#319 Eternal PerformanceParsing through Economic Trends, Indigenous Innovation with Chinese Characteristics, and Geopolitics of a Metro Train
India Policy Watch #1: Searching For ‘Eternal Performance’Insights on current policy issues in India—RSJA giant experiment will unfold over the next couple of quarters in India as the impact of GST reforms plays out in the economy. There is a lot to like about the reforms that came into effect a couple of weeks back. The rationalisation of tax rates by almost 30-40 per cent for a significant range of products is a significant break for the consumers. The two-slab structure is easier to administer and reduces the incidence of inverted tax structure in many industries. There will be a significant freeing up of working capital in industries where the claiming back of GST credit because of such a structure was an issue. The claim process has also been streamlined, with a facility for provisional credit also available now. All things remaining the same, there are strong reasons to believe these tailwinds should help consumption growth across sectors in the economy. Since the announcement of the reforms on August 15, the government has focused on two narratives. First, positioning the tax cuts as savings and urging customers to spend in the festive season. Like everything else, the PR machinery of the government and the industry has been on overdrive, thanking the PM for these reforms. The PM has, in turn, called this a ‘savings festival’ (“GST bachat utsav”) for citizens while also plugging in a ‘buy swadeshi’ message in his speeches. Second, the government has done its best to ensure that the benefits of the tax breaks are passed on to the consumers as a reduction in prices and not appropriated by the manufacturers or the trade. There have been overt threats about legal action against the companies that delay passing on the price reduction or try to get around it by increasing the quantity while keeping the price the same (yes, even that’s not allowed, as the Delhi HC ruled a couple of days back). There’s an air of urgency, even desperation, for the consumption flywheel to get going with this. All the monetary easing on the supply side, with surplus liquidity and a cumulative 100 bps rate cut since February, hasn’t boosted consumption in a material sense. The GST rationalisation is the almost final throw of the dice by the government to boost the demand side of the equation. With Trump tariffs impacting exporters and SMEs, the H1B visa restrictions and continued noise from the US administration on further action against India because of Russian oil imports, there is a strong desire to show the world India’s economic resilience on the back of domestic consumption growth. In the past two days, both the RBI and the finance ministry have been keen to emphasise that strategic autonomy is founded on ‘eternal performance’ anchored on domestic consumption. Clearly, the stakes are high for the GST reforms to work. Not surprisingly, then, if you were to believe media reports (heh), it is all working like a charm. Here’s the Times of India reporting (with quotes from government officials who cite industry data from their sources):
I don’t know about you, but I feel very assured when unnamed government officials tell the public that the economy is booming. It gives me a comforting 1970s Soviet Union vibe. I’m a sucker for that kind of nostalgia. Maybe this is all true, and we are indeed seeing a consumption boom. Still, I’d suggest we wait till we have the Q3 and Q4 results from the listed players to appreciate the immediate impact of the rate cuts and then track consumption over the whole of next year to see if it is sustainable. In a theoretical model, a tax cut from the government would have meant each manufacturer would have one of three choices to make: a) to pass on the entire benefit to the customer hoping that would increase sales; b) to keep the entire benefit to itself and boost their own profits; or c) to do a combination of the above two - pass some benefits and keep some as profits. Left to themselves, each manufacturer would make this decision based on its understanding of the price elasticity of its product and the underlying consumer sentiment. Nobody knows their business and consumers better than the market participants, and they have every incentive to increase their sales and profits. In a competitive marketplace, eventually the optimal mix between passing on the benefit to the consumer or keeping it as profit would have been arrived at through hundreds of individual decisions made by the manufacturers and the consumers. Instead of the market making this determination, the government has intervened with almost coercive threats to manufacturers to pass on all the benefits to consumers. Like always, the unintended consequences will follow. I did a quick run-through of a few sectors to see how the unintended might be playing out. Take sectors where the GST rates are down to zero or where there is now an inverted tax structure. Remember services and capital expenditure are still at the 18 per cent slab, so any industry that has a significant services or capex spend as input and a zero or lower GST on its output will have to forego or to manage input tax credit. It can’t pass that on to consumers (that’s the diktat). So, it either absorbs it (takes a huge hit on its profits) or asks its distributors to take the hit (who then have a hit on their profits). Life and health insurance is an example of such a sector where the industry has to absorb the input tax credit. The price for the customer