Editorial 1 : AI Race: What India Should Do
Context: In the AI race, what India needs to do.
Introduction: The global AI race has begun. US and China are making significant investments in AI infrastructure and innovation. After the release of Chinese DeepSeek, OpenAI CEO Sam Altman, who once dismissed India’s AI efforts, now advocates for India to take a leadership role in AI, highlighting India's growing influence.
India’s Strengths in AI
- Human Capital
- AI Professionals: India has 420,000 AI professionals, surpassing the tech sectors of many nations.
- Developer Community: India boasts the second-largest developer community globally, behind only the US.
- AI Adoption: Enterprises in India have a 92% AI adoption rate, the highest in the world.
- Market Potential
- Economic Opportunity: India’s AI market potential is estimated at $17 billion.
- Startup Ecosystem: Over 240 Gen AI startups, with 70% addressing industry-specific challenges in healthcare, education, BFSI, and agriculture.
- Digital Public Infrastructure (DPI)
- Financial Inclusion: Bank account penetration increased from 30% to 80% in seven years, far exceeding the World Bank’s 47-year estimate.
- Digital Payments: UPI transactions reached $568 billion monthly, accounting for 49% of global real-time payments.
- Crisis Response: During the pandemic, India transferred $4.5 billion to 160 million people instantly and leakage-free.
- Innovation Ecosystem
- Unicorn Growth: India has built nearly 108 unicorns, driven by DPI.
- Sectoral Impact: Startups leveraging DPI in healthcare, lending, and commerce have created new economic behaviours and possibilities.
Challenges to Overcome
- Hardware Dependency
- GPU Restrictions: The US has placed India in Tier II for AI diffusion, restricting access to advanced GPUs and large-scale AI model training.
- Need for Sovereign Hardware: India must develop its AI hardware capabilities to ensure independence and scalability.
- Language Diversity: With 22 official languages and numerous dialects, India must build foundational models that cater to its linguistic diversity.
- US and China Dominance: India risks becoming a technological colony if it fails to innovate independently and build sovereign AI capabilities.
Way Forward: Strategic Imperatives for India
- Build Sovereign AI Capabilities
- End-to-End Ecosystem: Develop sovereign frontier models based on Indian datasets to avoid biases and ensure independence.
- Hardware Innovation: Invest in AI hardware to create jobs, attract capital, and foster innovation across industries.
- Leverage Open-Source and DPI
- Open-Source Adoption: Promote open-source AI models while fostering an environment for brilliant engineering.
- Convergence of Software and Hardware: Combine software with computing power to address challenges like healthcare and education at low costs.
- Focus on Multilingual AI: Build multilingual and multimodal foundational models to break language barriers and ensure inclusivity.
- Strengthen Global Positioning
- Quad Partnership: Advocate for Tier-I status in AI diffusion to avoid restrictions on advanced technologies.
- Mission-Driven Approach: Adopt a sense of urgency and a mission-driven strategy to accelerate AI development.
- Foster Collaboration and Inclusivity: Champion open-hardware initiatives to encourage global collaboration and accessibility.
Conclusion: India has the foundational elements to lead the AI revolution. However, it must address challenges like hardware dependency and linguistic diversity while building sovereign AI capabilities. There must be a sense of great urgency and a mission-driven approach for India to secure its position as a technological superpower in the 21st century.
Editorial 2 : A Shallow Cut
Context: RBI’s shallow rate cut after five years.
Introduction: The monetary policy committee of the RBI has embarked on a rate-cutting cycle in its February 2025 review. The growth-inflation trends and outlook mix had provided a window to cut rates. However, while India’s rate cut cycle has kicked off, it is highly likely to be shallow.
Key Developments and Background
- Rate Cut Decision
- Repo Rate Reduction: The MPC unanimously cut the repo rate by 25 basis points, bringing it down to 6.25%.
- Neutral Stance: The MPC maintained a neutral stance, signalling cautious optimism.
- Historical Context: This is the first rate cut since April 2019, when the repo rate was reduced to 6% from 6.25%.
- Inflation and Growth Trends
- CPI Inflation: Inflation receded significantly, falling below the 6% upper threshold of the RBI’s target range (2-6%).
- December 2024 CPI: Breached 6%, ruling out a rate cut.
- February 2025 CPI: Declined appreciably, creating room for monetary easing.
- GDP Growth
- Q2 2024-25 GDP growth slumped to 5.4%, below expectations.
- Growth is expected to remain below the 8.2% recorded in 2023-24.
Rationale Behind the Rate Cut: Domestic and Global Factors
- Domestic Factors
- Moderating Inflation: Food inflation is expected to cool due to healthy rabi sowing and ample reservoir levels.
- Fiscal Measures: The Union Budget 2025 announced tax cuts of ₹1 trillion, boosting disposable income without significant inflationary risks.
- Fiscal Consolidation: The fiscal deficit is projected to narrow to 4.4% of GDP in 2025-26 (from 4.8% in 2024-25), supporting macroeconomic stability.
- Global Factors
- Rupee Depreciation: Rupee depreciation against the US dollar, though outperforming other emerging market currencies, raises inflation and growth concerns.
- Global Uncertainty: Tariff-related actions by the US and countermeasures by other countries have increased financial market volatility.
- Export Challenges: Muted export outlook, particularly for goods, constrains medium-term GDP growth.
Implications of the Rate Cut
- Economic Growth
- Urban Consumption: Lower EMIs for borrowers (194.9 million personal loan accounts, including 14.7 million home loans) will boost discretionary spending. Tax relief of ₹1 trillion will further support consumption.
- GDP Growth: Growth is expected to remain in the 6.5-7% range, below the 8% target. Domestic consumption will drive growth, as private capex remains measured due to weak external demand.
- Consumer Price Index: Inflation is expected to dip to 4.2% in 2025-26 (from 4.8% in 2024-25).
- Capex: The budget allocated ₹1 trillion for capex, a 10.1% increase, but medium-term growth in government capex may be constrained by fiscal challenges.
- Fiscal Constraints: Recommendations of the 8th Pay Commission and 16th Finance Commission will add pressure on fiscal consolidation.
Way Forward: Outlook
- Near-Term Expectations
- Further Rate Cuts: ICRA anticipates one more rate cut of 25 basis points in early 2025-26, contingent on domestic and global developments.
- Growth Support: Rate cuts and fiscal measures will support urban consumption and GDP growth in the next fiscal year.
- Medium-Term Challenges
- Fiscal Consolidation: Balancing fiscal discipline with growth-enhancing measures will be critical.
- Private Capex Revival: Strengthening domestic demand and improving external conditions are essential to revive private investment.
- Strengthening domestic demand and improving external conditions are essential to revive private investment.
Conclusion: RBI’s rate cut in February 2025 reflects a prudent response to moderating inflation and subdued growth. But, challenges such as global uncertainty, fiscal constraints, and weak external demand persist. A calibrated approach to monetary and fiscal policy, coupled with efforts to revive private investment, will be crucial for sustaining India’s growth momentum in the medium term.