‘What defines power and determines national standing is… no longer the same. Technology, connectivity and trade are at the heart of the new contestations.’

S. Jaishankar, Minister of External Affairs, 4th Ramnath Goenka Lecture, New Delhi, November 2019.

 

THE collapse of the Soviet Union in 1991, an important economic and strategic partner for India, provoked a fundamental reassessment of India’s approach to its geopolitical interests and its economic security in a post-cold war world. India responded boldly and this boldness paid off in a more competitive economy, substantial reduction in poverty and an improved standing in world affairs.

Thirty years later the domestic and global context once again demands creative thinking and radical choices. The main elements of the current context are familiar. Domestically there is a sense of flagging economic dynamism and a search for fresh growth impulses. Globally, the open, liberal, economic order anchored by treaty-based multilateral institutions is under attack with the shift in stance most pronounced in the case of the United States under President Trump.

In this essay I explore both the constraints and the opportunities of the world now revealing itself. To quote William Gibson, ‘the future is already here – it’s just not evenly distributed.’ While my focus is the coming decade, I also believe that we are at the start of a fresh thirty-year phase in global affairs, one that will take us to mid-century and to India’s centenary as an independent republic.

My analysis is loosely grounded in scenario thinking. The scenario discipline takes certain dimensions of the future as given and explores the implications of uncertainty by exploring branching points or forks in the road. Well designed scenarios avoid prescription. Their goal is to uncover and present alternative, plausible realities and to fight the temptation of linear extrapolation. Decision-makers do not enjoy this luxury. Their job is to take managed bets in the face of uncertainty and to hedge against shocks that threaten to deflect them from their chosen path.

Scenarios can help to deal with ‘known unknowns’ and are widely used both by corporations and governments to create a shared language to discuss an unpredictable future. As Donald Rumsfeld famously observed, equally important are ‘unknown unknowns’. Here too, wise responses depend on clarity of purpose, flexibility and quality of judgment. These are qualities that India demonstrated in 1998 at the time of the Asian crisis and again in 2008 during the global financial crisis, and will no doubt be available again as circumstances change.

This essay is intended as a modest contribution to the national discourse on India’s global choices and options. India being a conceptual society, a core challenge is for India to articulate a view of economic sovereignty that is politically grounded and also sufficiently flexible to grasp the opportunities available to it in the decade ahead. Such an articulation needs to become as widely accepted in the society, as were ‘non-alignment’ and ‘self-reliance’ a half-century ago.

 

I start with a brief review of the global economy over the past decade. The 2008 financial crisis in Western Europe and the United States has marked the decade that followed, both economically and politically, in a way that has significantly changed the context for India’s economic diplomacy. In the depths of the crisis, the leading Atlantic powers, meeting as the Group of Seven (G7), invited leaders from other large economies to forge a united response to the worst economic downturn in 70 years, one that radiated out from the US, regarded as the world’s most sophisticated and well regulated financial system. These leaders’ meetings (formally called ‘the summit on financial markets and the world economy’) have been held since 2008 (currently annually) under a rotating presidency. India has had a seat at the global economic high table for over a decade and is expected to assume the presidency in 2022.

The convening of the G20 leaders may have helped to save the world from a great depression, but the global economy that has emerged is strikingly different from the boom that went before. One surprise is the collapse of inflation, particularly in the advanced economies (AEs). This still poorly understood phenomenon is in turn reflected in astonishingly low nominal interest rates, a condition Maynard Keynes called the ‘liquidity trap’, now more usually referred to as the ‘zero lower bound’.

The weakness of interest rates as a tool for monetary stimulus has led to massive (and continuing) expansion in central bank balance sheets, designed to stimulate spending by boosting prices of domestic financial assets. While this flood of liquidity was probably necessary, it represents a major distortion in the pricing of global financial assets whose long-term consequences are difficult to assess. A second characteristic has been a sharp deceleration in the growth of world trade, possibly linked to the slump in global investment, except for China. While the return of global growth is to be welcomed, the associated global monetary disorder and slow trade growth serve to complicate economic management in emerging markets, including India.

 

The political consequences of the crisis in the AEs have been even more consequential for India’s economic aspirations. Most credible economic research suggests that trade and immigration have each been beneficial for growth, productivity and real incomes in the AEs while also benefiting the emerging and developing economies (EDEs). Technological change has been a much more powerful factor in reducing manufacturing employment, which in any case is a small share of total employment in most AEs. Regardless of what research has to say, populist politicians in several (not all) AEs have chosen to blame ‘unfair’ trade as the root cause of stagnant wages, rising inequality and for the hollowing out of their manufacturing sectors.