has come down but the key player in the value chain who goes out and sells the product (the distributor) has limited incentive to do so now. Especially, if they know through experience that the price cut isn’t enough for customers to queue up to buy the product (i.e. the product is relatively inelastic). Left to itself, the industry would have figured out the optimal mix in sharing the GST benefits between itself, distributors and customers to maximise sales, which is what the government wants. Instead, it is likely that over the next couple of quarters, the sales numbers won’t move up while the industry takes a significant profit hit that diminishes its ability to invest in growing the sector for the future. Or take the consumer durables or automobiles sector where there is a significant reduction in price for the customers because of GST rate rationalisation. Notwithstanding what the media reports are saying (and they could be true), my limited experience so far has been that the dealers aren’t yet sure if the cuts will bring in more footfalls than the usual increase they expect in the festive season. The dealers would rather wait and watch before passing on the full rate cuts to the customers. This is because they sense the underlying consumer sentiment is weak. But they can’t afford to wait and watch because they have to pass on the benefits to the customers. What this has meant is that the “dealer discount”, a discretionary subsidy with the dealer, that a customer used to get when they bought a white good or a car in the past has disappeared now. Usually, this used to be anywhere between 10-15 per cent and could go further up depending on the model or the period of purchase. Because the dealers aren’t sure of how elastic the demand is, they seem to have squared off the GST rate cut with these discounts that they would otherwise offer. The net impact is that the eventual price at the customer's door hasn’t changed much. As days go by and the dealers sense that the footfalls have indeed gone up, maybe they will gain greater confidence about the elasticity of their products and bring back the discounts. We will wait and see. There will be more such unintended effects playing out in other sectors during this transition period which will eventually go away when the government scrutiny over price cuts being passed to customer abates. My sense is that the positive impact of a good set of reforms could be seen earlier through the economy if the overriding goal of passing the benefits to consumers hadn’t been so forcefully employed. Now it might take 2-3 quarters more when things go back to normal (no cases of CBIC threatening raids on manufacturers, for instance) and for the manufacturers and the market to do what they would have done if there was no government intervention. In the meantime, I suspect we will see more of the government officials using sources to tell us about the wonderful consumption growth in the economy. I will wait for Q3 and Q4 results to see the real impact. Like the government, I too hope the consumption growth gets going though I think it will take more than just the GST rate cut for it. Separately, there was yet another stampede in India this week. The sixth killer stampede this year, if you are keeping count. At a rally of Tamil actor-politician Vijay in Karur, the usual scenario of a crowd surge unfolded with a sickening, familiar pattern. There were narrow barricades, there was the usual lack of planning in figuring out the potential size of the crowd, the random announcement that the star was about to leave, the mad rush towards the stage to catch a glimpse of the star, followed by a deathly crush that killed at least 41 people. The usual sequence that follows such a stampede has begun. Local administration blaming the organisers, few random arrests, blame game, SIT, judicial probe, everything we have seen elsewhere. We have previously written about stampedes (see edition #303). It angers me how we take such tragedies in our stride without demanding real solutions. The elite and the establishment see the people who die in such events as expendables. Their lives are cheap. And the cycle continues. Global Policy Watch: The Vectors of Indigenous InnovationGlobal issues relevant to India—Pranay KotasthaneThe news that India is evaluating the purchase of the Sukhoi Su-57 garnered a lot of attention last week. Those in favour argue that since Russia is willing to co-produce and transfer technology, this purchase would have an additive effect on India’s plans of producing a domestic fifth-generation fighter aircraft. The claim is that a collaboration will upgrade the skills of Indian firms. Those who disagree suggest that buying Su-57 will lock India into decadal purchases and hamper the production of domestic alternatives like the Advanced Medium Combat Aircraft (AMCA). Though they are antagonistic positions, they share a common assumption—the success of the chosen path rests on the absorptive capacity of Indian firms. Both positions overestimate the innovation capabilities of Indian firms. Consider how, despite manufacturing Sukhoi Su-30s under licensed production for many years, these firms haven’t been able to reverse-engineer critical components. This debate throws light on a broader question: how do companies innovate? To answer this question, it is helpful to consider a Chinese perspective. A 2022 book titled China’s Drive for the Technology Frontier by Fudan University public policy professor Yin Li tackles this question. The book presents the cases of China’s telecom and semiconductor industries to derive lessons for indigenous innovation. In doing so, the book questions the orthodox view on catch-up innovation. That view, drawing from experiences of South Korea and Japan, talks about innovation as a steady process of climbing the ladder from Original Equipment Manufacturing (OEM) to Original Device Manufacturing (ODM) to eventually Original Brand Manufacturing (OBM). Samsung and many other firms have followed this trajectory. Li explains this view as follows:
