đź“°Takeaways from Our Live Event

Dr. Viral Acharya's thoughts on India.

February 14, 2025

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Welcome to the best way to stay up-to-date on India’s financial markets. Today, we share with you takeaways from Dr. Viral Acharya’s remarks at our live event on Wednesday.

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Market Update.

Takeaways from Dr. Viral Acharya's Remarks

On Wednesday night, at Samosa Capital’s inaugural live event, Dr. Viral Acharya spoke to an audience of around 70 professionals in New York, addressing key questions about India's economic future. His presentation centered on two main inquiries: Is India's macroeconomic stability a temporary phenomenon or a sustainable trend? And, is India experiencing a "savings glut of the rich" that distorts the broader economy? These questions served as a springboard for further discussion on institutional reforms, structural issues, and policy recommendations.

Reforms

Since the Global Financial Crisis, India has introduced significant reforms to its monetary and banking systems. One key development was the introduction of inflation targeting in 2013, with a goal of 4 percent inflation (within a ±2 percent band). The formation of the Monetary Policy Committee (MPC) in 2016 further institutionalized India's approach to monetary policy. These reforms have moved India toward a more rule-based system, similar to the European Central Bank, Federal Reserve, and Bank of Japan, in contrast to the discretionary policies India had employed in the past.

In addition to these monetary reforms, India has seen a marked improvement in economic data, thanks to the external benchmarking of loans to improve monetary transmission. This innovation has made interest rate decisions more effective in reaching borrowers. Furthermore, the Reserve Bank of India (RBI) has gained greater independence and credibility, which has allowed it to shape economic outcomes with greater precision.

India's banking sector has undergone its own transformation, especially after the non-performing asset (NPA) crisis of 2015–2018. During this period, bad loans grew to unsustainable levels, but several reforms have helped rectify the situation. For instance, asset quality reviews have enabled better stress testing of banks, and the NPA resolution framework has provided mechanisms for debt restructuring and refinancing. Bank recapitalization was a crucial step in infusing liquidity into public sector banks, which has helped to stabilize lending and foster stronger credit flow.

In terms of market operations, the RBI has also enhanced its management of foreign exchange reserves, reaching a peak in late 2024. This has played a significant role in reducing currency volatility and mitigating the risks of sudden capital flight. On the government side, the introduction of the Goods and Services Tax (GST) and a shift towards capital expenditure (CapEx) have helped boost infrastructure, contributing to improved exports and economic growth.

In summary, the last decade has witnessed substantial changes in both the RBI and the Indian government. These reforms have stabilized inflation, improved banking health, and reduced volatility—issues that once hindered foreign investment and domestic growth. The RBI’s growing credibility has strengthened its ability to influence economic growth through monetary policy and the rupee, while also enhancing its capacity to shape the banking industry.

Structural Contradictions: A Savings Glut?

While India has made strides in achieving macroeconomic stability, structural contradictions persist. One of the key issues is the “savings glut” that has emerged, particularly in the wake of the COVID-19 pandemic. This has led to a K-shaped recovery, where wealthier segments of society—especially those invested in the stock market and luxury goods—have seen significant gains, while lower-income workers, especially those in the informal sector, have faced stagnant wages.

The informal sector has been hit particularly hard by several factors. Speculation in asset prices, driven by low corporate taxes and capital gains taxes, has indirectly harmed these workers. Policies such as demonetization, the introduction of the GST, and the lockdowns have disproportionately affected the lower class, exacerbating the inequalities already present in the economy.

There has also been a rise in NPAs due to shadow banking, which is largely financed by high-net-worth individuals engaging in speculative lending. The result has been riskier loans and inflated real estate prices, driven by excess liquidity rather than productive investment. Affordable housing, for example, which was growing rapidly before the pandemic, has been crowded out by speculative activity in real estate. Additionally, low-income groups are increasingly relying on unsecured credit, such as buy-now, pay-later schemes, which has led to higher default rates.

These trends have had political implications as well. In 2024, four years after the onset of the pandemic, Prime Minister Modi suffered significant losses in certain areas, particularly in education, wages, and issues facing the lower class. Dr. Acharya’s analysis of the savings glut helps explain this, with growing inequality fueling discontent. For example, the stock market's growth has largely benefited retail traders, but only about 5 percent of the population can invest. Meanwhile, policies such as taxation and stringent lockdowns have hurt lower-income groups, leading to a $12 billion (₹1.1 trillion) tax cut being announced to address some of these issues.

Dr. Acharya’s Policy Recommendations

To address these structural challenges, Dr. Acharya has proposed several policy recommendations. First, he advocates for reducing tariffs, in line with the US government's stance, to encourage foreign direct investment (FDI) in sectors such as technology and manufacturing. This would help India reduce its reliance on China and foster growth in these critical industries.

Another key recommendation is to break up the large conglomerates that dominate India’s business landscape, such as Adani, Ambani, and JSW. By de-conglomerating these massive firms, Dr. Acharya believes India can promote the growth of mid-sized companies and increase competition. The majority of Indians still work for small-to-medium-sized enterprises (SMEs), which are being squeezed out by the dominance of oligopolies. More competition would improve innovation and, in turn, raise worker living standards.

In terms of fiscal policy, Dr. Acharya calls for higher taxes on the wealthy, particularly by increasing capital gains taxes to reduce financial speculation in the equity markets. He also advocates for removing unnecessary corporate subsidies that lead to rent-seeking behavior, where companies profit off of government support without providing significant utility. The new tax plan already incorporates his third recommendation: redistributing demand from the rich to the poor.

On the monetary front, Dr. Acharya suggests narrowing the target for core inflation to 4 percent, rather than maintaining a wider band. While emerging markets can tolerate higher inflation due to rapid growth, the post-COVID inflation has disproportionately eroded purchasing power for poorer consumers. Welfare and agricultural subsidies, which form the backbone of India’s economy, must also be reformed. For instance, fertilizer subsidies, valued at $21 billion (₹1.8 trillion), have been criticized for degrading soil and groundwater without providing measurable benefits.

In conclusion, Dr. Acharya’s insights into India’s macroeconomic stability and the structural challenges it faces provide a nuanced understanding of the country’s economic trajectory. His policy recommendations offer a roadmap for addressing inequality, fostering competition, and ensuring sustainable growth in the years to come.

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Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.