worker participation remains roughly half that level. More importantly, the quality of employment remains a serious concern. A substantial proportion of working women continue to be concentrated in agriculture, informal employment and self-employment, sectors that are characterised by low productivity, low earnings and limited opportunities for advancement.

The issue, therefore, is not simply that too few women work. The issue is that too few women have access to productive, well-paying and sustainable employment.

For many years, low female labour force participation in India was explained primarily through the lens of social norms, educational deficits and household restrictions. But they are becoming less convincing as a complete explanation for current realities. The more plausible explanation is that the demand side of the labour market has not evolved rapidly enough.

The estimates are that roughly 125 million women with secondary education or above remain outside the labour force. Among them are approximately 35 million graduates and postgraduates. These are depressing statistics. The economy is creating opportunities for some women, particularly at the upper end of the skill distribution, but not at the scale required to absorb the growing pool of educated female talent. This reflects a broader feature of India’s development path. Historically, large increases in female labour force participation have been associated with structural shifts in employment. Industrialisation absorbed women into factories. The expansion of healthcare, education, administration and business services created large numbers of white-collar jobs. The growth of care industries generated additional opportunities. Women entered the workforce not simply because social norms changed but because economies created jobs worth entering.

India’s experience has been more uneven. We have produced globally competitive sectors in information technology, financial services and a range of professional occupations. It has also generated large numbers of jobs in construction, trade and informal services. What it has not created in sufficient scale is the broad middle layer of employment that historically drew women into the workforce in many successful development stories. Labour-intensive manufacturing remains smaller than it should be. Healthcare and care services are underdeveloped relative to the country’s needs. Administrative and business support sectors have not expanded enough to absorb the numbers entering higher education.

As a result, many women find themselves facing an unattractive choice. They can remain outside the labour force, or they can enter forms of employment that offer limited earnings, weak career progression and little economic security. The decision to stay out of the workforce is often interpreted as evidence of social conservatism. As education levels rise, reservation wages rise as well. An educated woman is less willing to spend long hours in low-productivity informal employment for meagre pay. In many parts of the country, the choice is not between a good job and staying at home. It is between a bad job and staying at home. The more than modest success on social metrics of women in India right now is paradoxically hurting its economic progress because the demand side of the equation for women hasn’t kept pace.

As countries become richer, a growing share of care responsibilities is transferred from households to institutions. Childcare centres, schools, eldercare services and other forms of support infrastructure allow greater participation in paid employment. India has invested in roads, airports, ports and digital infrastructure over the past decade. Those investments were necessary and will continue to be important, but the next phase of development may require comparable attention to the infrastructure that enables labour force participation itself.

There are limits to how rapidly productivity can improve across a large and diverse economy. Bringing more women into productive employment is one of the few available levers capable of delivering meaningful gains across multiple dimensions simultaneously. It expands the workforce, raises household incomes, improves human capital utilisation and strengthens long-term growth potential. India needs faster growth in labour-intensive manufacturing and substantial expansion in healthcare, education and care services. Women don’t want permanent exits from the labour force; they need accommodation at key lifecycle stages. Childbirth, caregiving and household responsibilities tend to be career-ending moves for women. Flexible work arrangements, part-time opportunities, remote work, returnship programmes and reskilling initiatives can therefore have a disproportionate impact. Equally important is the need to remove outdated restrictions that continue to treat women as workers requiring special protection rather than equal opportunity. Economic participation expands when regulations presume capability and enable it to be used.

India has already achieved something remarkable by bringing millions of women into schools, colleges and universities. The demographic dividend that has underpinned so much optimism about India’s future is not an inexhaustible asset. It is a temporary opportunity. Whether India reaches developed-country status before demographic ageing begins to constrain growth will depend in no small measure on whether the economy can make productive use of the capabilities of the women it has spent decades educating.

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Matsyanyaaya: India Has Leverage

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

Two events this week crystallised a question that has been making the rounds in discussions on Indian foreign policy over the last year.

On Wednesday, the US military struck commercial vessels in the Strait of Hormuz as part of its naval blockade of Iranian ports, killing three Indian sailors aboard the Palau-flagged MT Settebello off Oman’s coast. Hours earlier, another Palau-flagged vessel carrying 24 Indian sailors had also been hit. India summoned a senior US diplomat in New Delhi to demand an explanation.

Even after the Indian external affairs minister raised this issue with his counterpart, Rubio offered no apology for killing civilians. Essentially, Indian citizens died in an American military operation, on non-Indian vessels, in international waters, with no meaningful US acknowledgement of Indian lives lost.

Then on Friday evening, the US Commerce Department issued an export control directive barring all foreign nationals—including those living and working in the US—from accessing Anthropic’s newly released Fable 5 and Mythos 5 AI models. Anthropic had no choice but to disable the models for everyone. India had signed the Pax Silica declaration barely four months earlier, in February 2026, joining a US-led coalition explicitly designed to build “trusted” technology supply chains. The Pax Silica declaration speaks of “mutual economic security” and “trustworthy systems.” Four months later, the most advanced AI model on the market was yanked away from every Indian user and developer without warning, without consultation, and without any distinction between Pax Silica allies and adversaries.

These two events are different in domain but identical in structure. Both demonstrate that the US will now act unilaterally regardless of the costs imposed on partners. Both reveal that India’s current posture generates no meaningful deterrent. And both raise the question that’s come up many times since the tariffs on India: doesn’t India have any leverage over the US?

The Leverage Fallacy

The instinctive response in Indian strategic circles is that India cannot afford to push back against the US. The GDP disparity is too large. The military asymmetry is too vast. The technological dependence is too deep, and any retaliation would invite counter-retaliation that India cannot absorb.

This is analytically wrong. If leverage were purely a function of aggregate national power, Sri Lanka would have zero leverage over India, and the Maldives would have even less. Yet both states routinely extract concessions from New Delhi. Both play on Indian security anxieties against Chinese infrastructure investments to extract concessions. Neither state is “powerful” by any gross metric. Both generate leverage through the density of their relationships and their willingness to absorb costs.

This tells us that leverage is not a property of national size. It is a product of three factors: the density of interrelationships between two states, the asymmetry of vulnerability in specific domains, and the willingness to endure short-term costs to establish long-term red lines. Come to think of it, every country, whatever its size, can exercise some leverage.

You Play the Cards You Have

The main point is that a nation-state has to play the cards it has, not the ones it wants. On most occasions, it is sensible to avoid antagonising the bigger power, but sometimes there’s a need to behave unreasonably. And judging by its responses to Brazil and China, that’s precisely the stance that this US administration notices. And remember, this is coming from someone who has consistently batted for deeper India-US ties. Evidence now suggests that the stance is proving counterproductive.

Thus, a framework is needed to analyse India's leverage against larger powers. Broadly, there are seven factors that can help us assess any leverage. This is based on David Baldwin’s relational theory of economic statecraft, the Keohane-Nye model of complex interdependence, and empirical analysis of contemporary supply-chain weaponisation.

1. Asymmetry of Vulnerability, i.e., who suffers more? For leverage to exist, the target state must be more exposed than the acting state in the specific domain.

2. Political Salience in the Target State, i.e., does it generate domestic political pain?

   Leverage is only as powerful as the political costs it triggers in the target state.

3. Target State’s Substitutability, i.e., can India find alternatives if the US retaliates? Every act of leverage invites counter-retaliation. India must assess whether it can source alternative suppliers, markets, or partners if the US responds.

4. Acting State’s Substitutability, i.e., can the US replace what India provides? If the US can easily redirect its exports or find alternative markets, Indian leverage evaporates.

5. Reversibility, i.e., can India walk it back without permanent self-damage?

   The best leverage actions are those that can be calibrated, escalated, and de-escalated.

6. Credibility Impact, i.e., does it hurt India’s reputation with third parties?

   Every leverage action is observed by every other potential partner. Actions that instil fear in all partners are costly.

7. Signal Clarity, i.e., does the action unambiguously communicate a red line?

   A leverage action that the target cannot clearly interpret is wasted.

Of these seven factors, I guess the most important ones for India are the first two. The others can be rolled up together. The two factors generate a 2×2 matrix.

The Menu of Options

The Sweet Spot is where India should act. There is a high asymmetry of vulnerability favouring India, and these actions will have high political salience in the US. Some candidate actions for this category are:

1. Defence procurement redirection. US defence contractors maintain the most powerful lobbying operations in Washington with deep ties to congressional delegations across multiple states. India has credible alternatives: Dassault, Saab, and increasingly capable domestic platforms. Redirecting even one pending contract worth $2–5 billion sends shockwaves through defence-state congressional delegations. The signal is unmistakable, and the action is partially reversible through future procurement cycles.

2. A SAMR-equivalent regulatory mechanism is the highest-value long-term investment. China’s State Administration for Market Regulation (SAMR) has demonstrated how a populous nation can weaponise market access as a geopolitical instrument. It blocked Intel’s $5.4 billion acquisition of Tower Semiconductor in retaliation for US chip sanctions and delayed Broadcom’s $69 billion VMware acquisition. India is the decisive growth market for US Big Tech in digital payments, e-commerce, cloud infrastructure, and telecom equipment. A regulatory body with genuine authority over merger approvals, data localisation, and source-code escrow requirements would give India a standing institutional capacity to impose financial pain on the most effective lobbying entities in Washington. The critical caveat is that this must be built as a standing institution that demonstrates rules-based behaviour toward all partners, not as an ad hoc retaliatory mechanism.

3. California almond tariffs are a proven, low-risk lever. India is one of the largest export markets for California almonds. India has already used this lever before. The almond growers’ lobby in California’s Central Valley is politically organised and acutely anxious about losing the Indian market. Consumer price impact in India is marginal. The action is highly reversible; and tariffs can be imposed and removed within weeks.

4. Generic pharmaceutical supply works best as a declared red line rather than an activated measure. India supplies approximately 40% of the US generic drug volume. A disruption would be felt immediately by voters, hospitals, and insurance companies. The political salience is extreme, but the asymmetry is time-limited before US alternatives mature.

The Slow Burn quadrant contains military-strategic actions that operate through the Pentagon and NSC rather than through domestic US lobbying. Freezing the implementation of the foundational defence agreements (LEMOA, COMCASA, BECA) would degrade US force-projection capability in the Indian Ocean. Cancelling flagship joint exercises involving the US would be the most publicly visible military signal, instantly legible to partners as a relationship downgrade. Both carry a cost that they weaken India’s own deterrent posture against China. But as brief, visible signals, they communicate resolve without permanently degrading interoperability.

The Deterrence Shelf holds India’s most powerful latent threat: the 1,800+ Global Capability Centres employing over one million Indians. These are core R&D and engineering operations for US multinationals, structurally embedded in how these firms function. Replicating Bangalore’s talent density takes years. But activating GCC restrictions would directly hurt employment in India. The mere existence of regulatory uncertainty around GCCs, whether arising from a rule or a new governing body, acts as a deterrent. Swaminathan Aiyar’s proposal to grant compulsory licenses to Indian pharma firms to produce a couple of drugs that are still under patent also falls in this category.

A Reminder

The Fable 5 episode and the Hormuz killings reiterate that this US administration will continue to act unilaterally against Indian interests. Diplomatic summons and strongly worded statements will continue to be ignored. The only language that registers in Washington is the language of costs, specifically, costs borne by domestic constituencies with the political organisation to demand policy change.

India does not need to match the US in aggregate power to impose those costs. It needs to be selective, disciplined, and willing to absorb short-term friction for long-term positioning. Remember, these actions are not about some vague notion of “standing up” to the bigger powers. They are merely about changing the US’s calculus in a calm and clinical manner.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Paper] This paper on the sudden jump in the number of technology collaborations between middle powers debuts a concept called ‘workarounding.’ Using empirical data on tech partnerships, the authors suggest:

   “workarounding can have long-term implications for international cooperation, technological progress, and the global economy. The impact is cumulative. One agreement will not change the international order. But dozens or hundreds of agreements across energy, technology, ports, data, defense, finance, and industrial policy begin to create a different reality. They give middle powers more options and more bargaining power.”

2. [Paper] This EU2031 paper is a nice attempt at articulating what Europe’s AI future might look like if it continues on the current trajectory. Though I do not agree with its bombastic conclusions about the AI takeoff, this is a worthwhile exercise for India.

3. [Puliyabaazi] Our discussion proposes a way out of India’s entrance exam dilemma.

4. [Article] The EU’s tech sovereignty package should interest countries like India because it has specific provisions for trusted partners, argues Mathieu Duchâtel.

Insights on current policy issues in India

—RSJ

The MPC (Monetary Policy Committee) meeting this week wasn’t expected to be business as usual. There’s a degree of doom and gloom about the Indian economy that needed to be addressed and, possibly, acknowledged. The full impact of the West Asia supply shock is yet to be passed on, and the foreign institutional capital continues to flow out. I was expecting some straight talk about the state of the economy and specific measures on drawing foreign capital in. The governor delivered on both in some measure.

The Reserve Bank of India left the repo rate unchanged at 5.25 per cent and retained its neutral stance. There was little surprise in that decision. Growth remains reasonably resilient so far despite oil supply constraints and recent price hikes. Inflation has begun to inch above comfort levels, and the global environment remains uncertain enough to justify caution. The more consequential aspect of the policy was about foreign capital, as expected. The RBI used this meeting to launch a broad-based effort to attract foreign capital at a time when the India story has very few buyers and the global competition for capital is becoming more intense.

The growth and inflation projections had to be revised. There was no way to avoid that reality. The RBI lowered its FY27 growth estimate from 6.9 per cent to 6.6 per cent while raising its inflation forecast from 4.6 per cent to 5.1 per cent. The growth downgrade is concentrated in the second half of the year, which means the government plans to cushion the impact of the oil price hike for a few more months.

The inflation revision reflects concerns around energy prices, supply chain disruptions and weather-related risks (a below-average monsoon is most likely). The central bank, therefore, finds itself in an uncomfortable position. Growth risks have increased, but so have inflation risks, along with the stress on the Rupee. The room for any monetary easing has therefore narrowed considerably. Most analysts have factored in at least a 50-75 bps rate increase for the rest of the year.

Once that plain speaking was done, the governor moved to the pressing point on attracting foreign capital. The package announced by the RBI spans multiple channels of bringing in foreign capital.

Banks have been given incentives to raise FCNR(B) deposits by allowing the RBI to bear the full hedging costs on fresh three-to-five-year deposits mobilised until September 2026. The economics of FCNR(B) deposits have become considerably more attractive. Basically, RBI is insuring the currency risk for the banking system in drawing in foreign deposits at domestic rates. This is more than what Banks were expecting, and the past experience (during Governor Rajan’s tenure) on this has been positive. Banks no longer need to absorb hedging costs and reserve requirements on these deposits. This allows them to offer significantly higher rates to non-resident depositors. With US Treasury yields around 4 per cent and Indian banks potentially offering materially higher returns (7+ per cent), the proposition becomes compelling for many overseas Indians.

Also, public sector undertakings (PSUs) have been offered concessional swap facilities to encourage external commercial borrowings. This window could see good utilisation. External commercial borrowing by Indian companies slowed in FY26 as global funding conditions tightened. The RBI’s swap support improves borrowing economics and could revive overseas issuance by public sector borrowers and highly rated corporates. Again, the RBI is taking the hit on currency risk on behalf of the PSUs to encourage them to borrow in Dollars.

The investment universe available to foreign investors in government securities has been expanded. Restrictions on overseas participation in domestic equity markets have been eased. Export proceeds will once again need to be brought back within nine months instead of fifteen. Taken together, these represent a coordinated attempt to improve India’s balance of payments position and augment dollar liquidity.

The comparison with 2013 is useful. During the taper tantrum, the RBI’s FCNR(B) mobilisation scheme brought in over $30 billion and helped stabilise financial markets at a time of severe stress. The market is once again discussing inflow numbers in the range of $40-50 billion.

Yet the durability of these inflows will need to be seen. The FCNR(B) experience of 2013 is remembered largely because of its success in attracting dollars. Less attention is paid to the fact that these deposits were fundamentally rate-sensitive liabilities. They entered because the incentives were attractive and remained as long as those incentives continued to make sense. The same observation applies today. Such flows help address liquidity shortages, support the currency and reduce funding pressures in the banking system. They do not alter the structural drivers of external financing.

The bond market reforms are potentially more significant because they address a longer-standing issue.

For years, India sought deeper participation by foreign investors in its government bond market while retaining tax and regulatory features that reduced the attractiveness of Indian debt relative to competing markets. The decision by the government to exempt eligible foreign investors from taxes on interest income and capital gains from certain government securities, combined with the RBI’s decision to expand the Fully Accessible Route, removes some of the frequently cited impediments.

Foreign ownership of Indian government securities remains modest relative to the size of the market. The available investment headroom remains substantial. Inclusion in major global bond indices has already begun drawing passive flows into India. The latest reforms strengthen the case for broader participation and may improve India’s prospects for inclusion in additional benchmark indices where operational and tax concerns have previously acted as constraints.

At the same time, it is important not to confuse easier access with guaranteed inflows.

Foreign investors allocate capital on the basis of expected returns after adjusting for currency risk. India offers attractive nominal yields, but the currency remains central to the investment decision. A bond yielding 7 per cent becomes significantly less attractive if investors expect persistent depreciation of the rupee. Tax exemptions and expanded market access improve the equation, but they do not eliminate this consideration.

The central bank appears to be doing its bit in seeking a virtuous cycle in which stronger inflows support the currency, greater currency stability encourages additional investment and improved liquidity conditions lower funding pressures across the financial system. But that may not be enough unless the government does its bit on improving business environment for foreign investments (not doing stupid things like retrospective taxation will help), reducing market concentration in key sectors, allaying fears of India being an AI laggard by investing aggressively in the upstream AI chain and making its large domestic market count at a strategic level.

The immediate domestic benefits of the MPC steps are easy to identify. Banks have struggled to mobilise deposits at the same pace as credit growth. Additional foreign currency inflows can ease these constraints, support loan growth and reduce pressure on wholesale funding markets. Yields on certificates of deposit, commercial paper and government securities may benefit from improved liquidity conditions. The decline in intermediate bond yields immediately after the policy reflects these expectations.

Whether these benefits persist depends less on domestic policy and more on global developments.

