A World of Complexity

Political & Policy Issues to Watch . The Monsoon Session is proving a damp squib Expectations of a big legislative push during the Monsoon Session of Parliament have effectively been dashed. Building on the month-long agitation over the leaked NEET exam papers (which resulted in the Education Minister’s resignation), opposition parties have also taken the NDA to task over the controversial electoral-roll revision exercise currently underway in several states. With protests marring proceedings, there has been little time for legislative business. 28 bills lie pending, including a handful listed for consideration and passage before August 13 th , when the session concludes. These include revisions to the regulatory framework governing higher education; one providing for greater bench strength on the Supreme Court; stricter norms for foreign contributions via the FCRA Act and tighter processes for registering births and death; and an amendment to the Income Tax Act providing for more liberal tax rules for foreign investors. A hastily-passed law aims to avoid future NEET-like scandals, while another extends coverage of the Prevention of Insults to National Honour Act to the national song, Vande Mataram.

. More support for domestic manufacturing, and a possible Cabinet reshuffle Outside of Parliament, the Cabinet approved the Rs 1.28 tr Semicon 2.0 policy, which aims to boost India’s semiconductor design and manufacturing ecosystem, the Rs 625 bn Mobile Phone Manufacturing Scheme and a new chemicals park scheme. These policies align with the government’s overall Make in India thrust, which has become even more salient as the liberal trade order slowly crumbles. Meanwhile, there are credible reports of a major upcoming Cabinet reshuffle. Long delayed, this exercise will presumably help bolster the NDA’s regional alliances, including in states like Maharashtra. The move assumes added significance after the NDA recently lost two Assembly by-elections, including in Patna’s Bankipur constituency, which was considered a BJP ‘fortress’ for 30 years.

India continues to hedge its bets globally

After a spate of foreign visits by the Prime Minister, Mr Modi now seems to be taking a short breather. However, India’s diplomatic outreach continues through other channels. Notably, FM Jaishankar and Foreign Secretary Vikram Misri separately met their Chinese counterparts to discuss issues around market access, regional supply chains, and to advance other factors (including border-related ones) impeding the bilateral relationship. This clearly suggests that, more and more, India will avoid putting all its eggs in one (American) basket. The FM also toured several Gulf states (focused largely on energy security), Belgium and the US. The US visit appears to have been designed both, to advance India’s bid for a temporary (for now) seat on the UN Security Council, and to further the still only ‘99% done’ US trade deal.

. Outlook for the Market . Signs of a mild slowdown Increasingly, signals from the ground point to an economy that is slowing, though not drastically, and one with a few enduring bright spots. Auto sales remain the clear outlier, with car dispatches in July surging by 33.6%, and major 2-wheeler manufacturers reporting ~30% growth. The trade numbers also point to relative strength, with exports growing at 14-19% rates in Apr-Jun; even excluding petroleum products, they maintained double-digit rates. Imports are growing even faster, touching 31% in June (or 28% excluding oil). At a broader level, though, the HSBC PMI indices for Services (53.3, down from 57.4) and Manufacturing (53.5, compared to 54.2 in June) both dipped to over-four-year lows. Services companies continued to report strong export performance, but new order growth (particularly domestic) fell markedly and hiring also appeared to plateau. Manufacturers, similarly, reported slowing new orders, but an even sharper slowdown in hiring.

Similarly, the GST numbers also paint a picture of subdued growth. Monthly GST revenues in July – Rs 2.1 tr – were the second-highest ever, but there is now an unmistakable downtrend in the YoY growth figures. In the first 4 months of the fiscal (Apr-Jul), GST revenues rose by an anaemic 3%, down from 5.6% for FY26 as a whole. Admittedly, this is partly on account of last year’s rate cuts, which make apple-to-apple comparisons difficult. However, clubbed with other data, it is evident that the overall momentum is slowing. Specifically, e-Way bill issuances – which track the total number, not the value, of transactions – are ebbing. From ~20% rates last year, growth in Q1 (Apr-Jun) eased to 12.4%. Again, with tax compliance having vastly improved in recent years, this partly reflects a maturing system with fewer ‘low hanging fruits.’ However, there is plainly also a slowdown element to this. Looking ahead, even as robust July rainfall brought down the overall, country-wide deficit to ~12% below normal as of early August (compared to ~40% in late June), 49% of Indian districts have recorded deficient or severely deficient rain. By most estimates, this will hit agricultural output, and with it, rural demand.

. Inflation remains a key risk factor

It will also continue to feed into inflation, already rising due to high oil prices. In June, retail (CPI) inflation touched 4.4%, up from 3.9% in May. Food inflation crossed 5%, compared to 4.5% the previous month, and is likely to edge up further in the coming 2-3 months. More worrying are the headline numbers for wholesale (WPI) and the recently unveiled Output Producer Price Index. Both measures stayed above 9% in May and June, led by 25%+ monthly YoY increases in fuel and power prices. However, in its latest, August 5 th policy announcement, the RBI continued to hold the Repo rate at 5.25% while maintaining a ‘neutral’ stance. The RBI expects inflation to peak in Q3 before tapering off in Q4, and projects average inflation this fiscal at 5%, slightly lower than its previous, 5.1% estimate.

With the Iran war unresolved but now merely simmering, and with other Asian markets (notably South Korea and Taiwan) seeing sharp reversals in recent weeks, FII interest in India has revived. In June and July, net inflows came to $4.7 bn, making up for a part of the $24.2 bn that left the country in the preceding three months. This helped stabilise the rupee at sub-96/$ levels. How long this period of calm lasts, however, will depend on several factors: the war, progress on the India-US trade deal, and – most of all – on the growing possibility of a US rate hike later this year.