Despite these sizable hurdles and a slowing in the growth of both India and China after the financial crisis, there has been a steady shift in the location of real global production (measured at purchasing power parity) toward Asia. Looking at the current country members of the G20, China is on some estimates the world’s largest economy and India the third largest. With Japan now at number four, Asia has emerged as the geographic hub of global economic activity, with the three countries together roughly double the size of the US economy and about 90% larger than the EU28.

 

The world economy today presents a confusing picture. In the advanced economies inflation remains stubbornly below target even though official unemployment rates are at record lows. US bond and stock markets are both at near-record highs, yet major central banks, notably the European Central Bank (ECB) but also the US Federal Reserve (the Fed) have started to ease policy in expectation of an economic slowdown. The ECB and the Bank of Japan continue to expand their balance sheets through purchase of market securities to stave off deflation, twelve years after the financial crash. Commodity markets are similarly signalling expectations of slower growth, with OPEC in particular finding it hard to impose its will on the global oil market.

While global business cycles are a fact of life, a global slowdown at this time is somewhat surprising given the massive sustained monetary stimulus and a generally permissive fiscal regime in all major advanced economies, particularly the US. In the October 2019 edition of its authoritative World Economic Outlook (WEO) the IMF attributes the global slowdown to a rise in political and policy uncertainty. Foremost among these is the on-again off-again tariff dispute between the US and China. But there are other factors as well, including the future trading relationship between the UK and Europe following Brexit, regulatory taxation and trade disputes between Europe and the US and the uncertainties associated with transitions in technology and energy systems. The disputes between the US and China are one factor causing a slowdown in the Chinese economy, while other regulatory and policy uncertainties have a dampening effect on investment intentions despite abundant liquidity.

If the global slowdown does spread as predicted by the IMF, it will come at an awkward time for the Indian economy, where GDP growth has recently been on a steep decline. Domestic factors, particularly stress in the credit markets, as well as policy unpredictability, seem largely to blame for India’s own slowdown. However, India is sufficiently integrated into world markets that slow global growth aggravates a weak domestic investment environment, although this is somewhat offset by a low oil price. While India’s global footprint is nowhere near that of the US or China, it has been growing faster than the average so its slowdown has a measurable impact on global growth.

 

India’s economic challenges are much wider than the present slowdown, troubling though it is. It needs take a clear-eyed view of the international economic landscape that is now emerging, to consider the implications for its development path, and to develop an engagement strategy with key partners and institutions to help it manage the new uncertainties emerging in the global order. For a labour-abundant, young, natural resource poor, well located, maritime nation, access to technology and to larger markets must remain the path to rising labour productivity and therefore living standards.

We need to be both steadfast and realistic in our ambitions. If we succeed in growing at an average of 5% per capita per year for the next thirty years, our real per capita income (at purchasing power parity) can quadruple in thirty years, to approximately the current level of EU members such as Portugal and Poland. This would occur through a combination of sustained real GDP growth with slowing population growth. The French use the term ‘les Trentes Glorieuse’, the thirty glorious years, to refer to the period from 1945 to 1975 when the core countries of continental Europe vaulted from being devastated semi-industrial post-war economies to becoming pillars of the democratic liberal economic order.

 

The hope is that our ‘Trentes Glorieuse’ lies ahead of, rather than behind us. The alternative is, frankly, too awful to contemplate. Equally we need to remember that many countries get stuck on the way, largely on account of their political institutions. Convergence to full developed country status is a comparative rarity. The iconic case of non-convergence is Argentina, but the number of countries who achieve ‘escape velocity’ is relatively few, even if the term ‘middle income trap’ disguises more than it reveals. One should also note the important role of a benevolent hegemon in helping those countries that succeeded ‘cross the line’, although this is certainly not a sufficient condition. For Western Europe and Japan, that hegemon was the US, through the Marshall Plan and its security alliances. For southern and eastern Europe that economic hegemon has been Germany operating through the European Union.

If India’s path to economic prosperity will remain broadly unaltered, ongoing shifts in the global order could affect our possibilities and our tactics. At least three channels look to be affected: access to markets, access to technology, and weakened multilateralism. Each in turn will be affected by the evolution of the global economy, and each will shape the agenda for India’s economic diplomacy.

There is tremendous uncertainty on the medium-term prospects for the G7 economies and therefore the world economy. Serious American economists are talking of a continued ‘secular slump’ or ‘Japanification’ of the Atlantic economies, both the US and Western Europe, while the impact of technology on the labour market (demand, skills and wages) is another unknown. Economists have a wretched record in capturing turning points, and there is also a plausible alternative view that the still nascent digital and energy transitions will unleash an enormous wave of innovation, investment and productivity. Sluggish GDP growth would further intensify G7 sentiments against globalization of production and movement of labour; it is less clear whether this will be reversed quickly even if stronger global growth returns.