The RBI’s revised inflation forecast assumes crude oil at around $95 per barrel. Any prolonged disruption in global energy markets would place this assumption under pressure. If the Strait of Hormuz remains disrupted for an extended period, higher commodity prices could feed into inflation globally and domestically. The central bank’s own projections show inflation approaching 6 per cent during the third quarter of FY27.

That is why the market continues to price in an almost 75 bps probability of a rate hike in the coming months. The policy statement itself reflected a shift. Earlier communications emphasised the provision of “sufficient” liquidity. The latest statement refers to “appropriate” liquidity. The change is small but not insignificant. The RBI has bought itself some time. It has strengthened the incentives for foreign capital to enter India and improved the attractiveness of several financing channels. These measures are likely to generate good inflows and provide support to both the banking system and the currency.

The larger test will come over the next six to twelve months. The success of this package should be measured beyond the initial surge of dollars into the system. It will be measured by whether India is able to attract sustained capital despite a world of higher interest rates, greater geopolitical uncertainty and increasing competition for global savings. That remains a more persistent challenge of selling the India story.

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India Policy Watch #2: Tippling Over

Insights on current policy issues in India

—Pranay Kotasthane

It’s been ten years of Bihar’s prohibition. There seems to be no obvious movement towards reversing it, despite a change in the political guard. Later next week, the Bihar government is holding another entrance exam for the post of Bihar Police Prohibition Constable. It’s surreal that a state with poor law and order has been diverting its limited financial and intellectual state capacity towards catching tipplers for a decade now.

We had written about this tragedy way back in 2022 in these pages. As expected, addiction has only moved to other dangerous substances. Himanshu Harsh, in an Indian Express explainer last week, writes how cough syrup has become the new hooch in Bihar:

Since Bihar enforced alcohol prohibition in 2016, codeine cough syrups have emerged as an increasingly popular alternative to alcoholic beverages…

Following the ban, many former alcohol users have turned to other, easily accessible substances like cannabis, heroin, and most notably, codeine syrups. In Patna and across rural Bihar, users can often obtain these syrups through the black market or from pharmacies with inadequate oversight.

Codeine syrups are particularly attractive due to their affordability and powerful sedative effects. Their easy availability and relatively low cost — typically INR 100-200 per bottle — have contributed to their increasing popularity as an alcohol substitute. This issue is particularly alarming in Bihar, where the substance abuse crisis has shifted from alcohol to opioids, creating new challenges for law enforcement and public health authorities. [Indian Express, May 30]

So now the Prohibition Constables will also be chasing cough syrups and raiding pharmacies, thereby increasing the surface area of corruption. And we haven’t even discussed the second-order impact on the patients who couldn’t get these cough syrups because of their newfound popularity. It’s striking how predictable and yet inevitable the fallouts of this policy are, and yet there seems to be no change in the government’s stance.

P.S.: During the Bombay Prohibition Act, people turned towards high-alcohol-content tinctures, eyedrops, and eardrops. Sixty years later, all we can say is that people have slightly better alternatives on offer now.

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Matsyanyaaya: Five Ideas for Cooperation on Critical Minerals

Big fish eating small fish = Foreign Policy in action

—Shobhankita Reddy and Pranay Kotasthane

(An edited version of this article first appeared in The Hindustan Times on June 5, 2026)

On 26th May, India and the US signed a bilateral Critical Minerals framework; the same day, the Quad unveiled a $20 billion initiative spanning mining, processing and recycling. These join a growing list of recent US-India partnerships, including FORGE, Pax Silica, the bilateral TRUST, and the Strategic Mineral Recovery Initiative (SMRI). While the details of the India-US framework are not publicly available, the Quad countries jointly released a statement outlining key areas of cooperation.

The US is a minor direct consumer - accounting for less than 5% of global demand - for minerals such as cobalt, nickel and rare earths. Its imports of components made using these elements are orders of magnitude higher. India, too, is import-dependent in this sector. Its vast, rare-earth reserves remain unexplored, and its processing capabilities are underdeveloped. The instinct to respond through international partnerships in a sector acutely prone to Beijing’s economic coercion is sound and pragmatic.

However, many of these partnerships are yet to translate into assured mineral flows, technology transfers, or capacity building for processing and downstream manufacturing. These tangible outcomes will require work on five fronts.

First, China’s dominance in rare earths is rooted in subsidy-linked overcapacity that has driven out efficient producers elsewhere. Overcapacity is a structural feature of China’s investment-led model. Establishing alternative mine-to-magnet supply chains would require partner countries to combat this artificial price suppression through aggregate demand, long-term offtake guarantees, and coordinated price-risk mechanisms. That’s where the Quad initiative’s intent to mobilise ‘guarantees, loans, equity participation, insurance, subsidies, and offtake or other commercial arrangements’ holds promise.

Second, not all critical minerals are equally critical and require different approaches to ensure supply resilience. Rare earth elements, vanadium and antimony, for instance, are used in small quantities and for highly specialised applications. Their low demand, combined with high-criticality use cases, makes China’s dominance an effective lever in the short term. Export controls on these items disproportionately hurt other countries more than they hurt China itself. Partner countries should work together to stockpile these minerals, as their alternative supply-building is notoriously unviable in the immediate term. In contrast, minerals with a wide range of commercial applications and that are required in larger quantities - such as copper - are harder to stockpile and need a steady supply from diversified sources to offset any short-term shocks.

The US’s $12 billion Project Vault initiative is aimed at stockpiling for US firms but is bound to be inefficient. It does not differentiate between mineral categories and is financially inadequate for major minerals. Further, it risks distorting the prices of minor minerals already needed in small quantities. Expanding the initiative to more countries will make stockpiling economically viable by increasing both the available capital pool and overall demand.

Third, stockpiling without value-added manufacturing will not achieve derisking. China’s monopoly lies in the processing stage of the value chain. Opening new mines elsewhere will not sufficiently dent this without a proportionate scale-up of refining and magnet manufacturing capacity outside China. This would require joint research collaborations and partnerships that can help India move beyond being a consumer of final goods or an exporter of unprocessed ore.

For instance, India exports manganese ore in its raw form, the value of which would increase by three to ten times if it could refine it domestically to produce ferromanganese or manganese steel.

Additionally, breaking China’s chokehold on this sector would require not only investments in substitutes, such as using iron or manganese in place of cobalt for batteries, but also innovations and design improvements that make magnets rare-earth-free. While the current frameworks emphasise tech sharing, these efforts must be further strengthened.

Fourth, critical minerals differ from oil in that they can be recovered from their sources and reused. Recycling is often an underappreciated facet of mineral security, even though it enables a closed, insular loop from already available, friendshored products. Today, due to a poorly scaled collection network in most consumer economies and a genuinely limited amount of available feedstock, recycling can meet only a small percentage of overall demand. This necessitates pooling electronic waste and establishing joint recycling facilities to scale production as more products reach end-of-life over the next few decades. It is thus encouraging that the Quad critical minerals initiative seeks to ‘promote innovation in critical minerals recovery from, and recycling of, e-waste and scrap materials among Quad partners.’

However, as seen in the case of lithium over the past few years, unusually low prices of Chinese primary production can disincentivise recycling - less than 3% of lithium’s global demand currently comes from recycling. Procurement policies with guaranteed price floors between partner countries would be essential for recycling facilities to survive any price crashes in commodity markets, and would be critical.

Finally, the framework should extend to resource-rich countries in Africa and Latin America, where both the US and India have signed several agreements. Combating China’s entrenched presence in these countries and its ability to commit long-term capital while nimbly navigating political risks requires coordination and blended-finance mechanisms that provide a political backstop for private enterprises. Ownership of these existing mines is particularly important because starting a new mine typically takes an average of 16 years from discovery to production, with anecdotal data suggesting even longer timelines in the US and India.

The many frameworks on critical minerals are vital for managing the inevitable ‘China Shock’, in which low-priced minerals exported from China will make projects elsewhere uncompetitive. Tackling this scenario requires on-ground coordination between companies in like-minded countries across the entire critical mineral supply chain.

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Reading and listening recommendations on public policy matters

1. [Podcast] This BigIdea conversation between and is a fantastic listen. The point that caste has regrettably become the lazy explanation for everything is important to internalise. Several other gems in this episode.

2. [Article] Helpful post by Brian Albrecht, explaining why the compute tax is a bad idea. I am expecting this idea to reach India soon. And the latest Oxfam Report on Inequality or something similar will propose this. Soon, everyone will start taking this idea seriously, even though it’s a terrible one.

3. [Policy Brief] wrote three weeks ago that the capital gains tax for foreign portfolio investors should be abolished to stem the outflow of capital. The government’s move last week, exempting taxes on gains accruing to foreign investors from certain government securities, points in the same direction. There are several other useful recommendations in this policy brief.

Insights on current policy issues in India

—RSJ

Over the last month, we have once again found ourselves debating paper leaks, examination credibility, coaching centres, inflated educational claims and the ability of public institutions to administer high-stakes tests fairly.

None of these controversies is particularly new. What is disappointing is that despite their frequency and scale, they continue to be treated as isolated episodes rather than manifestations of a deeper problem. Every scandal produces a familiar cycle of outrage, clumsy investigations, arrests of a few coaching centre staff, the formation of committees, and eventual amnesia. The details change from one year to the next, but the pattern remains remarkably stable.

People seem to have already forgotten that we were in the same situation, at the same time, back in 2024. What came of that investigation? No one knows. So the pattern repeats. A leak occurs, or a website collapses, students suffer, explanations are offered, the troll army is pressed into service to hunt down detractors, and the system moves on. This time, we seem to have added another layer of pretence. The NEET test papers for the re-examination will now be transferred by the Indian Air Force. And the CBSE website will be evaluated by a team of experts from the IITs. The last few credible institutions in the country are now pressed into service to put lipstick on a pig. The obvious errors, like lack of planning and almost zero accountability, that stare at us from these episodes are barely addressed.

The recent CBSE evaluation controversy is a useful example. The transition towards on-screen marking was presented as a modernisation exercise. In principle, this was the right move. It makes the evaluation of test sheets location-independent for teachers, provides an audit trail for re-evaluation, and reduces logistical complexity. Large examination systems eventually have to digitise.

The problem was that the transition appears to have been executed without adequate preparation. Teachers complained about insufficient training and fatigue from doing on-screen marking. The scanning of such volumes of answer sheets was done without a proper test and control environment, resulting in mismatched answer sheets, lost pages, and often missed scans. Students reported discrepancies in evaluation after having a look at their scanned answer sheets. Re-evaluation requests surged, and the CBSE site struggled to stay up under the resulting demand.

The public discussion that followed focused largely on operational issues, but operational failures at this scale are rarely operational alone. How can such a large change be effected without pilots, a transition period and rigorous testing of each element of the chain? The number of discrepancies that have surfaced doesn’t suggest even a basic quality check before going live. A system that has not thought carefully about transition discovers them in production. That it involves millions of young students and their future should mean accountability for these lapses, and strong consequences should naturally follow. That is not visible at the moment. The government doesn’t fear public disaffection because it wins elections metronomically. The opposition is useless.

The same pattern is visible in the debate around NEET. Much of the discussion revolves around identifying the actors involved in paper leaks, determining the extent of the compromise and assigning responsibility for specific incidents. These questions are important, but they often obscure a more fundamental reality. The incentives involved in compromising NEET integrity are powerful. A government medical seat may cost a family a few lakh rupees, while a private medical education can cost well over a crore. The total number of seats in medical colleges in India is abysmally low for a country of its size. The NEET assessment model is still stuck in India of the 80s. A single examination, a single test paper of multiple-choice questions, determines the future of over 2 million students every year. The test paper is physical and static. The examination relies on a physical test booklet that must be printed, transported, stored and distributed through thousands of centres across the country. Under such conditions, leaks are not merely process failures. They are built into the design in which the rewards from compromise are enormous and the opportunities for compromise are plentiful.

This is why proposals that focus exclusively on punishment often feel incomplete. Disbanding institutions (such as NTA), arresting intermediaries, and strengthening penalties may satisfy the demand for visible accountability, but they do little to alter the underlying incentive structure. As long as the fate of a student depends overwhelmingly on a single examination conducted over a few hours, pressure will continue to build around that examination. The more useful reform proposals are those that attempt to distribute risk. Computer-based testing can be introduced gradually. Multiple testing windows can reduce the concentration of risk. Percentile-based normalisation can make large-scale administration easier. Most importantly, school performance can be given greater weight so that years of academic effort are not rendered secondary to a single high-pressure event. These ideas are all tried and tested modern testing frameworks. These might not eliminate all possible failures. But when a failure happens, these steps will ensure that the consequences are limited.

Yet even this conversation may be addressing only part of the problem. The recurring focus on plugging the leaks assumes that the examination is measuring the right thing and that the challenge is simply to preserve its integrity. Going through evidence collected by public-minded experts (Careers360 being one of them), the issue may be more complicated. Data from Maharashtra (which publishes such data digitally) revealed an extraordinary divergence between board examination results and entrance examination performance, despite both systems ostensibly evaluating the same underlying subjects. Students who excelled in one often performed unexpectedly poorly in the other. Such divergence does not automatically invalidate either system, but it raises an obvious question about what exactly is being measured. If two examinations covering the same syllabus produce dramatically different rankings, then at least one of them is not testing the right metric.

The coaching industry has understood this reality for years. They have turned into supplementary educational institutions with a particular specialisation. They have designed themselves to optimise for the entrance examination format. They teach pattern recognition, time management, elimination techniques, question prediction and psychological adaptation to high-pressure testing environments. When a student’s future depends disproportionately on a specific type of assessment, an industry inevitably emerges to optimise performance on that assessment. The remarkable growth of coaching should therefore be viewed not merely as an educational phenomenon but also as evidence that the examination system has become an end in itself. And over time, this industry has gone down the slippery slope of inflated claims, payments to toppers to retrospectively attach themselves to the institutes and eventually bribes and kickbacks to engineer leaks.

The comparison with China is also revealing, although perhaps not in the way it is often presented. China’s Gaokao examination involves more than thirteen million students, many times the scale of India’s major entrance examinations. It remains largely pen-and-paper, includes essays and long-form responses and is treated as a national undertaking requiring coordination across multiple levels of administration. The lesson here is not that India should replicate the Chinese model. The thing to learn is that examination integrity is fundamentally a governance challenge rather than a technological one. India often approaches these failures by searching for technological solutions, whether through digitisation, online testing or software platforms. Technology can certainly help, but technology cannot substitute for institutional capability. The harder questions concern planning, execution, accountability and the ability to learn from failure.

There is a broader issue that extends beyond examinations. The Indian education sector is one of the largest destinations for household savings and one of the most consequential determinants of life outcomes. Families routinely commit sums ranging from several lakh rupees to well over a crore in pursuit of educational opportunity. Yet the information environment surrounding these decisions remains weak. Coaching institutes advertise spectacular success rates. Colleges publish placement statistics that are often difficult to verify. Institutions compete through claims whose underlying methodologies are rarely transparent. And so you get Galgotias and many others who can get away with murder. Everyone within the ecosystem understands that selective disclosure, aggressive marketing and statistical embellishment are widespread. Yet regulatory scrutiny remains limited.

The state has the capacity to govern systematically important sectors and protect consumer interests. The contrast with financial services is striking. Over several decades, India has built a sophisticated architecture to protect financial investors. A person investing a relatively modest amount in a financial product benefits from disclosure standards, regulatory oversight, suitability requirements and enforcement mechanisms designed to ensure that claims can be independently verified. The burden of proof lies largely with the institution making the claim. In higher education, the situation is often reversed. A family committing twenty lakh, fifty lakh or even a crore rupees frequently has to navigate an information environment where verification is difficult and where the burden of challenging misleading claims falls largely upon the student or parent. It is difficult to think of another sector in which investments of such magnitude are made with such limited protections.

This asymmetry is not accidental. The entrenched political interests in the education system are largely responsible for this. We have devoted considerable intellectual and regulatory effort to protecting investors, while paying much less attention to protecting students and families making life-defining educational decisions. The result is a sector in which information quality is often poor, accountability is diffused, and incentives are misaligned.

It is against this backdrop that we saw the other phenomenon of this month, the emergence of the Cockroach Janata Party. The significance of the episode lies less in the satire itself than in the conditions that allowed it to resonate. Political satire succeeds when it captures a sentiment that already exists. The audience that embraced the joke was not responding only to an unfortunate remark made by the Chief Justice on NEET leaks. It was responding to a wider experience of institutions that frequently appear more comfortable managing narratives than confronting underlying weaknesses. Of course, it is a satirical website that will fade away soon and you could argue a whole lot of their followers are perhaps bots. Yet, it does capture something about the zeitgeist among young Indians who inhabit an environment shaped by examination controversies, unreliable information, recurring administrative failures and poor job prospects. Under such circumstances, satire becomes a vehicle through which accumulated frustration finds expression.

The speed with which the state responded to the Cockroach Janata Party by suspending its social media handles, calling them anti-national and sending out threats to its founders should be contrasted with the response on paper leaks and CBSE website failure. The state appears capable of mobilising considerable energy when confronted with criticism, symbolic opposition or perceived challenges to legitimacy. The response to structural failures that affect millions of citizens often is slower, more fragmented and less decisive. This is not a uniquely Indian phenomenon. Governments everywhere are tempted to focus on the visible manifestations of dissatisfaction rather than the conditions producing that dissatisfaction. People can accommodate mistakes if they believe institutions are learning, improving and holding themselves accountable. Confidence erodes when repeated failures appear to generate fewer consequences than those who draw attention to the failures. This is the India we are in now.

The unintended consequence is visible in the gradual widening of the gap between official assurances and public belief. Every unresolved examination controversy, every misleading educational claim and every unexplained anomaly contributes to that gap. Over time, trust becomes harder to sustain because citizens increasingly rely on lived experience rather than institutional communication. The real question facing us is therefore not whether a satirical movement is offensive, political or irresponsible. We have to ask instead if our institutions can rebuild credibility by demonstrating the qualities that ultimately matter most: competence, transparency, accountability and a willingness to learn from failure.

Without those attributes, the next joke is always on us. And, never very far away.

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India Policy Watch #2: A Review of the Semiconductor Strategy Report by NITI Aayog

Insights on current policy issues in India

—Pranay Kotasthane

The NITI Frontier Tech Hub’s Future of India’s Semiconductor Industry report, released last week, is worth reading for those interested in India’s advanced manufacturing ambitions. It is a comprehensive take on this subject and gives some indication about the government’s future course of action in this domain. Hence, it’s worth taking a closer look at it.