However, the book argues that such a model is not the defining feature of China’s innovative firms like Huawei for structural reasons. It’s because the proliferation of global value chains allows multinational companies to isolate production from core know-how. So the success of Korean and Japanese companies through ‘learning by doing’ in the past could not be replicated by Chinese firms. Instead, the author claims indigenous innovation needs ‘learning by innovating’, i.e., investing in research without waiting to master assembly and manufacturing. Huawei is, of course, the poster child for this argument. The book’s chapter on the telecom equipment Industry is quite interesting from an Indian perspective. Of course, path dependence has a lot to do with Huawei’s success but it’s worth revisiting the foundational factors. China began its telecom journey much like India, with the government monopoly Ministry of Posts and Telecommunications (MPT) being the sole player, umpire and maker of telecom equipment. However, after the liberalisation in the 1980s, several joint ventures began between multinational and local (mostly state-controlled) companies. These JVs mostly relied on foreign designs and did not have the research chops to innovate locally. To compete with these JVs, the Chinese government backed another state-owned company, the Datang Telecom Group. Despite years of trying to reverse engineer, this national champion failed to take off. Then came the smaller domestic players like Julong, Huawei, and ZTE, which focused on the neglected rural telephony segment since the JV firms had already captured the lucrative urban zones. Of the three, Julong, with direct connections to the People’s Liberation Army, was the first to innovate a public digital switching system. Of the four domestic Chinese firms—Datang (a big state-owned monopoly), Julong (a small firm connected to the PLA), Huawei, and ZTE—it was Huawei that transformed itself into an ‘innovative enterprise’. Li argues that it was because Huawei invested in three capabilities:
Just pause for a moment here. Huawei seems to be sui generis. Many path-dependent factors worked out for the company, and it would be wrong to derive any lessons from its success alone, as we would be committing the survivorship bias. But observe some foundational features. One, a wide variety of foreign and domestic firms existed in the Chinese market, feverishly competing against each other. The ones that the government favoured withered away, but the private ones succeeded. Next, observe the role of bureaucratic decentralisation—rural governments had the freedom to experiment and adopt indigenous technologies, which provided learning opportunities to domestic firms. Furthermore, Huawei has always aimed to go global since the domestic market already had many embedded players. Finally, market protectionism was low. China was able to attract a large number of foreign firms, even if in the form of JVs, igniting intense competition. Many of these building blocks are missing in India. Perhaps without these formative conditions, asking why India doesn’t have a DeepSeek is the wrong question to ask in the first place. India Policy Watch #2: Geopolitics of the Bengaluru Yellow LineInsights on current policy issues in India—Tannmay Kumarr Baid and Pranay Kotasthane(A shorter version of this article first appeared in The Hindu on 8th October 2025) The inauguration of Namma Metro’s long-awaited Yellow Line in August 2025 should have been a moment of celebration for a city beleaguered with traffic congestion. Instead, an incomplete line operating at one-fifth of its planned capacity has delivered overcrowded trains, packed stations, and a suboptimal commuter experience. This tepid launch was avoidable. Civil construction for the line was completed by 2023. For nearly two years, Bengaluru had a finished metro line with stations, tracks, and signals ready, but no trains to run on them. The delay in procuring trains is intricately linked with India-China geopolitics, and offers an important lesson for future procurements: stick with the choices you make. Here’s the full story. The contract is signedIn 2019, BMRCL invited bids for the train-sets that would be used on Phase-2 of Bengaluru’s metro system. Eventually, Chinese state-owned rail manufacturer, CRRC, beat Indian companies like BEML and other foreign competitors in this bidding process, and secured a ₹1,578-crore contract for 36 train sets, of 6 coaches each. This placed the cost per coach for this contract at ₹7.3 crore per coach. This was significantly cheaper than other competitors. BEML was offering ₹9.2 crore per coach, and Bombardier was at ₹8.5 crore. Thus, CRRC won the bid, solely on cost, and the contract was signed. It is important to note that this bidding process was done under the L1 system, by which the lowest cost bidder always wins as long as they meet certain basic, baseline criteria. The contract included a CRRC’s plan involving a clause which mandated that 75% of the production take place in India, as part of the Make-in-India initiative. As a result of this, CRRC decided