 

There is similar uncertainty attached to future prospects for access to technology and to foreign markets for both goods and services. India has had lengthy experience of being shut out of what were considered dual-use technologies, a regime from which it has only recently exited. In the escalating dispute between the US and China we see an enormous widening of technologies that the US believes to be strategic. The US has also invoked national security to justify tariff actions against allies. A divided Europe has recently declared China to be a systemic rival and is attempting to put in place screening mechanisms for investment or acquisition in firms where the underlying intent is strategic or otherwise non-commercial. It does not take a lot of imagination to see that India, with its large state sector in areas from banking to energy, could equally come afoul of these regulatory structures.

The issues in the trade arena are, if anything, more worrying. India has so far taken comfort that the rules of the World Trade Organization, its reliance on consensus and its dispute settlement mechanism and enforcement machinery, would all be sufficient to help India maintain market access in merchandise trade, even if not in services where it is more competitive. The dispute settlement function of the WTO has effectively been shut down by US veto, the consensus principle is seen as unworkable, the issue of state aid for exports has become a major concern, and new topics such as digital commerce are being discussed in plurilateral groups which India has so far chosen not to join but is unable to block.

 

As it navigates these rapids, India will need clear thinking in respect of its interests, its assets, its selection of like-minded partners on specific issues, its negotiating capacity and its domestic capacity to provide reciprocity. It is not in India’s economic or political interest to be forced to choose between the US and China in the coming decade even though this will require some fancy footwork. Japan and Korea have shown in managing their relationship with China that it is possible, indeed essential, to decouple economic engagement from strategic friction.

China and the US each offer India different opportunities: technological cooperation in the case of the US, investment capital and cheap capital goods in the case of China. And if India believes (correctly) that the US is economically misguided in focusing on bilateral trade deficits we should not commit the same fallacy in our own bilateral relationships even if we are egged on by our private sector. It is also not in our interest to be dictated to by a condominium of the G2. The latter seems unlikely at the present juncture, but a lot could change depending on the outcome of the US presidential election in 2020. The US pressure on India to shun Huawei’s 5G equipment is an example of the first choice, while the cooperation between China and the US on emissions reduction under President Obama in 2014 (which conditioned India’s response in the 2015 Paris climate change negotiations) is an example of the second.

In managing the balance between China and the US, India will of necessity enlist the support of both Japan and the EU. Both powers are deeply engaged with China, and each shares India’s interest to ensure, in Minister Jaishankar’s words, that a multipolar world requires a multi-polar Asia. Japan is a critical partner in arriving at a sensible trade architecture for Asia, and both it and Europe are potential allies in the governance of cross-border high quality infrastructure. Each has leverage over China that India can benefit from, but India will need to accept that the engagement will come at a price in terms of engagement and reciprocity.

India’s economic diplomacy must also comprehend multilateralism, an arena where it has expertise but has traditionally been shy. As the discussion on the WTO has already indicated, for now the world has moved on from multilateral institutions to engagement occurring bilaterally among sovereigns. As noted, India has long had a seat at the top table. As 2022 approaches, it will need to decide what to order from the menu.

 

France’s President Charles de Gaulle noted, ‘No nation has friends, only interests.’ I have tried to explore this dictum for India as it enters the third decade of this crucial century. The 21st century is as important for India’s rise as the 20th century was for the US. Comparisons with the US are helpful on many dimensions. In each country (a better word than nation, given their continental scale and cultural diversity¹) the adoption of their written constitutions rather than formal independence from the British crown dates the start of the modern polity. In the case of the US this was 1789, and for India is 1950.

Both countries have had a fundamentally stable political order, though this order has continued to evolve. Both are countries where personal faith is of importance to a large part of the population, but there is no constitutionally sanctioned state religion. Both countries have been stained by historical injustice – slavery in the US, untouchability in India. In the US the government has gradually accepted responsibility to address these wrongs, while in India compensatory action is written into the Constitution. 2020 marks 70 years for the Indian republic. At a similar stage (1859) the US was bitterly divided on the issue of slavery, which ultimately resulted in civil war. India has thankfully been spared that tragedy.

 

The US experience is a reminder of the deep political stress that is generated by economic modernization. These stresses prevailed even though the US enjoyed vast natural resources and empty lands not available to India, and at rates of growth and of urbanization well below those of India today. It is also a reminder of the resilience of democracy. The full blossoming of the US into the world’s leading economic and intellectual power took another 90 years (and two world wars that destroyed the earlier leading powers). Protected by two oceans, American democracy survived and flourished largely autarkically and soon developed the capacity to find domestic solutions for its problems. India both enjoys and suffers the consequences of being a latecomer to economic modernization. Its challenge is to use its economic diplomacy to maximize the advantages and minimize the disadvantages of this situation.

 

* Views are personal.

Footnote:

1. Deepak Lal argues that in both the US and India, as also in China, the correct term is empire.