What the Report Gets Right

There’s a lot to like about the vision the report proposes. As we have been writing in these pages, the core argument is that India should double down on its comparative advantages rather than just play catch-up. Here are the key paragraphs:

Winning the semiconductor race will not be easy if India continues to run the existing race; instead, it should shift gears and target becoming the ecosystem player that the global semiconductor industry cannot run without. This requires India to pivot away from the catch-up game in the foundry race and focus on winning the “More-than-Moore” era, where advanced packaging, system integration and manufacturing scale matter as much as transistor nodes.

By 2035, India should target building a USD 120-150 billion semiconductor value chain by choosing leadership and purpose over participation. Instead of chasing the global wafer race from behind, India should define its own pathway—one that is not only distinct but shaped by strategic self-sufficiency, ecosystem strength and global indispensability.

At the core of this vision is a resilient and disciplined manufacturing foundation, anchored by world-class fabs that focus on what matters most to India’s economy and strategic autonomy: mature-node logic, specialty analog and mixed-signal chips and compound semiconductors such as Silicon Carbide (SiC) and Gallium Nitride (GaN). Together, they will power India’s automotive, energy, industrial, telecom and strategic sectors—ensuring that technologies critical to India’s future are built on Indian soil. When it comes to advanced-node capability, the strategy most suitable for India is a selective and pragmatic approach aligned with national interest.

At the same time, India will play to its greatest strengths, including its design talent, highquality workforce and materials and chemistry ecosystem potential. Building on these advantages, it should aim to emerge as a global leader in semiconductor design and system architecture, a top-three destination for outsourced semiconductor assembly and test (OSAT) and advanced packaging and a trusted supplier of critical semiconductor materials, particularly wide-bandgap and advanced packaging materials. In these domains, India should aspire to set standards, shape supply chains and create enduring global dependence, rather than limit itself to mere participation. [Future of India’s Semiconductor Industry, NITI Aayog]

The report then goes on to identify five pillars for achieving these goals, all of which make quite a bit of sense. But I want to spend some time focusing on what I think are three gaps in this otherwise excellent report.

Gap #1: The Taiwan Contingency is Conspicuous by its Absence

The report organises India’s semiconductor imperative based on four reasons: import dependence, forex drain, national security, and societal upliftment. While these are legitimate concerns, the document largely sidesteps the most destabilising possibility in the global semiconductor landscape, a kinetic or economic disruption in the Taiwan Strait. This is not a tail risk, and is not limited to the most-advanced chips, as I have discussed in edition #324.

A report on deploying billions over the next decade should perhaps have an explicit section on what a Taiwan disruption means for India’s strategic and economic position, and how India’s investments can be structured to hedge against this scenario or position India as an alternative node.

While the report does discuss regular Multi-Project Wafer (MPW) shuttle runs, which aggregate designs from multiple companies and lower the cost of silicon prototyping, the destinations of these MPWs cannot be limited to TSMC alone. Encouraging these shuttle runs to happen at foundries outside Taiwan will provide a cushion to Indian firms if and when the Taiwan contingency happens. Even that won’t be enough. We will need a flexible sovereign fund to help domestic firms and start-ups absorb the two- to three-year drag they will face in the event of a Taiwan crisis.

Gap #2: The Design Section Misses a Trick

The report rightly identifies chip design as India’s strength. The Pioneering pillar includes sovereign EDA and MPW access, a National Design and Packaging Co-Design Platform, an AI-Enabled Semiconductor Engineering Mission, a National Frontier Semiconductor Research Programme, and a long-term Strategic Semiconductor IP and Patent Programme with explicit national IP targets and a sovereign IP fund.

But the report does not address the more difficult problems that have hindered the translation of Indian design talent into Indian intellectual property. The Design Linked Incentive scheme, announced in 2021, was structured around the same instincts—support for fabless companies, EDA tool subsidies, and IP filing assistance.

But overly restrictive Indian ownership conditions disqualified many firms from applying, and an unfavourable trade policy made importing second-hand design tools needlessly expensive. Moreover, difficulties in moving capital in and out of the country and the deterrent effect of tax policies mean that most Indian founders remain incentivised to create firms outside India. The key point being that pre-revenue deep-tech firms in India still don’t have access to capital markets.

The roadmap’s design recommendations make no reference to these bottlenecks. These issues are binding constraints for India’s success in most deep tech domains, not just in semiconductors.

Gap #3: Open-source Hardware is Absent

The EDA market is a tight oligopoly with Cadence, Synopsys, and Siemens EDA controlling roughly 97 per cent of the market. Tool licences run to hundreds of thousands of dollars per seat. This is a structural barrier to entry for Indian fabless startups. Besides, there is a geopolitical risk involved, given that these tools are controlled by a select few countries. Moreover, fabs prefer to work closely with a few of these players, locking others out of the game.

That’s why we made three recommendations in this Open Tech Strategy for India report:

• Co-create robust open-source hardware products with like-minded partners: Open-source Hardware need not always be Indian. Collaborations with like-minded partners will more effectively address the strategic imperatives for open-source hardware. Outputs generated by global open-source projects such as RISC-V will benefit everyone, including India.

• Award grants for creating the next generation of open-source EDA tools. Identify crucial toolchains required for chips used in critical applications and fund research to develop open-source alternatives.

• Make Semiconductor Lab (SCL) Chandigarh’s PDK for CMOS 180nm open access. SCL should enable Indian companies to fabricate prototypes of their designs cost-effectively. DARPA funded the Metal Oxide Silicon Implementation Service (MOSIS), which allowed US fabless start-ups to produce chips quickly. India, too, must enlist government research fabs in this project through a MOSIS equivalent fabrication service.

The NITI roadmap mentions EDA subsidies and AI-for-EDA pilots, and even proposes a sovereign IP fund to license ARM cores. But it says nothing about India’s participation in open PDK initiatives, nothing about OpenROAD, nothing about RISC-V as a design foundation for domestic startups. This is a missed opportunity because open-source alternatives are crucial for India’s strategic autonomy.

Overall, the NITI roadmap has many good ideas and a long list of recommendations for the government. But it takes the safe route of recommending ideas that come under the domain of MeitY. Converting India’s potential in this domain into geopolitical leverage, however, requires policy reforms across many ministries.

AIforPublicPolicy: A Policy Reasoning Assistant

—Pranay Kotasthane

For over a decade, The Takshashila Institution has built a public policy research methodology, i.e., a specific way of framing policy questions, using frameworks, encoding constitutional values, mapping stakeholders, tracing causal logic, etc.

Most of it lived inside the institution, in the heads of researchers, and in internal documents. We always believed it should be open access because every Indian state can have many Takshashilas. That was hard to do in the pre-AI age.

These are not proprietary secrets. They are learnable, teachable methods. We have now turned them into a tool called Scholar and released the entire stack as open source. The thinking behind making this open-source was that policy reasoning capacity is a positive-sum game. More people doing rigorous analysis makes the overall quality of public discourse better. If a researcher in a district collectorate, a journalist covering state finance, or a student at a university can use the same frameworks we use, that would be a terrific outcome.

The tool offers three entry paths. Start with a hypothesis and trace it through actor mapping and causal loops. Take a policy problem and run it through a structured framework to surface actionable alternatives. Or you can bring a completed draft and test it against Takshashila’s values. You can also use individual tools like budget analysis for Union and State governments, stakeholder map creation, and causal loop diagram generation separately.

Scholar is still in a beta version. Some tools are more polished than others. The workflow will change as we learn how people actually use it. Feedback is welcome and will shape what comes next.

Try it here. File issues or suggestions on the GitHub page.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Book] China’s Wars is a new book by former Foreign Secretary, Mr Vijay Gokhale. The book analyses five cases of warfare waged by communist China, and finds that in each of the instances, it was China that was the aggressor, even as it successfully crafted the narrative that it was only ‘counterattacking in self-defence.’ A must-read, and a quick one too.

2. [Puliyabaazi] Continuing with the China theme, this conversation ft. , , and , discusses the future of India-China relations. Their book, Taming the Dragon, is a thought-provoking read. Don’t miss.

   पुलियाबाज़ी Puliyabaazi

   क्या चीन के साथ दोस्ती मुमकिन है? India-China Relations: Cordial or Volatile?

   क्या भारत और चीन के बीच कभी सच में दोस्ती हो सकती है? आज की पुलियाबाज़ी में हम इसी सवाल की तह तक जाने की कोशिश कर रहे हैं। बीजिंग में बैठे पॉलिसी मेकर्स भारत को किस नज़रिये से देखते हैं और उनका ‘Western Theatre Command’ भारत के लिए कितना बड़ा सिरदर्द है? अरुणाचल प्रदेश पर चीन के लगातार दावों से लेकर दोनों देशों के बीच बढ़ते व्यापारिक रिश्तों के नफ़े-नुक़सान त…

   Listen now

   3 months ago · 2 likes · Puliyabaazi Hindi Podcast, Anushka Saxena, and Manoj Kewalramani

3. [Report] This AI 2027 outlook is most fascinating and one of the most rigorous ones out there.

Insights on current policy issues in India

—RSJ

Over the past couple of weeks, I spent some time in Silicon Valley trying to get some sense of where exactly the AI economy is headed first hand. Jensen Huang’s “five-layer AI cake” has become the dominant framework for thinking about the industry. Energy, Chips, Infrastructure and Models stacked one upon the other. Then, the tooling and applications at the top. My own interest was primarily in the model and application layers because that is where India’s opportunity appears most plausible. We are unlikely to dominate frontier compute. We do not have the capital base, hyperscale infrastructure or industrial policy architecture required for that race. But applications and workflow systems are where most traditional Indian IT services players are pinning their hopes on, and I wanted to understand if there was real play there.

Fairly quickly in my visit and in some of the early meetings with venture funds, PEs and investors, I could see a mismatch between technological momentum and financial reality. Nobody I met doubts that AI capabilities are advancing at a remarkable speed and are going to be transformative. That debate is effectively over. But the amount of capital that’s already been pumped in across the 5 layers, and that’s still waiting on the sidelines, reminded me of the dotcom boom era. One leaves the Valley with the distinct sense that the entire ecosystem is pricing in civilizational transformation while still struggling to explain current profit-pool opportunities.

This matters because technology gains show up in different forms over time that can’t be predicted, while capital gets deployed on bets that are visible now. The core technology could change society with massive capital being deployed on it, but the returns on capital deployed could be diffused across sectors. Examples from the early 20th century echo this. Railroads transformed America and destroyed enormous amounts of investor capital. Airlines change mobility radically while remaining structurally weak businesses for decades (possibly the worst sector in terms of shareholder returns in the past century). Telecommunications reshaped the world but commoditised much of the underlying infrastructure. Everyone else who built on telecom rails made money. AI may well become foundational infrastructure for the next era of capitalism while simultaneously proving to be one of the great overinvestment cycles in technology history.

Part of the reason for this is the usual problem of extrapolating the current trend into the future instead of planning for scenarios. The industry still behaves as though compute will remain scarce. Current valuations require sustained pricing power at the model and infrastructure layer. Yet most technology markets eventually move toward abundance and price compression. Open-source models will continue to improve, and over time, inference costs will get optimised. The better the models become, the harder it may become to preserve economic rents around foundational intelligence itself.

The AI infrastructure companies I saw already understand this. The focus on optimising storage and compute, and the kind of funding and research talent going there, suggests this will happen sooner. But at the overall ecosystem level, what I understood was that companies were trying to industrialise intelligence before fully understanding how it would ultimately be monetised. The metrics right now seem to be tokens used per engineer rather than anything that creates tangible economic value.

At the application layer, something more significant is happening. The best way to understand most AI application companies is not to think of them as software firms in the conventional sense. They were attempting to solve problems that I refer to as the coordination problem inside enterprises.

Every large organisation consists of three broad layers. There is the customer-facing interface on one side with people, stores and internet and mobile apps funnelling customers into the enterprise. There are systems of record on the other side that include core databases, ledgers, ERPs and transactional systems, which build trust and fidelity within the enterprise for the customers.

Between these two layers sits the actual enterprise. That’s the series of processes and workflows with checks and balances that ensure the customers coming in turn into economic value for the firm. That middle layer is essentially a coordination machine. Operations, procurement, compliance, finance, audit, legal, and HR are all coordination systems. Documents flow from one team to another with incremental value addition. This is a division of labour with specialised teams having experts and their own network of systems that only they can access. This is how organisations run and manage to control their execution. Exceptions are escalated, and information is reconciled across systems and people. Large enterprises are sprawling networks of coordinated actions.

The SaaS era tried to solve this problem through standardised workflows. Software companies encoded organisational processes into applications and asked enterprises to adapt themselves to those systems. This worked well enough for two decades. But much of enterprise coordination still escaped formal systems and remained in meetings, emails, spreadsheets, and institutional memory.

The AI application layer is now attempting something more ambitious. Instead of merely digitising workflows, these systems are trying to orchestrate workflows dynamically. Agents retrieve information, reason across systems, route tasks, generate outputs and coordinate actions across organisational boundaries. The industry uses the word “agentic” almost obsessively today because the enterprise agent is becoming the central abstraction of this cycle.

I saw platforms describing themselves as AI operating systems where one could define chains of agents and sub-agents in natural language and construct autonomous workflows in weeks. Sometimes days. The abstraction layer itself is changing, and soon the workflow becomes adaptive and self-improving. An enterprise agent is essentially a software construct attempting to replicate the operational behaviour of middle layers inside organisations. It will learn the workflow from its code, gather context with practice and then replicate the workflow.

But the AI agent need not be split into departments. It can work across systems, resolve ambiguity and most importantly, act autonomously over time with perhaps a human in the loop. The application layer of AI is gradually becoming the coordination layer of the enterprise itself.

This has deep implications for India’s IT services industry and the broader Indian economy.

For three decades, India benefited from a global labour arbitrage built around large-scale white-collar process execution. Much of the services industry grew around managing coordination complexity for global enterprises. Teams maintained workflows, reconciled systems, processed documents, managed tickets, supported applications and handled the operational exhaust generated by large organisations.

Agentic systems are now coming directly for that layer.

The real disruption is not coding copilots or chatbots. It is the possibility that large parts of middle and back-office coordination itself become autonomously executable. What will a bank look like if the coordination layer is running with autonomous agents? There will be a significant deflation of mid and back office across the services industry.

The phrase “AI will augment humans” remains broadly true in the long run. New professions will emerge, of course. Human demand has historically expanded alongside technological progress. But the transition will take time, and it will be painful. The political economy will struggle with this. We may be entering a period of significant deflation of work before new forms of work emerge at scale.

India has a limited presence in the energy, chip and infrastructure layers of the AI stack. The model layer itself is evolving at such speed that even many people inside the Valley struggle to keep pace. Frontier labs are now pursuing increasingly autonomous systems where code writes code, workflows recursively improve themselves, and software development itself becomes partially automated. Whether such ambitions fully materialise is secondary. The direction of travel is unmistakable.

India can certainly attempt sovereign frontier models and should probably do so for strategic reasons. But it is difficult to see how such efforts can compete directly with the concentration of capital, talent, and compute now embedded in the Valley ecosystem.

That leaves the application layer as India’s most plausible opening. There is a genuine opportunity there. India has deep enterprise process knowledge, large software talent pools and long experience integrating technology with operational workflows. One can imagine entirely new categories of AI-enabled service providers emerging from India. Firms combining domain expertise, workflow redesign and agentic orchestration into globally competitive operating models. But the great deflation may overwhelm the opportunity creation cycle in the near term. That’s a real possibility.

Large Indian enterprises themselves may require dramatically fewer white-collar workers over the next three to five years if autonomous coordination systems mature at the pace currently visible in the Valley. Entire layers of repetitive managerial and process-heavy work may shrink simultaneously across sectors. Banking, insurance, IT services, operations, support functions, audit, compliance and internal coordination roles could all face pressure.

India already faces significant underemployment disguised beneath services growth and platform work. Quick-commerce delivery networks and gig labour have partially masked deeper weaknesses in formal employment generation. AI now threatens to arrive precisely at a moment when the economy has still not fully absorbed its existing white-collar workforce.

The next disruption may therefore not resemble earlier automation cycles that primarily affected manufacturing labour. This one may hollow out sections of the educated middle-class services economy itself.

I left Silicon Valley with the sense that the direction of history is now largely set. The technology is real, and the disruption is coming. The only uncertainty is the speed at which institutions, labour markets and political systems are able to adapt.

That uncertainty may become the defining economic and social question for India in the next decade.

Related: Check out this Puliyabaazi with Sidu Ponnappa on this theme.

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India Policy Watch #2: An Evergreen Puzzle

Insights on current policy issues in India

—Pranay Kotasthane

While RSJ was in Silicon Valley, I spent the last week as a tourist in Sri Lanka. For an Indian public policy analyst, travelling to other countries always throws up comparisons, puzzles, and questions. We notice differences in governance outcomes and can’t help but wonder why we are the way we are.

In fact, this instinct is how the famous ‘M document’ came into being. VP Singh happened to travel to Malaysia twice in a matter of months and was confounded by the pace of change happening there. He then asked Montek Singh Ahluwalia what India could do to transform itself in this way. Ahluwalia prepared the memo that would go on to become the basis of the economic reforms in 1991-92.

Sri Lanka in 2026 provokes a similar reaction, though in a different dimension. This is a country that has faced a devastating civil war, a catastrophic economic collapse, and a destructive environmental disaster in the last 40 years. It is heavily dependent on aid, and one can see the markers of international aid everywhere—a water filtering machine at the main airport carries a ‘donated by Japan’ sticker, China’s infrastructural footprint is unmissable wherever you go, and India’s first response in environmental crises is well-appreciated.

Despite these challenges, the Sri Lankan State doesn’t seem to be as omniabsent as its Indian counterpart. The roads, not just in the capital, but even in rural areas, are uniformly marked and well-designed. There are no signs of the white-topping boondoggle, and the roads are largely pothole-free. Roads are peppered with well-marked zebra crossings even in remotely populated areas. Vehicles stop graciously and let pedestrians use these crossings without honking endlessly. The footpaths in Colombo are stroller- and wheelchair-friendly, yet it is hard to spot a two-wheeler misusing them to beat traffic snarls. Not once over the week did I see people driving on the wrong side of the road. It’s one thing to see these things happen in the richer countries, and completely another to see some of it happen in a locale that’s superficially not different from our own.