to build a new plant at Sri City in Andhra Pradesh. It agreed to supply the first set of 12 coaches from China within 87 weeks, then ramp up to deliver the remaining 204 coaches from India. The Galwan EffectThe May 2020 Galwan incident significantly heightened geopolitical tensions between China and India. It also slowed many large Chinese-related infrastructure ventures, like the trainset manufacturing for the Yellow Line, in India. This was because the central government imposed tighter screening on Chinese firms under various regulations. Any direct investments from Chinese firms needed Cabinet permission and Home and External Affairs approvals. This meant that the FDI inflow and the component inflow that had to happen for CRRC to set-up its Sri City factory was now in limbo. Additionally, CRRC technical staff were also denied visas, and weren’t even allowed to come into India to set up the manufacturing facility till December 2023. CRRC’s local manufacturing plan never moved forward because the land transfer for its Sri City factory faced barriers. Customs seized imported parts for inspection for long stretches, and they eventually had to be released by a special clearance, once again from the Union cabinet. By mid-2021, Bangalore Metro Rail Corporation Limited (BMRCL) tried to cancel the contract altogether with CRRC, citing “persistent default.” CRRC responded that between the policy shifts and COVID-19, it was exposed to force majeure events. The legal proceedings were slow, and involved both the Delhi and Karnataka high courts. The legal stalemate caused a total standstill in delivering the Yellow Line’s trains, even as civil construction finished. Delay and the Cost of OverreachOnce the courts ordered the contract to stand, CRRC accepted a workaround. It formed a joint venture with the Indian rail firm Titagarh Rail Systems Ltd (TRSL). CRRC shifted local manufacture of the coaches to TRSL’s plant in West Bengal. However, the transition took time. TRSL had to receive technical handovers from CRRC, import crucial Chinese parts, get regulatory clearance, and bring in foreign engineers. Each step ran into repeated delays because any items or visitors from China faced scrutiny. It was only at the start of 2024 that a prototype six-coach train arrived in Bengaluru from Shanghai. The second and third trains, assembled locally, arrived in early 2025. By August 2025, it was decided that the line should finally open at a limited capacity with these three trains, and that more trains would be added as they were manufactured by Titagarh. The cost implications of this delay are significant. The total outlay rose by 32%, adding ₹1,866 crore to the project. Since the original difference between CRRC’s bid and an Indian competitor was around ₹410 crore, the extended delay cost far more than what was saved by choosing the cheaper Chinese bid. Additionally, the total final cost that taxpayers had to pay for the Yellow Line evened out to about ₹7610 crore, giving it a ₹400 per kilometre cost, which is higher than usual for elevated metro lines in India. From Conflict to CorrectivesIn the months since, the government has been much more cautious about awarding new infrastructure contracts to Chinese firms. As an example, a Chinese-led bid for Vande Bharat trains was cancelled after the Galwan clash. In Bengaluru itself, the next large coach order of ₹3,177 crore for other lines went to BEML, despite a higher cost per coach. Nevertheless, a complete ban on Chinese companies would not be in India’s best economic interests. China remains a large source of lower-cost infrastructure inputs and advanced manufacturing systems. Cutting it off from all future projects would deny Indian firms potential technology transfers, hamper local manufacturing, and reduce competitiveness. Yet blindly awarding crucial infrastructure contracts to companies that may face geopolitical restrictions partway through a project is not ideal either. Lessons for Policy and ProcurementThe underlying policy lesson from this saga is that critical infrastructure procurement must align with long-term strategic posture. While China may remain the lowest-cost option for many capital items, the structural differences in our relationship, such as the border dispute, are also fixed. Therefore, the essential calculation is whether the price advantage offered by a Chinese supplier is worth the risk of geopolitical uncertainty. Regardless, once a decision is taken to allow Chinese capital, there must not be any ex-post reversals. India does not need a blanket exclusion of Chinese capital. A more practical approach is a graduated investment-review mechanism. Low-security-risk items could still be sourced globally to leverage cost benefits, while the highest-risk segments, such as core electronics or critical rail signalling, might require deeper scrutiny. Once a firm passes these requirements, it should be free to complete its project without sudden policy reversals. Finally, infrastructure procurement cannot rely on a L1 approach, which only rewards the lowest quote. India should adopt a more comprehensive method like Quality-cum-Cost Based Selection (QCBS). QCBS combines a technical evaluation (covering past performance, technical edge, local manufacturing capacity, and geopolitical risk exposure) with a financial evaluation to award a contract to the highest composite scorer. It allows decision-makers to consider reliability and strategic concerns alongside raw cost, reducing the chance of sudden disruptions. HomeWorkReading and listening recommendations on public policy matters
|