Even in formerly war-torn areas like Trincomalee, roads are well-marked, lanes are painted, and people largely follow traffic rules. Public libraries—even if battered and forlorn—dot small towns. The civic infrastructure of a country facing multiple crises looks better maintained than that of comparable Indian towns. What explains this?

An easy explanation is endogeneity. Sri Lanka is roughly 1.5 times as rich as India on a per capita basis. More money implies better public services. Broadly true, but the comparison breaks down when we decompose India into smaller fragments. States like Goa and Karnataka are far richer on a per-capita purchasing power parity basis than Sri Lanka is, and yet you don’t see the kind of public service provision in our richer states.

Another explanation could be generational literacy. Sri Lanka achieved near-universal literacy by the 1970s. India's literacy gains are more recent. But even here, India’s most literate states are no match for Sri Lanka in rule-following and public service provision.

Another instinctive reaction is that Sri Lanka simply doesn’t have megacities. Colombo’s city proper has roughly 700,000 people; Kandy has 125,000. Managing a 125,000-person town is obviously easier than managing a 13-million-person agglomeration like Bengaluru. But this is a weak objection because there is no reason Bengaluru must be governed as a single, monolithic unit. It could be decentralised into borough-level governments with genuine authority over roads, waste, and traffic, as in London, Tokyo, or even New York. Scale is not a natural constraint on Indian urban governance. It is a political constraint.

Beyond grand explanations, there might just be some micro-institutional work that is doing the heavy-lifting. For example, Sri Lanka’s Road Development Authority (RDA) is a single national agency responsible for the design, construction, and maintenance of the national road network. It sets and enforces uniform standards across the country—lane widths, marking patterns, signage placement, speed indicators, etc. When a road is built or resurfaced anywhere in Sri Lanka, it follows one set of specifications.

Road governance in India is fragmented across at least four tiers: NHAI handles national highways; state PWDs handle state highways and major district roads; municipal corporations or councils handle urban roads; and panchayats nominally handle rural roads. Each tier has its own lack of standards. A beautifully asphalted NHAI stretch gives way to a cratered state highway, which feeds into an urban road where the white-topping contractor has left things half-finished for months. No single authority owns the standard across the full network.

The fragmentation can also explain why Indian civic norms around road use are weaker. When road design is inconsistent, drivers rationally stop paying attention to markings altogether. Why would you stop at a zebra crossing when the last three you saw were painted over, half-erased, or placed in locations where no pedestrian could possibly cross? Sri Lanka’s consistency in road design has created a feedback loop. Uniform markings lead drivers to learn to respect them, which in turn leads pedestrians to trust them. India’s inconsistency produces the opposite loop: unreliable markings lead to a rational disregard and norm erosion.

At this point, it’s tempting to reach for cultural explanations. Perhaps Sri Lankans are simply more civic-minded, more rule-following, more invested in public order. Perhaps there’s something about the society—Buddhist values, island-nation cohesion, a smaller and more homogeneous population—that makes people respect zebra crossings and public libraries in ways that Indians don’t.

I’m sceptical. Sri Lanka is no stranger to the pathologies we usually attribute to Indian culture. Corruption is endemic. Communal tensions between Sinhalese and Tamils produced a full-blown civil war. Political dynasties have dominated the country. Clientelism, patronage networks, ethno-religious mobilisation—Sri Lanka is no stranger to these. If ‘culture’ were the explanation for poor public services, Sri Lanka should look no different from India. And yet, the roads are better. The zebra crossings work. The public libraries are visibly present. This suggests that the difference isn’t in the culture of the people but in the structure of the State.

The Indian State optimises for avoiding the worst-case outcomes, such as runaway inflation, civil wars, large-scale violence, and recurring macroeconomic crises. Performance and delivery are merely good-to-have features. Other countries like Sri Lanka optimise for uniformity. A small, relatively homogeneous state can afford to centralise authority, impose uniform standards, and focus institutional energy on delivery.

Whatever the precise reason, why we, as citizens, demand and expect so little from the Indian State while venerating those who hold its reins remains an evergreen puzzle.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Book] Samanth Subramanian’s This Divided Island is a terrific book on Sri Lankan politics and society.

2. [Puliyabaazi] The next episode is on the invisible infrastructure created by Engineering Talent, Non-Profit Trade Bodies, and Public Libraries.

   पुलियाबाज़ी Puliyabaazi

   अनदेखा ढाँचा: Engineering Talent, Non-Profit Trade Bodies, Vibrant Public Libraries

   यह चर्चा पिछले एपिसोड से चल रही चर्चा का दूसरा भाग है। पिछले हफ्ते हमने बात की थी AI और डिजिटल दुनिया के बारे में। इस हफ्ते हम अपनी नज़र दौड़ाते है उस अदृश्य इंफ्रास्ट्रक्चर पर जिसकी कमी की वजह से भारत कई मायनों में पीछे छूट जाता है। हम टटोलेंगे अमेरिका के ‘ट्रेड शोज़’ का गणित, समझेंगे हवाई जहाज़ के ईंधन पर लगने वाले टैक्स को, और आख़िर में बात होगी कि कैसे …

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   3 months ago · Puliyabaazi Hindi Podcast

*Anecdata = Anecdote + Data

India Policy Watch: To Stop A Juggernaut

Insights on current policy issues in India

—RSJ

The usual trope of election coverage in India is to refer to them as festivals of democracy. Anchors will momentarily tone down the cacophony in their studios to speak about the dance of democracy in exalted terms. That these are celebrations of participation, moments of collective will and periodic renewals of the social contract.

All that is true, but perhaps irrelevant. Elections might be festivals of a kind. But for the citizenry, they are primarily disciplining mechanisms. Their real function is not simply to produce governments, but to remind governments that they can be removed.

The fear of removal is one of the great invisible stabilisers of democratic systems. It disciplines arrogance, forces responsiveness, moderates excess, and occasionally compels probity in public life. Governments that believe they can lose behave differently from governments that believe defeat is improbable.

Since the surprising blip of the 2024 Lok Sabha elections, where the BJP lost its majority, the empire has struck back with vengeance. The BJP electoral machine has been relentless since. And this is a point to ruminate over after another round of state election results declared last week. Not whether the BJP wins or loses a particular state election in Assam, West Bengal, Tamil Nadu or Kerala, but whether India is entering a phase where electoral competition itself begins to lose its disciplining edge.

The BJP’s rise is often explained through ideology alone. Critics see only Hindutva, state capture and divisiveness. Admirers see nationalism, leadership and decisiveness. These are somewhat accurate though facile explanations. What India has witnessed over the last decade is the construction of the most sophisticated electoral machine in democratic history. The scale of this machine is still underestimated because Indian political commentary continues to operate with assumptions from an older age. The usual shibboleths dominate our discourse: that economic underperformance naturally produces anti-incumbency, unemployment translates into anger, inflation gets punished, and that, over time, voters simply get tired. But elections in India are no longer referendums on governance. They are contests over narratives, identity, organisational permanence, with a late dose of welfarism to sway voters.

The BJP has mastered the craft of bringing several things together that Indian parties historically struggled to combine simultaneously: ideological coherence, welfare politics, charismatic leadership, booth-level mobilisation, and a permanently active cadre ecosystem (anchored by the RSS). Most Indian parties awaken during elections. The BJP operates continuously. It is not merely a party fighting elections every five years; it is an ecosystem that remains politically alive between elections. Electoral politics for the BJP isn’t about episodic communication. It is an ambient presence in all its decisions.

And because it is so ambient and ever-present, it is changing the psychology of the electorate itself. Consider a voter born in 1992. That person would have been too young (under 18) to vote in the 2009 general election, the last election won by the Congress-led UPA. By 2029, that voter will be 37 years old. For their entire adult political life, for anyone below the age of 37 in 2028, the BJP would have occupied the political mindspace with continued narrative dominance. To such voters, the opposition begins appearing abnormal rather than an alternative.

There is a tendency among sections of the opposition, especially the Congress old guard, to assume that the BJP’s dominance is temporary, that eventually anti-incumbency will mechanically restore equilibrium. This is the underlying message you hear from Rahul Gandhi apologists. History offers little support for that assumption. Democracies across the world have repeatedly produced dominant-party systems that last for long. Post-independence India itself was effectively a one-party dominant state for almost three decades. Japan’s Liberal Democratic Party has been in power for most of the post-war era. Mexico’s PRI ruled for decades. Dominant-party systems emerge when political organisation, ideology, governance and institutional advantage converge in a manner that leaves the opposition without a plank.

But there is a crucial difference between the old Congress system and the current BJP system. The Congress system was inherently centrifugal, which eventually led to its decline from within.

Congress thrived over the years by absorbing contradictions. It was less a political party than a sprawling tent under which socialists, conservatives, industrialists, secularists, caste leaders and regional aspirants all coexisted uneasily. Every new social movement eventually found its way into the Congress tent.

But big tents carry within them the seeds of fragmentation. Prolonged power creates newer claimants. Not every claimant gets what it wants, and that creates factions. Factions eventually seek autonomy. Congress could not permanently satisfy its contradictions: the left and right, centralisers and federalists, socialist instincts and market-oriented impulses. Over time, these resentments accumulated. The Swatantra Party emerged from one side, socialist formations from another, and regional caste politics from yet another. By the time the Emergency arrived in 1975, the Congress system was already weakening internally. And then it started breaking. Almost the entire political class that’s non-BJP and non-Congress today owes its origins to Congress eventually.

The BJP operates differently. People do not enter the BJP expecting ideological negotiation. They enter accepting an ideological hierarchy that’s cast in stone. Nationalism, welfare delivery, centralised leadership, civilizational rhetoric and Hindutva form the party’s core grammar. Leaders from different backgrounds may join, but they are expected to align themselves with this existing ideological framework rather than reshape it. There is a syntax to learn, and that’s the only way to move ahead within it. The likes of Scindia, Sharma and Adhikari have all followed this. Congress expanded by diluting its ideological boundaries. The BJP expands by converting entrants to follow their ideological order.

This is why the usual theories of dominant-party decay may not fully apply here. The Congress weakened because its contradictions became unmanageable. The BJP’s contradictions are narrower and more controlled. That does not mean the BJP cannot fragment. All dominant parties eventually confront succession crises and personal ambition. But ideological centrifugal forces inside the BJP are weaker than they were inside Congress. The primary fault lines are likely to emerge not from doctrine but from ambition after Narendra Modi.

And even there, the BJP possesses something Congress did not (or frittered away): a durable organisational spine outside the political party itself. The RSS is not merely a support organisation; rather, it is the source of its ideology, the reserve of cadres, its arbitration mechanism and its institutional glue. In many instances, dominant parties weaken after charismatic leaders fade because there is no deeper coherence beneath them. The BJP may prove more resilient because its ecosystem extends beyond electoral politics.

The BJP has also occupied much of the traditional opposition space. Welfare politics, once the natural terrain of Congress and regional parties, has been appropriated and fused with nationalism. The BJP speaks the language of aspiration and subsidy simultaneously. It invokes markets when convenient and redistribution when necessary. Successful dominant parties are rarely ideologically pure. But they are emotionally coherent. And BJP is Exhibit A of this approach.

The other transformation is institutional and informational. Elections are now fought inside a surround-sound environment of television amplification, WhatsApp networks, micro-market mobilisation, constituency-level analytics and narrative saturation. Add to this campaign finance asymmetry, institutional takeover and administrative leverage, and the challenge before the opposition becomes enormous. The playing field has not disappeared entirely, but it has unquestionably tilted.

This is where the opposition’s problem becomes deeper. The German political theorist Carl Schmitt argued that politics ultimately rests upon the distinction between friend and enemy. Every durable political movement defines who belongs and who does not. The BJP has understood this distinction with remarkable sophistication. It has gradually positioned itself not merely as a party asking for votes, but as the authentic political expression of national belonging itself. Opposition to the BJP can therefore be reframed not as opposition to a government, but as opposition to the nation’s emotional consensus.

This creates the central dilemma for the opposition. To oppose the BJP frontally on nationalism or civilizational politics risks immediate delegitimisation because the opposition is then pushed too quickly into the category of “enemy” of the nation. The traditional anti-BJP vocabulary of secular restoration, anti-majoritarian rhetoric, and anti-Hindutva positioning struggles because large sections of society no longer experience those arguments as culturally persuasive. Hindutva isn’t merely an ideological position any more; it has become part of the accepted operating system for large sections of Indian society.

Which means the starting point for defeating the BJP may paradoxically require not appearing as an enemy at all.

A successful challenger may have to present itself as a dissatisfied friend rather than a hostile adversary. Someone operating within the broad emotional universe that the BJP has normalised, while arguing that the current regime has become complacent, arrogant or ineffective. Not a rejection of nationalism, but a claim that nationalism has become performative rather than productive. Not an assault on welfare politics, but an argument that welfare without broad-based prosperity perpetuates the mai-baap sarkar model, which the people wanted to exit. This kind of dominant political position can’t be defeated through direct negation. It will need to be challenged from within their own emotional framework. I don’t see anyone from the opposition space that has the political nous and the energy to mount such a challenge. The idea that everyone ganging up against the BJP will lead to its electoral defeat is an arithmetical chimaera. It will never become a reality.

Democracies do not get undermined simply because one party wins repeatedly. The greater danger emerges when permanence begins reshaping institutions, incentives and public imagination. Bureaucracies adapt to continuity. The judiciary seeks to please rather than challenge. Media ecosystems align themselves with power. Capital and business optimise around incumbency. In such an environment, voters are conditioned to blame everyone except the party in power for their problems. Over time, elections become routine exercises of continued dominance, and the disciplining mechanism weakens.

Of course, nothing is inevitable. History offers a final caution. Dominant systems often appear invincible until suddenly they are not. Congress once looked immovable. So did Mexico’s PRI and Japan’s LDP at various moments. Political permanence is rarely permanent. But the effects of prolonged dominance can endure long after electoral turnover eventually arrives.

The real question for Indian democracy, therefore, is not whether the BJP will someday lose. Every dominant party eventually does. The more important question is what happens to democratic competition, institutional neutrality and political imagination during long periods when defeat itself stops feeling plausible. Those scars are almost permanent.

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Matsyanyaaya: US-China De-Risking is a Euphemism

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

I spent the last week at an Indo-Pacific Roundtable organised by the University of Cambridge on US-China de-risking and its global fallout. It was coincidentally appropriate that this discussion took place in a week that also saw the US President’s much-discussed trip to China.

What follows is an annotated version of my comments.

1. De-risking is a Euphemism

“US-China de-risking” is a euphemism coined somewhere between Brussels and Washington. What really is happening is better described as the weaponisation of interdependence, a term coined by Henry Farrell and Abraham Newman in their influential 2019 article. While the US has weaponised export controls, entity lists, the dollar system, and technology access, China has weaponised supply chains, rare earths, and market access.

Neither of these is conventional trade policy. Conventional trade policy uses barriers to protect domestic producers or penalise imports. What both powers have done is more structural: they have turned the architecture of globalisation into an instrument of coercion, even as they continue to trade with each other in high volumes.

De-risking is what countries like India are trying to do in response to this weaponised interdependence. India faces this weaponisation from both directions simultaneously. Other countries have it bad in one direction. The EU faces Chinese overcapacity and American technology controls, but EU members are US allies with treaty relationships that act as a buffer. EU countries are biding time for the Trump administration to end. Japan has a deep alliance architecture with the US, and its METI subsidies are often coordinated with Washington. India’s position, not fully aligned with either power and dependent on both, is what makes its de-risking challenge distinct.

2. China as an international market failure

China’s overcapacity in manufacturing was the market failure of negative externalities. Subsidised production at scale, underwriting costs no commercial firm could match, drove out investment everywhere else and made the rest of the world structurally dependent. The steel and solar stories are the canonical ones, but the pattern extends to industrial chemicals, consumer electronics components, and now EVs. Individual governments responded with tariffs. Tariffs protected domestic producers temporarily and raised consumer prices permanently. None of it resolved the underlying problem, because the underlying problem was not a trade imbalance. It was a structural market failure that individual country responses cannot fix.

China’s restrictions now display a different kind of market failure, that of monopoly behaviour. The global controls on rare earth magnets, gallium, and germanium target every country. But India also faces something more targeted, and the targeted restrictions are more revealing.

Over the past year, China blocked speciality fertiliser exports to India even as it resumed them to other countries. Herrenknecht tunnel boring machines assembled in China, used in metro projects across Indian cities, were held back from Indian buyers. Foxconn’s Chinese engineers were recalled from Indian facilities. Specialised manufacturing equipment shipments were delayed without a formal explanation.

Each of these restrictions is individually substitutable. Herrenknecht now supplies from its Indian facility. Taiwanese and Vietnamese engineers replace the Chinese ones within weeks. Fertilisers get routed through third countries at a cost premium. The point is not that any single restriction is crippling. The point is that they function as attrition. They introduce friction, slowing the pace at which manufacturing capacity shifts out of China.

The strategic signal here is that China views supply chain diversification itself as a threat. The irony is that this outlook makes diversification a necessity for companies seeking policy consistency. Its own restrictions are accelerating the diversification it fears, i.e., China is making China+1 happen.

3. India has a long memory of tech denial and the confidence to build base-level capabilities in critical sectors

In January 2025, the Biden administration’s AI Diffusion Rule placed India in Tier 2, not alongside Japan, the UK, and Australia, but with most of the developing world, with caps on how many advanced AI chips India could import. The Trump administration rescinded it before it took effect but the fear looms that some controls on AI compute might be forthcoming.

These developments have a familiar narrative territory. India has a long institutional memory of technology denial. Cryogenic rocket engine technology was denied in the 1990s, which is why ISRO spent the next fifteen years building its own engine. Cray supercomputers were denied to Indian institutions in the 1980s, which is why the Centre for Development of Advanced Computing built PARAM. Nuclear fuel and dual-use technology were withheld for decades under NSG and MTCR restrictions, constraining not just the weapons programme but civilian nuclear power too.

Every time, the lesson was that India can build what it prioritises, even if that version is slower, more expensive, and takes more time. The AI Diffusion Rule triggered exactly that institutional memory. This is why India’s response to US-China ‘weaponised interdependence’ has been to invest in building base-level capabilities across semiconductors, AI, and rare earths.

4. India does trade defence alright. But it has no institution to deploy offensive economic statecraft.

India’s defensive architecture is largely in place. Press Note 3 screens Chinese investments. Huawei is excluded from 5G deployment. There is a Trusted Source, Trusted Product framework for telecom vendors and satellite services. The relationship with China is a one-dimensional buy-sell transaction. This is in sharp contrast to the web between China and the West, characterised by overlapping layers of talent, technology transfer, investment, and trade, making it difficult to untangle.

But what India lacks is offensive economic statecraft. China’s State Administration for Market Regulation has turned antitrust review into a geopolitical lever. It can threaten to block any cross-border merger where the parties have significant China revenue, which, for major technology and industrial companies, is nearly every deal. India is the only other market large enough to plausibly do something similar.

And India has a structural asset that almost never appears in de-risking discussions. It has over 1,800 Global Capability Centres, R&D hubs, product development facilities, and operational decision-making units for nearly every large global corporation. These are not call centres. They are where chip architectures get designed, where algorithms get built, and where product roadmap decisions get made. They are sticky in ways factories are not; the organisational dependency they create is deep and hard to reverse. In an era of weaponised interdependence, talent inside someone else’s company is leverage. But India has no institution to deploy it. That’s why we have written in these pages that India needs a SAMR equivalent to use market access as a bargaining chip.

5. The coordination problem remains underappreciated

If Chinese overcapacity is structural, individual country responses are insufficient by design. Domestic capacity built behind tariff walls gets destroyed the next time Chinese prices drop. We have seen it in steel, where Indian mills built behind high duties watched their margins collapse when Chinese export prices fell. We have seen it in solar, where module manufacturing capacity in the US and EU became unviable the moment Chinese panels got cheap again. The pattern is stable and repeating.

There are 91 semiconductor fabs under construction globally right now, some of them outside China, most incentivised by industrial policy responses to the chip shortage and the CHIPS Act. Without cross-country coordination on capacity, pricing, and market access, a significant portion of this investment will not survive the next deflationary wave from China, as the largest amount of mature-node capacity coming up is from China. We are setting up for a massive collective write-down unless some big markets can frame a collective response.

India’s challenge is whether the political economy can sustain de-risking, whether institutional imagination can move from defence to statecraft, and whether anyone will solve the collective action problem before the next ‘China Shock’ makes individual country responses moot.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Puliyabaazi] The next episode discusses the AI Divide(?), India’s Human Capital, Cognitive Autonomy in the AI age, and the Enshittification of Software.

   पुलियाबाज़ी Puliyabaazi

   सोच की स्वछंदता, सॉफ्टवेयर का 'कबाड़ा' और AI की दौड़ में भारत कहाँ? Cognitive Autonomy, Enshittification and AI Divide

   पुलियाबाज़ी के इस एपिसोड में, हम चर्चा करते हैं AI क्रांति और उभरते हुए “AI Divide” पर। क्या भारत AI के इस्तेमाल से अपनी विशाल मानव पूंजी (human capital) के लिए अवसर पैदा कर पायेगा? क्या AI क्रांति भारत की समस्याओं को सुलझाने में काम आएगी? इसके अलावा, हम AI के दौर में अपनी सोचने-समझने की आज़ादी (cognitive autonomy) कैसे बचा कर रखे? साथ ही, बातचीत सॉफ्…

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   4 months ago · Puliyabaazi Hindi Podcast

2. [Article] Check this take by my senior colleague Nitin Pai, on the significance of the early findings of the Genome India project. Aside from the findings, I found it motivating that several organisations came together to work on this multidisciplinary study that’s vital for India.

3. [Book Bundle] Read Farrell and Newman’s The Underground Empire and Edward Fishman’s Chokepoints as a stack.

4. [Repo] What if you had access to the Takshashila Way of Research from anywhere in the world? What policy question would you ask and investigate? Well, here’s a beta version of ‘Takshashila in a Box’ for you to begin your policy research journey.

India Policy Watch #1: Gradually, Then Suddenly

Insights on current policy issues in India

—RSJ

As in previous quarters, I was looking at both the Q4 results announced by corporate India and the commentary they offered during analyst calls to get a sense of how well the economy was faring. While there is good evidence to suggest India’s energy security, or the lack of it, will play out during the course of this year on its fiscal math, the economic data so far doesn’t seem to suggest there is any real impact on the ground.

India’s story at the moment is caught between two competing instincts. One is the instinct to panic. Every new flare-up produces predictions of oil shocks, rising inflation, supply chain disruptions hurting the industry, and a return to the bad old days of external vulnerability. The other instinct is to back domestic resilience, fiscal space, and political stability to declare that India has structurally escaped these constraints and is insulated from global disorder. Neither view is particularly useful.

The current reality is that the Indian economy is proving more resilient than many expected, even as signs of fragility are emerging underneath. The resilience is visible in the numbers and high-frequency indicators. The fragility is visible in forecasts.

Going back to Q4 earnings data from large listed Indian companies (about 180 and counting at the moment), sales growth accelerated to roughly 16% year-on-year, while EBIT growth rebounded to about 11% after a weak preceding quarter. Around 42% of firms beat analyst expectations, while only about 12% missed. Metals, autos, real estate and discretionary consumption led the rebound. Even banks, despite weaker net interest margins, reported lower provisioning ratios, suggesting that the feared deterioration in asset quality has not yet materialised.

India’s banking system also looks structurally healthier than it did a decade ago. Corporate leverage is lower than during the previous investment cycle. Public sector bank balance sheets are cleaner. Credit growth has moderated but remains positive. The mood in the market feels recessionary; the underlying data does not.

That is not what an economy sliding toward crisis usually looks like.

At the same time, global trade flows are also behaving in an unexpectedly resilient fashion despite worsening geopolitical conditions. Global goods trade grew by around 12% year-on-year in Feb and March 2026, with volumes expanding strongly despite disruptions in freight routes and rising insurance costs. Asian export systems continue functioning at scale.

As we have seen on multiple occasions in the past few years, conflicts and tariffs don’t freeze global commerce. The information flow and the flexibility built in since COVID-19 have meant that alternatives are found quickly. Trade routes change, shipping corridors lengthen, and rising freight costs or insurance premiums are absorbed by the players. But the system continues moving.

The Strait of Hormuz disruptions illustrate this dynamic clearly. The Gulf region still accounts for roughly 28% of global crude supply and 20% of LNG exports. Around half of Asia’s crude demand and roughly 40% of its LNG demand remain tied to Gulf energy flows. India itself sources close to 60% of its seaborne crude imports through Hormuz-linked routes. The disruptions have been meaningful. Shipping transit through Hormuz reportedly fell more than 90% below normal levels during peak disruption periods. Freight rates for very large crude carriers have risen between three and six times from pre-crisis levels. Oil exports out of the Gulf are down by nearly 65%.

Yet the global economy has adjusted faster than many expected. Strategic petroleum reserves are activated. Saudi and UAE pipeline infrastructure partially rerouted exports. Sanctioned Russian oil and gas is back in the market. American suppliers are now accessing Asian markets, including India. There’s been demand destruction in energy-intensive sectors, but so far, things have held out in the wider economy.

India benefits from certain structural features in this environment. One of the least fashionable elements of the Indian economy is that coal still dominates its electricity generation mix. Gas exposure remains limited compared to East Asian economies. This is environmentally bad but strategically useful during LNG disruptions. Coal prices have gone up globally, and that will hurt the consumers or the government subsidies, but there isn’t a serious electricity supply disruption impacting households or industry.

But India’s vulnerabilities are elsewhere.

Agriculture remains a critical area. India imports roughly 50-60% of its DAP fertiliser requirements, and a meaningful share of these imports is linked to Gulf supply chains. More than 50% of sulphur demand is met through imports, with over 90% sourced from Gulf producers. Around 40% of urea imports also come from the region. A prolonged LNG disruption could reduce gas availability for domestic fertiliser producers by as much as 30%. There are buffers. Fertilisers exposed to Gulf-linked disruptions account for only around 6% of a paddy farmer’s production costs. Agrochemicals account for another 2%. Subsidies cushion farmers from immediate volatility in urea and several fertiliser categories. But subsidies do not eliminate costs. They transfer them to the State. The fertiliser subsidy bill is likely to come in excess of ₹1.5 trillion over budget, given our reluctance to pass on the costs to farmers. But the real issue is we might run out of supply after Kharif sowing, given the urea inventory levels. This matters for India’s food security and inflation, which will hurt the masses.

One reason there is relatively little visible anxiety within the Indian establishment about the electoral implications of economic disruption is that the current political machinery has repeatedly demonstrated an ability to transcend traditional economic voting behaviour. The BJP election apparatus, aided by welfare delivery systems, hyper-centralised political communication, and increasingly “sophisticated” electoral mobilisation, has shown across multiple elections that economic distress isn’t a political vulnerability. Many governments around the world today are constrained by political fragility. Inflation shocks rapidly translate into collapsing approval ratings, coalition instability or fiscal panic. India currently does not face that problem to the same degree. The government, therefore, has room either to support the economy through measured fiscal expansion or to hold the line and allow parts of the shock to pass through consumers and companies.

This flexibility is rarer among large economies than is commonly appreciated.

The COVID-19 experience offers a useful guide here. India did not pursue massive household income replacement on the scale of the United States or parts of Europe. The State intervened selectively with food transfers, targeted welfare, credit guarantees, infrastructure spending, and calibrated fiscal easing, rather than an outright abandonment of fiscal discipline. Much of the adjustment burden was ultimately borne directly by households, small businesses and informal workers.

A similar pattern is likely in the event of a prolonged energy or commodity shock. There will probably be some fiscal expansion. Fertiliser subsidies may rise. Food support through free rations may expand. Credit guarantee schemes will come into play (already announced last week). But the response is likely to remain measured rather than dramatic. The government will hope to absorb the disruption within a single fiscal cycle and then return to the familiar 6.5-7% growth trajectory that policymakers increasingly treat as India’s natural cruising speed.

Like always, I am somewhat sceptical of this scenario.

Not because India is fragile in the old sense. It clearly is not. Foreign exchange reserves remain strong. Banks are healthier, and corporate balance sheets are cleaner. Public infrastructure has improved logistics and formalisation. The concern is different.

The greater risk for India may not be a single oil shock but rather prolonged, medium-level instability. The global economy appears to be moving from a system built around efficiency toward one built around redundancy and resilience. That means structurally higher logistics costs, larger inventories, duplicate sourcing systems and more expensive trade finance. Economies will increasingly pay a premium simply to ensure continuity. Parts of this adjustment are already visible. Governments are accelerating renewable deployment not only for climate reasons but because energy security has re-entered economic strategy. Strategic reserve policies are expanding. Supply-chain redundancy is replacing just-in-time efficiency. India isn’t well placed for any of these. It will have to make significant investments fairly quickly to adjust to this new reality.

There is, of course, the other challenge of India’s labour advantage being eroded faster than previously imagined because of technology. Just look at the Q4 numbers of Indian IT services companies. The first stage of revenue deflation is on already, despite all the soothing words offered about how these companies are adapting to AI and getting more business. This matters for India because much of the urban middle-class confidence rests on the continued expansion of the IT and services economy. For nearly three decades, India benefited from a fortunate alignment. Globalisation expanded outsourcing, while technology spending created a rising demand for software services faster than automation reduced employment.

Generative AI is disrupting that balance.

The risk is not that Indian IT services will disappear. It will take time to morph and adjust to this new reality. But the days of it being the mass white-collar employment engine are coming to an end. Entry-level coding, testing, maintenance and documentation work are disappearing faster than these companies would like to admit. Even if technology spending remains healthy, the number of billable human hours required per project will decline steeply. This matters because India’s consumption story has been built less on wealth effects than on salaried employment expansion. If hiring growth slows in IT while manufacturing still struggles to absorb labour at scale, consumption growth could become narrower and more uneven.

There is an additional irony here for India. The AI boom itself depends heavily on energy-intensive infrastructure. Data centres consume enormous amounts of electricity. Electricity can account for 60-70% of operating expenses for large data centres. Semiconductor manufacturing depends on fragile supply chains involving helium, energy inputs and specialised industrial materials. Rising energy costs and supply vulnerabilities of India in these areas could therefore slow parts of the domestic AI infrastructure buildout that is being planned in the next few years.

And then there are some familiar unknowns that India still cannot fully hedge against.

A weak monsoon linked to El Niño, as is being predicted, could quickly turn things worse for the rural economy. India’s agriculture system remains heavily monsoon dependent than policymakers often acknowledge. Reservoir levels, crop yields and rural demand still depend heavily on rainfall patterns despite decades of irrigation investment.

None of these risks individually looks unmanageable. But it is possible that in the next 2-3 quarters, several moderate risks indicated above will interact simultaneously: inflation driven by global oil prices, weaker hiring, food-price shocks, slower global demand, and rising fiscal burdens.

The economy is neither collapsing nor transcending economic gravity, given Q4 data. It is looking more resilient than expected at this moment. But as Hemingway noted about bankruptcy, it happens gradually and then suddenly. That’s an important lesson to keep in mind over the next couple of quarters.

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India Policy Watch #2: One Year after Op Sindoor

Insights on current policy issues in India

—Pranay Kotasthane

It’s been a year since Operation Sindoor. Several “hard-lessons-for-India” articles came out earlier in the week assessing the state of play between India and Pakistan. Most began with a rather sobering tone and pointed out that, one year later, Pakistan is in a better position than it was before May 7, 2025. Geopolitical assessments often suffer from a recency bias, and Pakistan-US relations reaching a local maxima have weighed heavily on them.

Nevertheless, my senior colleague has an insightful assessment of three structural military changes fast-tracked in Pakistan over the last year, even as India hasn’t been able to action many of its military reforms. These are:

“The 27th constitutional amendment, passed in November 2025, abolished the post of Chairman of the Joint Chiefs of Staff Committee and established the post of Chief of Defence Forces. Multiple coordination layers were consolidated into a single decision channel. The amendment was procedurally clean and politically uncontested, which is itself an indicator of the institutional consensus behind Pakistan’s velocity reforms.

The Army Rocket Force Command now unifies long-range strike assets, including ballistic missiles, cruise missiles, and armed drone swarms, under one authority. Previously these assets were scattered across services. They can now be employed in coordinated, multi-domain strikes within hours of a crisis. The separation of conventional strike forces from nuclear command is the more consequential reform, because it enables rapid conventional employment within nuclear thresholds. The Indian planner who calculates a Pakistani response under the previous architecture is calculating against a system that has been replaced.

The Defence Forces Headquarters now unites operational planning, information operations, and strategic messaging. This institutionalises the narrative advantage Pakistan demonstrated during Sindoor. The empirical record from May 2025 is instructive. During the attribution window, Pakistan enabled over sixty engagements with American policymakers and media. India managed four. By the time Indian messaging reached Washington, perceptions had hardened. The new architecture is built specifically to widen that gap.” [Anil Raman’s Substack]

These changes have direct consequences for the next round of confrontation. Besides, reports suggest that China has finally owned up to providing direct on-ground support to Pakistan. I’m sure India’s military strategists must be following these two developments closely.

Since this newsletter covered Operation Sindoor extensively, let’s look at how we fared on those assessments. On 10th May 2025, I made three points:

One, India is better placed strategically. By hitting air bases all along Pakistan’s length, India has changed the payoffs for Pakistan. It has signalled that acts of terrorism against India will invite a response directly to Pakistani cities. By taking out air defence systems and runways in some air force stations, it has also exposed Pakistan’s vulnerability.

This assessment holds even if the reports of Pakistan downing Indian aircraft are partially accurate. There’s been a lot of chatter surrounding the implications of a J-10C possibly taking out a Rafale. The obsession with this question is partly because our mind slots it in the same category as the Balakot airstrikes, which ended up in the downing of an Indian Mig-21 in Pakistan-controlled territory. But the situation was quite different this time. Pakistan is claiming that its air defence system took out an Indian aircraft in the Indian airspace, while the Indian side has not accepted any such claims. If true, it is indeed a military gain for the Pakistani Air Force. But even that military win doesn’t change the strategic calculus. Despite this supposed loss, India was able to hit primary military and terrorist targets deep within Pakistan consistently, and that is the more significant development.

The second part of this assessment holds quite well one year later. Notice how the number of aircraft that went down on both sides is a non-issue in the strategic sense one year later. Moreover, the downing of US Air Force jets in the Iran war and the Ukrainian attacks on Russian aircraft have also made people realise that such things are not unusual during wartime. Larger powers have larger military surfaces that can be targeted through asymmetric warfare. But what matters is the overall strategic effect, not tactical losses.

The first part of this assessment has played out somewhat differently. On May 19th, in an episode of The Seen and the Unseen Podcast, I classified the war's effects into three levels. At the tactical level, which focuses on individual battles and engagements, Pakistan's shooting down of Indian aircraft was a tactical win, just as India could claim a tactical win for successfully striking its intended targets. Next, India was more successful at the operational level, winning campaigns, and achieving its goal of sending a clear signal that the entirety of Pakistan is vulnerable to retaliation if it continues sponsoring terrorism. At the strategic level, which focuses on the realisation of long-term national objectives, I was less sanguine. This level is an “infinite game” where results remain ambiguous. While India gained a strategic advantage by demonstrating that such attacks now incur high costs for Pakistan, I didn’t think it would effectively end future terrorist activity, as Pakistan maintains the free will to continue its path regardless of economic or military setbacks.

The Red Fort terrorist attack later in November shows that even if terrorist activity declines substantially, the marginal cost of reducing it to zero is infinite. And in any case, because terrorism is theatre, less-frequent acts can have equally harmful strategic effects. India’s response was equally interesting. Having publicly committed to a zero-tolerance policy, the Indian government tried to portray that this attack was below the threshold that deserved an Op Sindoor-like response. The credibility cost of that manoeuvre has not been fully priced in yet.

All these events over the past year show that the India-Pakistan conflict dyad is far more stable than people realise. Limited wars continue to happen, but both sides, operating under a nuclear overhang, prefer to de-escalate quickly. The last round, beginning with the April 22 terrorist attack in Pahalgam, lasted around 18 days; compare that with other ongoing wars between Ukraine-Russia and Iran-US-Israel, and you will immediately notice the difference.

Two, the events serve as a reminder that Pakistan is a capable military adversary despite its significant economic and social troubles. The military-jihadi complex (MJC) has the first claim on the resources of that country, and it can squeeze out the funds for its requirements, even if the rest of the country suffers. Thus, it would be foolish to discount the MJC’s military capabilities. The dreams of balkanising Pakistan are just as improbable as Pakistani dreams of taking over J&K.

I think this holds well one year later. We need a measured understanding of Pakistan’s capabilities, not some fantastical notions of its decline fed by social media narratives and cricketing failures. Pakistan’s moment under the sun, diplomatically, is all well, but the truth is that the US-Pakistan equation will neither be as bad as Indian hawks wish nor as strong as Indian strategists fear. Pakistan’s economic fragility and the terror infrastructure it has built limit how far any outside power is willing to go in treating it as a serious partner. The engagement will remain one-dimensional and transactional.

Third, it is fascinating that even in the Information Age, information ecosystems of two adversaries can be managed and partitioned to an extent that each side can claim victory. This is a major takeaway, and we will discuss it in subsequent editions.

Despite the Fog of War lifting, this bifurcation between the two information environments has persisted. The two governments are able to assuage domestic constituents and climb down from a confrontation reasonably quickly.

The net assessment then is that the dyad’s basic stability-instability logic has not changed. Asking who won and who lost is futile because this is an infinite game.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Article/Paper] Anupam Manur decodes the policyWTF that is India’s taxation of Aviation Turbine Fuel (ATF). We are no strangers to cross-subsidisation but Indian governments have taken ATF taxation to absurd levels. Don’t miss this opinion piece and paper.

2. [Article] An opinion piece which casts a doubt on the US-Pakistan bonhomie.

3. [Podcast] There are many opinions about India’s legislators but little empirical research on it. So this Puliyabaazi with Ajit Phadnis discusses his extensive research on the incentives of legislators.

4. [Frameworks Compilation] We've been discussing public policy frameworks here for 6+ years. 99 frameworks later, they now have a home in a searchable, cross-referenced form. Thanks to Claude Code. Now you can describe a policy problem and find the most relevant framework. Check it out.

Global issues and their impact on India

—RSJ

It’s good to be back after a two-week break. Much has moved in the interim, but the underlying picture remains familiar. West Asia sits in a tense ceasefire, with the U.S. and Iran settling into a holding pattern that neither side seems inclined to disturb. The former is relying on the slow grind of economic pressure, while the latter works around it through land routes, informal channels, and partial flows that keep the system from tightening fully.

For countries like India, much of Southeast Asia, and parts of Europe, the effects are beginning to register in ways that are more immediate than strategic, as oil prices firm up and supply becomes less predictable, setting the stage for second-order effects. If this persists into May without resolution, shortages will begin to move from the abstract to the tangible. By then, the domestic political calendar will have shifted as well, with election results behind the government and us in a position to act through price pass-through, tighter distribution, or some form of rationing in the more sensitive segments of the economy.

The inflationary impulse from such a shock rarely stays contained within fuel; instead, it moves through transport, packaging, and any sector where petroleum derivatives sit within the cost structure. Add the risk of an El Niño year and the possibility of a weaker monsoon, things tighten further, as fertiliser prices continue to rise globally, and urea shortage risks look real for the Rabi season (we have enough for Kharif sowing). There is bound to be fiscal policy action by the end of this quarter.

High-frequency indicators for April suggest some moderation in the economy, though nothing sharp enough to force a reassessment. The next few weeks will begin to shape the policy response, and once the election cycle clears, both fiscal and monetary choices and actions will offer a clearer signal of how seriously these risks are being taken. We will have a lot to chew on in the future editions on this.

For this edition, let me start with a minor gloating point.

At the beginning of the year, I had made my usual set of predictions (edition #329), one of which was this:

“Surprisingly, in 2026, Europe will buck the trend of right-wing parties gaining ground in elections. I think the overt support from the MAGA crowd plus the US national security strategy document published last month that openly seeks to support “patriotic European parties” and “to help Europe correct its current trajectory” will backfire. The firm stand by the current leaders to Trump’s bullying, to China’s dumping and promised manufacturing stimulus will steal some of the thunder of the right. The result of this will be seen in their underperformance across the board: of Farage’s Reform UK in the midyear local elections, AfD losing what seems like a slam dunk now in state elections in Germany and similar setbacks in France and the Netherlands for right-wing parties. And, in perhaps the most visible sign of this, Orban will lose in Hungary this April.”

Yeah, I had called it at the start of the year.

Of course, like all such forecasts, this is just good fortune. A fluke. But I hadn’t provided one vital piece of information in that post.

The basis for that call was not a model or a decisive piece of information, but a sense that something in the prevailing narrative did not quite hold, shaped in part by the week I spent in Budapest last year. Over the following months, I returned to Hungary in fragments, reading more closely and tracking developments while trying to reconcile the dominant story of political stability with the less tangible signals I had observed both while I was there and in my conversations with people. I planned on writing about Hungary more than once over the last year, only to leave the piece unfinished each time because something else, more pressing, came up.

Now that the result is known, it is tempting to impose clarity on what were in reality scattered impressions. But I thought it was best to finish that long-pending post on Hungary in this edition. We are all wiser after the event, of course. But in my defence, I had made this prediction four months back.

In January, when I made the prediction, there wasn’t much in the public domain to support that view. Most commentary assumed continuity. Orbán had been in power long enough to have reshaped institutions, aligned the media, and built a durable political base. I didn’t have a specific trigger for my prediction. A week is not enough to understand a country, but it is enough to notice when things don’t quite line up.

Budapest itself presents well. The central parts are efficient and in line with what you would expect from a European capital. Move out of that zone, and the picture changes. Infrastructure weakens, maintenance slips, and in the countryside, the general state of disrepair becomes clearer.

Alongside this was a second layer of economic ambiguity. Hungary had drawn in European manufacturing investment about a decade back, and it was also seeing increasing Chinese interest, which was working to undercut the EU by setting up a base there. On paper, that diversification looks sensible. But the idea that Orban could take EU funds, use its membership as a lever to draw in investments from Europe and then become the first port of call for China to set up their assault on European manufacturers seemed too precious. I could sense the EU tap would run dry soon. And it did.

Politically, the surface looked stable. Orbán’s version of nationalism had not lost support in any obvious way. Positions on immigration, culture, religion, and family still had broad acceptance. There was no strong ideological pushback in everyday conversations. If anything, those ideas had become part of the baseline. That is where the shift had begun. After more than a decade of dominance, the ideology had done its work. It had defined boundaries and built a narrative. There are only so many times you can return to the same themes before they stop adding energy. At some point, the question changes from whether people agree to whether the ideology is still doing anything for them.

That change was visible in how discussions moved from identity to utility. People were not arguing against nationalism; they were asking what it was delivering at this stage. Hungary’s relationship with the European Union, the steady friction with it, and the position taken on the war in Ukraine had started to feel less like a clear strategy and more like a set of positions without an obvious payoff. The proximity to Vladimir Putin added to that. EU funds had been an important part of the economy, and questions around their use and future availability were part of the conversation. None of this led to open opposition, but it introduced doubt.

There was another strand that came up in a few conversations, which helped make sense of the broader picture. Some people described Hungary under Orbán as a kind of model for the global right, a place that had shown how to build what he had called an “illiberal democracy.” The comparison that came to mind for them was Fidel Castro, not in terms of ideology but in terms of role. A country that becomes a reference point, a leader who stands for something larger than his own electorate. A system that sees itself as a model begins to behave like one. It leans into its narrative and becomes less flexible. That works when a system is set up in opposition to the outside world. It is harder when it is embedded within it. Hungary is part of the European economic and political structures. It cannot operate as a permanent outlier without incurring costs. The more the narrative moved in that direction, the more the gap between posture and reality widened.

That gap became more visible as Orbán’s international profile grew. Alignment with figures like Donald Trump and attention from right-wing movements across Europe increased his standing outside Hungary. Inside the country, it created a different reaction. Nationalism is built on the idea of sovereignty and independence. It does not sit comfortably with visible external influence, even when that influence comes from ideological allies. When politicians from other countries begin to engage with domestic politics, it raises questions. The idea that nationalist movements across countries would operate in alignment carries its own contradiction. It suggests coordination that runs against the premise of autonomy. What can a global group of bigots rally together for? Demonising the global Left? Yes, perhaps. But beyond that, if all right-wing, populist movements want to make their nations great again, how will any bilateral discussions among them be a mutual win-win?

All of this played out in an environment where public debate was limited. The media was co-opted, dissent was not visible, and there was little space for open disagreement. In private conversations, there was more questioning than the public discourse suggested. That is the setting in which what is described as a preference cascade can take shape. People hold back their views because they assume they are in the minority. The absence of visible dissent reinforces that assumption. When someone credible breaks that pattern, opinions that were already present begin to surface quickly.

The emergence of Péter Magyar needs to be seen in that context. He did not build a campaign on ideological opposition to Orbán. He stayed within a similar broad frame on nationalism and conservative positions and shifted the focus to governance, corruption, and the sense that the system had become self-serving. That mattered. It meant that voters did not have to change their beliefs to consider an alternative. They only had to reconsider who was best placed to act on those beliefs. Magyar did not create dissatisfaction; he made it visible and usable in a political sense.

Over the months after that visit, I kept coming back to these threads to see if they held. Economic divergence remained. The strategic ambiguity in foreign policy continued. The nationalist narrative did not change in substance. The gap between global positioning and domestic concerns widened. None of these on their own was decisive. Taken together, they pointed to a system that was no longer adjusting. It was maintaining itself, but without resolving the tensions within it. Systems can run like that for a while. They tend not to do so indefinitely.

Hungary is not a template that can be applied elsewhere without adjustment. It is smaller, more tightly connected, and shifts in sentiment can move through it faster. It is also a case where the challenge to the incumbent came from within the same ideological space rather than from a clear opposite. That is a specific configuration. In larger countries, with more complex social and political structures, similar outcomes are harder to produce.

What that week in Hungary provided me was a set of inconsistencies that did not resolve over time. Political outcomes often look sudden when they arrive, but the conditions for them build gradually. If you pay attention to where narratives stop aligning with lived experience, you can see that build-up before it shows up in polls or results. That was the basis of the January prediction. It was about recognising that the system was no longer fully coherent on its own terms.

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Matsyanyaaya: India Has a Stake in the US-China Fight on Advanced GPUs

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

Jensen Huang has long wanted to sell advanced AI chips to China. Dario Amodei, on the other hand, has compared doing so to selling nuclear weapons to North Korea and then bragging that the missile casings are made by Boeing. For most of 2025, this was a debate about American interests.

But the outcome of this debate will determine whether India has just one or many sources of advanced computing infrastructure. It will also determine whether Chinese AI labs continue to release open-source models that Indian companies use to build applications. This is not a US-China question alone.

The Biden administration’s October 2022 export controls on advanced chips to China rested on a clear causal chain: deny chips, deny compute, deny AI capability. The controls succeeded at the first link. China cannot manufacture leading-edge chips at scale; its SMIC foundry remains stuck at around 7nm, while TSMC has moved to 3nm and below. On this narrow measure, the denial worked.

But the wider chain is broken. DeepSeek, Moonshot, and Qwen emerged as frontier AI labs despite the curtailed access to chips. Huawei reported revenue of CNY 880.9 billion in 2025 and invested a record CNY 192.3 billion in R&D in the same year. Chinese AI researchers still constitute roughly half the global talent pool. The controls bought time on the manufacturing side, perhaps two to three years on leading-edge nodes. But they did not buy any meaningful time on the AI capability side, at least not in the sense that the US got to this Brahmastra first and then used it to deny others access to it.

Jensen Huang made this point in the much-discussed interview with Dwarkesh Patel. As he likes to put it, AI is a five-layer stack: energy, chips, infrastructure, models, and applications. American policy sacrificed the chips layer to protect the models layer, while China adapted across the other four layers with abundant energy, algorithmic innovation, and a large engineering workforce. The chips layer matters, but it is not the only layer that matters.

India’s position in this five-layer stack is distinct from both the US and China. At the applications layer, India has the right ingredients. Its IT services sector could become the global delivery platform for enterprise AI deployment. At the chip design layer, every major fabless semiconductor company, including those driving the current Nvidia debate, runs large Global Capability Centres in India. Indian engineers are central to the chip architectures being contested.

But below those two layers, India is dependent. India’s data centre capacity is an order of magnitude smaller than that of the US or China. Energy constraints limit the ability to compensate for chip quality with raw compute volume. India imports advanced chips and, despite Sarvam AI’s 105B-parameter multilingual model in March 2026, will continue to import frontier models too.

This consumer-integrator position creates a strategic calculus that neither Jensen Huang nor Dario Amodei represents. India does not want China to dominate all five layers of AI infrastructure. India also won’t prefer to use China’s AI chips. But India also does not benefit from a world in which access to advanced chips is contingent on the policy preferences of the US administration, which reversed its own H20 policy four times in three years. India definitely benefits from China’s open-source AI ecosystem. DeepSeek and Qwen are not threats to Indian AI ambitions; they are inputs. Indian companies use these open-source models to build products and services. The more competitive the global model ecosystem, the less leverage any single country holds over India’s access to frontier AI capability.

Open-source models are separable from Chinese hardware. Indian firms can optimise Qwen’s weights without deploying Huawei Ascend chips. The security concern India legitimately has is about hardware, not about models. A Chinese chip with undisclosed firmware in critical infrastructure is a genuine risk. An open-source model that has been fine-tuned is not as big a threat.

India should therefore want Chinese AI labs to keep releasing open-source models. It should want that ecosystem to remain competitive with American proprietary models. It should not want Huawei hardware anywhere near sensitive Indian infrastructure. The current American debate collapses this distinction, treating Chinese chips and Chinese models as the same threat. For India, they are not.

India has three tasks at hand. Through its engagement in Pax Silica, the US-led technology initiative that India joined in early 2026, it has an opportunity to articulate a specific position rather than defer to Washington’s framing. Second, funding for GPU-agnostic middleware is vital. Public investment in open alternatives to reduce the CUDA lock-in should become a priority for the India AI Mission. Third, India should maintain model pluralism as a deliberate strategy. Use American proprietary models where they are best. Use Chinese open-source models where they are useful. Build sovereign models like Sarvam for applications where dependency on foreign providers is unacceptable. A pluralist global model ecosystem is structurally safer for a country in India’s position.

The causal loop analysis below captures this logic.

For more, check my paper on this topic.

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Global Policy Watch: Tech Geopolitics ICYMI

Global issues and their impact on India

—Pranay Kotasthane

(This section was first posted on Technopolitik — our technology geopolitics newsletter. Subscribe to it here.)

1. NDRC, not SAMR, blocked the Manus-Meta deal

The proposed acquisition of Manus by Meta was stopped by China’s National Development and Reform Commission (NDRC), not by the State Administration for Market Regulation (SAMR). This distinction is significant.

SAMR is the antitrust regulator. It blocks deals on competition grounds. China is known to use this instrument for national security reasons, but it often does so under the guise of anti-monopoly or consumer harm. You’ll find more about SAMR’s actions in this post.

Anticipating the Unintended

#323 Emotional Integration

Applications for the 43rd cohort of Takshashila’s Graduate Certificate in Public Policy are now open. If you enjoy reading this newsletter, doing the GCPP is the next logical step…

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10 months ago · 25 likes · 3 comments · Pranay Kotasthane

NDRC, by contrast, is the macroeconomic planning body. Its intervention signals that China views this deal not as a competition problem but as a security problem. If NDRC is now the effective gatekeeper for tech mergers & acquisitions, that suggests Chinese AI firms are no longer commercial assets subject to normal market rules. They are national assets, and their disposition is a matter for economic planners, not antitrust lawyers.

Meanwhile, the NDRC had banned two co-founders of Manus from travelling abroad since March this year, citing this regulatory review. Tough times for a Chinese technology firm—foreign companies see you surreptitiously, and even if you manage to convince them, the CPC blocks the sale. This is exactly the problem that rare-earth refiners in China have been facing due to stringent controls over the past 12 months.

2. The wrong lessons from Mythos

The Anthropic Mythos model, whose cyber-offensive capabilities led Anthropic to delay its public release while American companies patched their software, has become the centrepiece of the case for chip export controls. The argument, most prominently made in the Dwarkesh-Huang exchange, runs like this: if China had more compute, it could have trained Mythos first. And that would be unacceptable to the US and the world because of the harm it would cause.

This framing has three problems.

The first is the frame itself. Mythos-type capabilities do not structurally change national power the way nuclear weapons did. Thinking of AI through the nuclear lens, where getting there first and then denying others is the only viable strategy, leads to bad policy. For countries like India, AI is better understood as a vital, general-purpose technology: something you want widely available, not concentrated in one place.

The second problem is the assumption of asymmetry. The argument treats Chinese offensive cyber use as a given while treating American use as defensive. Both countries have offensive cyber capabilities, and both have used them. The real problem is not Chinese malice in particular; it is the absence of credible governance mechanisms for AI deployment, a problem neither Washington nor Beijing has solved.

The third problem is the most important for India. The Mythos episode shows that if AI models can find thousands of unpatched vulnerabilities in major software systems, then every country running those systems is exposed, including India, regardless of who trained the model. The lesson is about defensive readiness and software hygiene, not about chip exports.

3. What made Taiwan think ITRI’s spinoffs should be private?

Karthik Tadepalli has a lovely essay on ITRI, the Industrial Technology Research Institute that seeded Taiwan’s semiconductor industry, in the Asterisk magazine. He finds that ITRI demonstrates how a focused, applied R&D institute can build a world-class chip industry by starting small, training people, and serving firms rather than competing with them.

One question worth thinking over: what led Taiwan’s planners to assume that ITRI’s spin-offs should be private firms? The default in most developing countries, and certainly in India, was the opposite. C-DOT had genuinely good technology, including telephone switches that were competitive by any standard. BEL had developed strategic IP. But neither institution could imagine letting go of the downstream functions. They did engage private players, but merely as “vendors” rather than partners. The IP stayed inside the public sector and did not compound.

Taiwan’s answer to this question is the crucial variable in the ITRI story. It was not just industrial policy; it was industrial policy with a particular theory of ownership and incentives. Getting that theory right is what allowed TSMC to become TSMC rather than a government procurement vehicle.

[Do not miss the essay]

4. Heavy rare earths outside China, for the first time in two decades

Lynas has begun heavy rare earth production at its refinery in Malaysia, reports the Wall Street Journal. Apparently, this is the first time in twenty years that a heavy rare earth refinement on a commercial scale has happened outside China.

This is a direct consequence of Chinese coercion. Beijing’s export restrictions on rare earth processing, imposed as leverage in the broader technology dispute with the US, accelerated the diversification it was meant to deter. China+1 is happening, not because of Western industrial policy alone, but because China’s own actions have raised the cost of dependence.

The Lynas development will not resolve the structural imbalance overnight. China still dominates processing capacity. But the direction of travel is now clear, and it is being driven as much by China’s behaviour as by any Western strategy.

5. Tech companies as military targets

My colleague Nitin Pai makes an uncomfortable argument in a recent essay that tech companies, which have become entangled in military operations, are now legitimate targets under international humanitarian law.

The legal standard is whether an entity makes “an effective contribution to military action.” Palantir’s AI targeting tools, Microsoft’s communications infrastructure for US-Israeli operations, and the sanctions imposed on Russia at Washington’s behest are not incidental. Palantir CEO Alex Karp has said explicitly that tech firms owe the US government their support, given the historical conditions that allowed them to grow. That is a coherent position, but it has consequences. You cannot claim both the returns of geopolitical alignment and the protections of civilian status.

The Indian implication is that the more India’s critical systems depend on foreign tech infrastructure whose owners have chosen sides, the more India’s infrastructure is exposed to the targeting logic of conflicts it has no role in. This is not a hypothetical. It is the architecture of the current moment. Nitin’s conclusion is to reduce dependence on foreign tech for critical systems and increase defence spending to protect what cannot be reduced.

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1. [Puliyabaazi] Since geopolitics is the flavour of the decade, we got the brilliant to decipher international relations from first principles.

   पुलियाबाज़ी Puliyabaazi

   क्या अंतरराष्ट्रीय राजनीति सिर्फ ताक़त का खेल है? Geopolitics, Diplomacy and IR Framework with Prof. Atul Mishra

   क्या अंतरराष्ट्रीय राजनीति सिर्फ ‘स्ट्रांगमेन’ यानी ताक़तवर नेताओं के अहंकार से चलती है, या इसके पीछे कोई गहरी प्रक्रिया काम करती है? दुनिया की व्यवस्था पर आज जो प्रहार हो रहा है, इसका दुनिया और भारत पर क्या असर पड़ेगा? आज की पुलियाबाज़ी में हमारे साथ हैं आईआर (IR) एक्सपर्ट प्रोफेसर अतुल मिश्रा, जिनके साथ हम इन पेचीदा सवालों के जवाब तलाशेंगे। तो आप भी इयर…

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   4 months ago · 4 likes · Puliyabaazi Hindi Podcast and Atul Mishra

2. [Puliyabaazi] We had another terrific masterclass by MR Madhavan on what exactly transpired in the Parliament in the special session a couple of weeks back.

   पुलियाबाज़ी Puliyabaazi

   संसद में आख़िर हुआ क्या? संवैधानिक संशोधन की गुत्थी। Parliament, Delimitation & Women's Reservation ft. M. R. Madhavan

   पिछले हफ़्ते हमारी संसद में एक ख़ास सत्र बुलाया गया था। इस सत्र के बाद जो रिपोर्टिंग हुई उसके चलते लोग और भी कन्फ्यूज़ हो गए। तो हमें लगा कि हमें भी पुलियाबाज़ी का एक अर्जेंट सत्र बुलाना चाहिए ताकि संवैधानिक संशोधनों की इस गुत्थी को सुलझाया जाए। इस चर्चा पर हमारे मेहमान है PRS Legislative के एम. आर. माधवन जी जो हमारे विधायकों को भी सलाह देते हैं। आज की चर्च…

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   4 months ago · 1 like · Puliyabaazi Hindi Podcast

3. [Audio] Check out this wonderful little Radio Netherlands audio piece from 1994 on what had changed in India since the economic liberalisation. The title (Microchips yes, Potato chips no) refers to a quote by Murli Manohar Joshi that encapsulates Indian policymakers’ confused approach to imports.

4. [Repo] Turn a non-fiction epub or PDF into a 35–45 minute podcast episode and publish it to a private RSS feed you can subscribe to from any podcast app.

Course advertisement: It’s that time of the year; intake for the next PGP cohort is on. Take up this 48-week PGP course, carefully designed keeping the busy professional and personal lives of mid-career professionals in mind. Live webinars happen on Saturdays. There are 4 in-person workshops spread over the year. And of course, it is fun and anti-boring.

Table of Contents

1. India Policy Watch: What to Expect from the Islamabad Talks?

2. Matsyanyaaya: Pakistan’s Moment Under the Sun

3. Global Policy Watch: Geography Comes Back to Bite

4. HomeWork

India Policy Watch: Talking Good In Islamabad

Insights on current policy issues in India

—RSJ

Some kind of ceasefire discussion will be going on in Islamabad by the time you read this. Going by what Iran has put as its 10-point demand charter and what might be the views of the US, Israel and its Gulf allies on them, I remain sceptical of any long-term peace settlement emerging from this. It took a couple of years for the Obama administration and a more ‘settled’ Iran to agree on a smaller list of issues (uranium enrichment, inspections, and lifting sanctions) to arrive at the JCPOA, which went through multiple iterations with experts and political interests from both sides weighing in. More importantly, there was no Israel to queer the pitch at that time.

What we have now are Vance, Kushner and Witkoff talking to a battered and more hardline Iran that’s holding the global economy at ransom. This doesn’t inspire any confidence for arriving at a long-term accord in under two weeks. But I remain hopeful of a short-term solution. The consequences of a continued war or blockade of Hormuz beyond April are terrible for the world, especially for India. If saner minds were at work than visible at this moment, then these negotiations in Islamabad could be viewed as round 1 of a series of talks to arrive at long-term peace in West Asia. But these aren’t sane people, so any kind of prognosis is risky. But one can still theorise and hope for some method from both parties.

In this round, the biggest (and possibly the only) goal of the US is to get Iran to open the Strait of Hormuz without it having to send its navy or have boots on the ground in Iran to prise it open forcibly. This is clear based on the reading of the unhinged TruthSocial posts of Trump leading up to Tuesday’s 8 PM deadline that he had set for Iran and the past evidence that the only real Trump disciplining tools are bond markets and crude oil futures. So, for Trump, the best outcome from the talks is to get Iran to open up the Strait of Hormuz without the US conceding much, so he can spin it as some kind of win for his base and move on to other things. The inconvenient fact that the Strait of Hormuz was open prior to the Feb 28 attacks, and this will only take us back there, isn’t going to bother Trump or most of his MAGA base. For them, he’d have played 3D chess again and won.

For Iran, conceding to open the straits of Hormuz and revert to the pre-February 28 scenario shouldn’t be as big a deal as analysts reading Iran are making it out to be. For one, Iran has already shown that it can choke it for six weeks and counting, and the rest of the world can do precious little about it. Something that was once in the realm of war-game scenarios has now been made real by Iran. Therefore, it can concede to open it fully aware that it can choke it at any point in future. Everyone has to learn to live with this risk. In fact, now that some kind of ceasefire is on, the longer it blocks Hormuz from here on, the more it hurts Europe, China, India and Southeast Asia. Why would it want to have practically the entire world as its enemy?

Also, the more it overplays its chokehold, the greater the motivation for the rest of the world to find a long-term solution to derisk itself from the Strait of Hormuz. It will only hurt its leverage. We discussed this in the last edition. It is best for Iran to position these six weeks of global economic blackmail as a one-off that it was forced to deploy because of the existential risk it was pushed into by the actions of the US and Israel. Iran would prefer to be seen as a long-term rational actor pitted against an irrational Trump in this game. So, from a game theory perspective, Iran also should be as eager to open the passage as the US.

However, Iran would pretend to show this as a huge concession and would like to get as many of its 10-point demands accepted by the US in exchange. In reality, it will open the Strait even if not a single one of its demands is met, except for a long-term ceasefire, even if it is without any guarantee. But it has a stronger hand, so it will push for more. This is where it will have to be careful and not be too greedy. My view is that it will prioritise among its 10 points and, in this round of negotiations, satisfy itself with only those that build on its image of being a rational actor.

What could they be? Here’s the list of Iran’s ten demands (not acknowledged explicitly by the US yet):

1 - Commitment to non-aggression

2 - Continuation of Iran’s control over the Strait of Hormuz

3 - Acceptance of uranium enrichment

4 - Lifting of all primary sanctions

5 - Lifting of all secondary sanctions

6 - Termination of all United Nations Security Council resolutions

7 - Termination of all Board of Governors resolutions

8 - Payment of compensation to Iran

9 - Withdrawal of US combat forces from the region

10 - Cessation of the war on all fronts, including against Hezbollah in Lebanon

In my view, after a lot of posturing, Iran will concede on #2 and, in return, will be happy to get #4, #5, #6 and #7. Point #10 is already in the mix as part of the ceasefire, except for attacks on Lebanon. That will get resolved after Israel has bombed Beirut to its heart's content over the weekend.

So, will it get these? I suspect it will get #5, #6 and #7, and on #4, it will ask for the continuation of the suspension of the sanctions on its oil exports as has happened in the last month. Everything else is a bridge too far for the US and its allies, and actually makes no difference to Iran. If the US and Israel start bombing them again (small chance of the US getting involved any time soon), Iran can go back to blocking Hormuz. So, it really doesn’t need #1, #9 and #10. And #3 and #8 have been added as part of the negotiating strategy, only to drop them at the first instance of a deadlock. Even Iran knows they are non-starters.

Those would be the outcomes if, as I said earlier, sane minds were at work. This should mean a fairly quick agreement on this core issue and a successful press conference by next Friday. Trump declares it the best deal in the entire history and is relieved to get out of this Netanyahu mess. He won’t have anything more to do with Iran for some time now, and he will let the Gulf states and the rest of the world deal with Iran with their own bilateral agreements. That’s an endgame I have mentioned in more than one previous edition.

Iran will also show this as a win because, quite frankly, given its battered state, to have the Islamic state survive, have the sanctions lifted and get legitimate oil revenues to flow in, is the best possible deal for it. And for any other eventuality in future, it has the trump card of blocking the Strait of Hormuz up its sleeve. That is a low-risk, high-gain, and less messy option that beats having a nuclear bomb any day. That’s the best-case scenario for the world and India, and it is the only rational choice for Iran. It will be able to sell it internally to the regime and the people.

This should mean a return to full normalisation of traffic through Hormuz by the end of the month. Is that good enough for the world to avoid an oil shock of the kind seen in the past? Or have we crossed that date already, and it is only about damage containment now?

Here’s the simple math on total production loss of crude if we return to normalcy by the end of the month (62 days post Feb 28). The daily flow of crude through Hormuz before the war was about 20 MN barrels a day. The lifting of the sanctions on Iran has meant that it has continued to send its 2 MN barrels a day. The east-west pipeline of Saudi Arabia—which obviates the need to use Hormuz—transports crude from oil-producing eastern wells to the port on western Saudi Arabia on the Red Sea, and is now working at full capacity. That takes care of about 4-5 MN barrels a day. So, the daily production loss right now is about 14 MN barrels a day and total production loss over the 62 days will be about 850 MN barrels. The International Energy Agency (IEA) released about 400 Mn barrels of strategic emergency reserves in March to take care of the supply shortage. So the net production loss would be about 450 MN barrels after netting this off.

Clearly, there’s no such storage capacity among oil-producing Gulf countries, so one has to assume that they have cut back on production dramatically and shut down oil wells in the past two months. For them to revive those wells and get back to full capacity could take about 2-3 months. So, it will take the world until July to reach the regular average daily oil supply as before, at the earliest. Then they will have to deal with 450 MN barrels of production loss seen during the war. This will mean elevated oil prices for most of 2026 and a foregoing about six months of global GDP growth, amounting to about 1.2-1.5 per cent of total global GDP loss. This will require fiscal support in most countries, and it will be a drag on growth for at least 2 years. But that’s a much better outcome than a failed ceasefire and the Strait of Hormuz remaining closed beyond April. We will then be at real risk of a global stagflation.

But given the cards with Iran and the corner that the US has painted itself into, I would like to believe we will have that successful press conference no later than Friday next week, followed by a few insufferable Trump posts on TruthSocial. It will be a small price to pay for our future.

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Matsyanyaaya: Pakistan’s Moment Under the Sun

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

Our previous office premises had a round table that stood precariously on its three legs. This rickety table often shook but never collapsed. We christened it Pakistan because of its ability to resist collapsing under its own weight, and prove detractors wrong. The other parallel was that just as the table had three legs, Husain Haqqani, in his iconic book Pakistan: Between Mosque and Military, had argued that Pakistan's state security model also relied on a "tripod": a reliance on religious nationalism, an anti-India sentiment, and dependence on the West (or foreign aid).

Well, April 2026 has thus far been Pakistan’s. Whether it was a postmaster or the architect of the ongoing talks is beside the point. The fact is that it was the only player with the credibility and willingness to play the mediator, and it positioned itself well and early in that role. On April 1, I had written that this was a good strategic move by Pakistan, and this war is one of the rare superordinate threats where our interests align with Pakistan. Within ten days, Islamabad is now the centrestage of the ceasefire negotiations.

There are a few lessons from this turn of events for us in India, and yes, we should have done what Pakistan’s doing, is not one of them.

First, we too often mistake macroeconomic failure with state failure. Macroeconomic failure has disastrous consequences for people, but nation-states are resilient entities that are often able to absorb economic shocks more than we realise. Only a few years ago, Sri Lanka was on the brink of an economic crisis; Pakistan continues to be in one forever, but that doesn’t imply a proportional decline in the country’s military or diplomatic power. Yes, economic power is the most fungible of all powers, but all dimensions of power operate at varying time horizons. Economic power cannot be converted into military and diplomatic power instantaneously, just as military might is the only dimension that can pose an existential threat within a lifetime.

Those who believed in the caricature that Pakistan’s flailing economy implies imminent state failure and incapability have egg on their faces now. Some Indians genuinely believed that Pakistan’s poor economy would have meant a sudden decline in its warfighting and diplomatic capabilities. Or that the only reason why India couldn’t take PoJK in the past was because previous Indian governments were pusillanimous. Or that Balochistan will break away from Pakistan easily. It’s a good lesson to keep in mind: big nation-states are resourceful and resilient. They can spring back in ways you don’t expect. Don’t write them off in all dimensions even if they are tottering on some of them.

Two, not everything has to be a zero-sum game between India and Pakistan. Surely, stopping this insane war benefits India, Pakistan, indeed the whole of Asia and Europe. Just because India didn’t play the role of the mediator doesn’t mean we need to pooh-pooh Pakistan’s role. Similarly, Pakistan punching above its weight on this occasion doesn’t mean the doors are closed for India. All countries involved will still want Indian markets and Indian talent once things settle. We have many more cards at out disposal. Foreign policy is not a finite game, and no player wins all the plays.

Interestingly, those who treat Pakistan’s mediator role with outright contempt actually are making this same “zero-sum” mistake as those who argue that India should have mediated instead of Pakistan. A ceasefire doesn’t even mean an end to the ongoing war. There will be much to do later, so we should keep calm and not see every event through the India-Pakistan equation.

Three, the events during the past year have shown that Pakistan remains a capable military adversary despite its significant economic and social troubles. The military-jihadi complex (MJC) has the first claim on the resources of that country, and it can squeeze out the funds for its requirements, even if the rest of the country suffers. Thus, it would be foolish to discount the MJC’s military capabilities. The dreams of balkanising Pakistan are just as improbable as Pakistani dreams of taking over Kashmir. We need a measured understanding of Pakistan’s capabilities, not some fantastical notions of its decline fed by social media narratives and cricketing failures.

Four, Khawaja Asif’s threat earlier this week that Pakistan will take the fight to Kolkata, and Gen Munir’s earlier comment comparing Pakistan to a dumper truck to India’s Ferrarri, are a good indication of the stakes at play—as the bigger and more prosperous country, we have more to lose in a confrontation with that army-owned State. We need a stance grounded in reality rather than one that’s derived from slickly made movies.

PS: Pakistanis are obsessed with validation from India, and Indians are obsessed with the inadequacies of Pakistan. It’s a toxic relationship.

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Global Policy Watch: Geography Comes Back to Bite

Global issues and their impact on India

—Pranay Kotasthane

For most of the past two decades, the word “geopolitics” has been bastardised beyond recognition. We have techno-geopolitics, talent geopolitics, climate geopolitics, data geopolitics, and now, AI geopolitics. I’ve used many of these terms in these pages too. Each prefix promises that the “new” strategic competition would be about new and fancy artefacts. Territory—the actual root of the word, from the Greek geo, meaning earth—was relegated to a twentieth-century concern, something that Cold War generals worried about but that policy wonks had moved beyond.

But this is a decade when we are coming to terms with geography as leverage, all over again. Hormuz is one reminder that the earth never left. Helium is another.

The Economist recently made a point that amongst all searoute chokepoints, the Strait of Hormuz is exceptional in the sense that while disruption to others only leads to costly rerouting, a blockage of Hormuz has the potential to outright block most of the trade passing through it. Geography is sometimes destiny.

Similarly, think about helium for a moment. It is the coolant that keeps wafers at tightly controlled temperatures inside lithography and etch tools. It is pumped through EUV scanners because, unlike air or nitrogen, it does not absorb extreme ultraviolet photons.

As a liquid, helium boils at about 4.2 K, far colder than almost anything else, and at normal pressure it doesn’t freeze at all, i.e., it stays liquid all the way to absolute zero. This means boiling liquid helium can be used as a refrigerant to cool things to just a few degrees above absolute zero. When it boils, it absorbs heat from its surroundings, just like sweat evaporating from our skin, but at absurdly low temperatures. This imakes Helium a must-have in all MRI machines because they use superconducting magnets that need to be kept at ~4K to operate.

But the inconvenient fact is that helium is found on earth only where it has been trapped, over geological time, alongside natural gas deposits with unusually high helium concentrations. Those deposits exist in a handful of places. Qatar alone accounts for roughly a third of global helium supply. Russia was supposed to bring its enormous Amur plant online to diversify supply but sanctions and accidents have made that source unreliable. The US, which once held enough helium in its Federal Helium Reserve to smother any shortage, sold the reserve off last year.

Thus, sometimes the constraints are geographic. Geopolitics is really about the geo. Atmanirbharta cannot solve this. For some dependencies, interdependence is not a problem to be eliminated but a condition to be managed. Diversifying suppliers, building buffers, and investing in substitutes and recycling, are the only real options.

This story has just begun. The world is about to discover many more helium-like chokepoints, and in every one of them the answer will involve trusted partners, layered supply chains, and a full accounting of what the earth will and will not yield. The countries that do this well will quietly thrive. The ones that insist on a cartoon version of self-reliance will pay a premium and then, eventually, pay a much higher one when a single supplier decides to turn the tap.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Podcast] A masterclass in the latest Puliyabaazi on what would it take for modern renewables to make a breakthrough in India, ft. Ajay Shah.

2. [Post] Check out Brian Potter’s take on Helium on Construction Physics.

   Construction Physics

   Helium Is Hard to Replace

   The war in Iran, and the subsequent closure of the Strait of Hormuz, has unfortunately made us all familiar with details of the petroleum supply chain that we could formerly happily ignore. Every day we get some new story about some good or service that depends on Middle East petroleum and the production of which has been disrupted by the war. Fertilize…

   Read more

   5 months ago · 216 likes · 28 comments · Brian Potter

3. [Book] Underground Empire: How America Weaponised the World’s Economy, by Henry Farrell and Abraham Newman, is worth your time.

Insights on current policy issues in India

—RSJ

Bit of a ramble in this edition. I had a couple of interesting conversations in the past few weeks.

A few days back, I caught up with the owner of a mid-sized catering business (annual topline of ₹40-60 crore) in Mumbai. He’s not seen any real impact on demand yet arising from the Iran war. In fact, March was among the best months he has had in the past year.

The problems right now are all on the supply side. The government has deprioritised commercial LPG cylinders over supplies to households, and that has meant the waiting time for cylinder replenishment is now stretching over ten days. His supplier tells him that LPG is now coming from the US at a higher price, which was news to me. The cylinders are available in the black market at more than 50 per cent premium, which he’s being forced to buy. His cooking and catering staff are finding it difficult to get LPG cylinders for their households. There is already a sense of anxiety among them about not having cylinders to cook for their families, and a slowdown in demand in the near future that will hurt their salaries. The temporary staff that he would call upon for events to help are beginning to leave the city. This move back home among immigrants is further aggravated by the assembly elections in four states scheduled for this month.

The result of all of this is that his working capital is absolutely stretched, the banks have gone cautious on his business, and he’s struggling to extend his working capital loan despite his good track record over the years. He’s not the only one. Most SMEs are facing the first-order impact of an energy supply shock because of Iran’s chokehold on the Strait of Hormuz.

India has managed to hold off a larger supply shock by finding alternative sources of natural gas and LPG and by rationing the supply for commercial use. But another 2-3 weeks of the ongoing war will make things difficult. The cushion of a large forex reserve and the upcoming state elections have meant the government has so far absorbed the spike in crude oil prices without passing it on to consumers. But this can only last for another month. Once that happens and the price of oil goes up, we will have a demand shock to contend with, along with the supply shock. At this time, I estimate a 1-1.5 per cent haircut on H1 (Apr-Sep) GDP growth estimate of 7 per cent, even if things were to normalise by the end of this month. If it were to stretch further, this would get worse. For the Indian subcontinent, this war can’t end any sooner.

Also, a few weeks back, I happened to sit through a discussion on cross-border payments that included established banks, global and domestic payment fintechs focused on remittances, and, of course, SWIFT, the global secure messaging network that has a near-monopoly on sending transaction instructions between banks. A large part of the discussion focused on inefficiencies of cross-border payments and how the friction built into the process helps the intermediaries (largely banks and old-fashioned money exchanges) make a lot of money.

The other discussion which interested me more was on SWIFT itself. SWIFT, as many of you will know, is a member-owned not-for-profit cooperative whose shareholders represent around 11,000 member organisations (financial institutions mostly) and which is governed by the central banks of G10 countries and the European Central Bank. SWIFT is the default global financial communication system used across more than 200 countries, with over 50 million transactions processed daily. Till a few years ago, no one thought about SWIFT for more than a moment beyond those who worked in the treasury department of banks, brokerages and clearing houses. It was a secure, efficient and scalable system that greased international finance. It had a board of 25 members that represented what used to be called the Washington Consensus (mostly US and NATO allies), and they took care that it ran like clockwork.

That was until Russia invaded Ukraine. For the first time in its history, the connectivity to SWIFT was weaponised when all the major Russian banks were removed from the network. This meant Russian firms could barely trade with the rest of the world because they could no longer communicate between their banks. Russia had developed an alternative system back in 2014 (when it annexed Crimea) called SPFS, anticipating such a scenario. But it was barely functional. It had to accelerate its adoption among its key trading partners after the SWIFT sanctions, and it took a couple of years for it to recover. Meanwhile, China, taking a cue from Russia, also built its own messaging network to counter SWIFT called the CIPS, which is now the default for any trade transaction with China. SWIFT was no longer just a neutral platform in the eyes of nations not controlling it. It was a strategic chokepoint that could be used against you.

Anyway, in the discussion I attended, SWIFT was keen on defending itself as a cooperative that’s overhauling its governance to assure member countries that it won’t arbitrarily unplug them from its network. It was a tough sell considering the Russia example on hand and the increasingly irrational ways of the Trump administration. The underlying apprehension among participants was about what safeguards the SWIFT board has to resist if the US pushes it to sanction a country that falls out of its favour. While SWIFT has decided to reconstitute its board and add more members from countries that have a larger share of the global population, and that soon India will also be represented on it, the general perception was that this was another one of those chokepoints vital for global commerce, which is held by a few players who could abuse it at their will. That it hasn’t been done so far, barring the Russia exception, doesn’t mean it won’t be weaponised in future.

The two conversations were both about chokepoints - one geographical (Hormuz) and the other financial (SWIFT). The difference was in timelines. SWIFT was a chokepoint weaponised a few years back, while Hormuz is an ongoing risk. In that sense, it is instructive to see how the sanctions on Russia over SWIFT were a moment of reckoning for most big economies of being vulnerable to such a chokepoint. The actions taken by them to derisk away from SWIFT and free themselves of the chokepoint will be the playbook used for others, too. Chokepoint is clearly the flavour of the season and an early frontrunner for the word of the year.

There’s a timely book on it too, Chokepoints: How the Global Economy Became a Weapon of War, by Edward Fishman, which talks about how the control of global nodes of finance, hi-tech and information, through which global trade and supply chain operates, has become the primary source of power beyond conventional military strength. The book argues that over time, the global supply chains have created hubs of concentration of a specific material or capital, which allows the entity or country that controls it to wield structural power over the entire chain. SWIFT is an example of it. China’s threat last year to stop exports of rare earth metals was another.

As I see it, there are a few things to consider as policymakers think about chokepoints.

First, if you look closely, almost every supply chain will have a chokepoint where you will find a significant concentration of structural power with an entity or country. The nature and extent of globalisation and the maximisation of comparative advantage have meant that there is barely a single item that you might use on a daily basis that won’t have a chokepoint in its supply chain. How many such chokepoints will you derisk and find alternatives for? It will be a Sisyphean ordeal. No sooner you derisk one chokepoint, another will appear. Also, resilience will mean building redundancy all over, but then the costs will pile up. The best course of action isn’t to revert to some kind of autarky and try to make everything domestically. Impossible because you can’t have all the minerals and elements in your country in any case. Instead, it is best to have a limited list of strategic items that can be derisked from chokepoints through a multi-country reciprocal collaboration model or through domestic self-sufficiency. Beyond the limited set, you let your diplomatic efforts ensure you don’t get on the wrong side of a chokehold.

Second, the ability of global supply chains to find alternatives, auto-adjust themselves and get the trade flowing again is underestimated. As the Russia sanctions have shown, countries will trade, if they want to, between themselves, regardless of constraints. It will take some time and effort to get around the chokepoints, but it is far less onerous than is being imagined. Russia and China launched a rival to SWIFT and got it running at scale within a year. Even Iran’s hold over Hormuz will become redundant in a few years, once the Gulf countries start putting pipelines across east to west to use the Red Sea for their exports. There are no permanent chokepoints.

Third, since there are no permanent chokepoints, any entity or country using the chokepoint to hold counterparties and global trade to ransom should know that their act of doing so takes away their future leverage. Because once they have pulled the trigger on abusing the chokepoint, the search for alternatives will begin in earnest, and the salience of the chokepoint will erode faster than they can imagine. The idea of control over a chokepoint is more powerful than actually using it to stop global flows. The idea gives you leverage. Using it takes it away in the medium run.

Lastly, there is one question that I have thought about quite often over the past few months as I have seen countries use their control over chokepoints to their advantage. What is that one thing on the back of which India can hold the world to ransom? Supply of a world-class technical or management resource pool is often an answer that I receive. But that’s not really a chokepoint. And even if it is, it can’t be exercised at speed to bring others to their knees. Maybe it is the global capability centres (GCCs) of large multinationals that run out of India and provide a host of “keeping the lights on” kind of services to them. If that’s partly true, India should make an inventory of such services done from India that, if switched off, can bring a large part of global commerce to a halt. At least for a few weeks before alternatives are found. Maybe it should push to have more such services done out of India for global banks, hi-tech firms and communication companies. India shouldn’t be seen as keen to ever use this power, but it should work to let the idea that such power exists and the extent of damage it can do be known to the world. That the global back office can shut down the front offices all over the world is an idea whose time has come.

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A Framework A Week: What is a Nation?

Tools for thinking about public policy

— Pranay Kotasthane

This week, I went back to reading an old classic, historian KK Aziz’s 1967 book, The Making of Pakistan: A Study in Nationalism. In its introduction, the author does a stellar job of structurally defining the slippery concept of a ‘nation.’

I thought it was worth discussing Aziz’s framing at length. He begins by defining the nation as a mental construct, an act of collective imagination. This is similar to the views of other prominent scholars of nations, such as Ernest Gellner in Nations and Nationalism and Benedict Anderson in Imagined Communities. Only that Aziz did this a good 16 years before the other two, and in far more evocative prose. Sample this:

… nationalism, like so many other human experiences, is a state of mind. We know that we are a nation, therefore we are a nation. It is not logic, it is intuition. It is not dialectics, it is instinct. It is not a thought process approved by the laws of reasoning. It is a conviction born of insight. It is a vision, an awareness, which comes to us in a flash of a moment. That is what makes it irresistible. People die for their faith; they rarely die in defence of reason.

He then goes on to define the four stages in a nation's evolution, comprising a total of thirteen conditions.

Stage 1: Emotional Basis

1. A sense of comradeship with each other

2. The “love for fellow nationals” as indicated by the fact that in a foreign country, people who consider themselves of the same nation tend to get together

3. common hostility to other groups, with this hostility being proportional to ‘the threat which one national group poses to the existence of the other’

Stage 2: Political and Social Apparatus

4. A common territory possessed or coveted by a nation

5. The existence of a common sovereign government or the desire for it

6. existence of common moral, social or economic institutions or ideas. For example, Reformism, Communism, Capitalism, or Fascism

Stage 3: Spiritual Equipment: Myths

7. Common cultural characteristics, such as language, customs, manners, literature, art, music and folklore

8. Common religion. The author acknowledges that in the age of secularism, this factor has become much weaker. But it still continues to produce nations on a few rare occasions, like Israel and Pakistan

9. Common history or common origin. It can be real or manufactured. As the author writes, “it is unwise to underestimate the role of myths… they are liable to obsess the minds of their creators and thus to become not true but real. And a real myth is a sword which few know how to sheath.”

10. a common national character, circumscribed by geography, history, religion, and culture

Stage 4: A Doctrine for the Nation’s Past, Present, and Future

11. pride in national achievements and a common sorrow in national tragedies

12. devotion to a national cause in the present

13. The hope that the nation will one day be the greatest in the world.

The author goes on to clarify that these are aspects of nationalism, not its definitions. Every nationalism is sui generis, emanating from a particular context and environment. It is a linear combination of these thirteen ingredients, but the recipe is never the same. Some nationalisms place greater weight on emotional aspects, while others rely more on myths or on a desire for prestige, security, and sovereignty.

I thought this was a wonderful structural definition of a nation, as it allows us to interpret the different strands of nationalism not just across nation-states, but within them. For instance, the dominant strand of India’s freedom movement nationalism emphasised a common syncretic history, a pride in national achievements, and a desire for self-government, while de-emphasising the need for a common religion and suppressing the hostility towards others, including the British. But there were many other strands—such as Hindutva or Muslim nationalism—that emphasised other aspects of the thirteen listed above.

Luckily, the strand that won in India was the one which emphasised the liberal variant of nationalism, one that stressed on a common character without religion, and wanted to get the British out without mobilising violence towards all Britishers. The dominant strand that shaped Pakistan, on the other hand, was overindexed on a common religion and a hatred towards other groups in India. And we know how that turned out.

We just got lucky that the political leaders chose a different recipe for India’s nationalism. And it is a pity that today, many Indians would opt for the ingredients that make our nationalism look structurally closer to the Pakistani nationalism than ever before.

Nevertheless, the lesson is that shaping the dominant nationalism is a grand project. One cannot castigate “nationalism” and brush it under the carpet because that will only mean the worst ideas of nationalism will displace the better ones. Think of it as a Defence Against the Dark Arts (DADA).

On that note, here’s an episode of Deepak Disagrees in which we discuss nationalism at length.

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PolicyWTF: Loan Waiver, Bengaluru Edition

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

The Greater Bengaluru Authority has proposed amending building bye-laws to allow regularisation of deviations up to 15% from sanctioned plans, tripling the existing 5% limit. Apparently, 3–3.5 lakh properties that currently cannot obtain Occupancy Certificates stand to benefit from this change. On the surface, this looks like pragmatic governance, as it brings illegal structures into compliance, collects fees, and issues documents. But the problem is the incentive structure it creates.

For instance, when governments announce loan waivers, two things happen simultaneously. Existing defaulters get relief. And future borrowers revise their calculations. Why repay diligently when strategic default might eventually be rewarded? The GBA’s regularisation proposal works the same way. For every builder who violated setback norms by 14% and now gets a legal path to an OC, there are ten future builders who will treat that 15% band as the base case, not the deviation limit.

This is a classic moral hazard, Bengaluru edition.

The counterargument is that these families didn’t break rules maliciously. They built what the market demanded. The rules were unrealistic. Probably, some of them are households that extended a room for a growing family or added a floor when children got married. Without OCs, they can’t get water connections, bank loans, or sell their properties. This is a problem that deserves a strategic answer. Here’s one: rule-breakers must either pay a penalty heavy enough to eliminate the economic advantage of the violation, or modify the structure to comply with existing norms. The penalty should not be a facilitation fee that makes violation-plus-regularisation cheaper than compliance. It should sting. Set it high enough that no future builder concludes that violating is the dominant strategy.

That’s the difference between a regularisation scheme that functions as an amnesty and one that functions as a deterrent with a compliance pathway. The GBA’s proposal leans toward the former.

The 5% Limit Was Already a Dead Letter

Consider what the 3.5 lakh backlog tells us. The existing 5% tolerance was already being massively violated. Builders weren’t calibrating to a 5% band but were blowing past it entirely. If the old tolerance couldn’t hold the line, nor will the 15% one. In electronics engineering for non-critical applications, we consider a 10% error rate as acceptable. The 15% error rate here is, in fact, signalling the acceptance of a much broader violation of upwards of 20%.

The high number of violations strengthens the case that Bengaluru’s building norms are fundamentally disconnected from what people actually need to build. The question to address is why the norms are so restrictive that widespread non-compliance is the equilibrium.

The answer lies in Bengaluru’s low Floor Space Index and its high setback rules. Bengaluru has been notoriously restrictive on FSI compared to peer cities. Mumbai allows FSI of 3 or more in transit corridors. Tokyo’s land-use flexibility is legendary in urban economics. This low FSI is a core reason that people violate building norms.

If the underlying problem is that sanctioned building norms are too restrictive, then the solution is to increase the Floor Space Index. That addresses the same housing supply crisis without constructing an incentive structure that rewards violations. Otherwise, we reward rule-breaking and reduce the legitimacy of the State.

Regularisation Without FSI Reform Is Pointless

Regularisation is politically easy. It has immediate, visible, grateful beneficiaries. FSI reform is politically hard, and it faces resistance from existing property owners who don’t want densification near them and from a real estate lobby that profits from artificial scarcity. If the GBA regularises violations now with a vague promise that FSI reform will follow, the political pressure for FSI reform evaporates the moment the backlog clears. The symptom has been treated, but the disease remains. Every few years, the backlog will rebuild, and another round of regularisation will become necessary.

Here are some ways to tackle this problem.

One, raise FSI substantially and immediately. Make it the headline reform. Signal to every future builder: build legally, build more. Without this, regularisation will become a recurring amnesty scheme.

Two, regularise existing violations, but price the penalty punitively. The penalty must exceed the economic benefit of the violation. If violating and paying the fine is cheaper than building legally, we haven’t created a deterrent; we've only created a fee schedule for rule-breaking.

Three, frame this explicitly as a one-time measure tied to the FSI reform. The regularisation window should open and close. Future violations beyond the new, more generous FSI norms should get no amnesty pathway.

The political logic of standalone regularisation is understandable. But the road to Bengaluru’s current housing situation was paved with administratively convenient decisions that made the incentive structure a little worse each time. This time, convenience should not be allowed to travel alone.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Show&Tell] Details of India's semiconductor manufacturing projects are scattered across hundreds of press releases, news reports, and government announcements. There's also a lot of hype and misreporting. So I built a tracker using Claude Code to fix this. It scores each project on technical complexity (benchmarked against a 3nm fab), tracks slippage from original announced dates, and links every data point to its source.

2. [Book] Henry Farrell and Abraham Newman’s Underground Empire: How America Weaponized the World Economy is worth reading.

3. [Podcast] A terrific Ideas of India episode on All Things Macroeconomy ft. Profs VAN & .