Slowing West means dramatic shift in India strategy
Though Brexit is the latest threat to globalisation, as chief economic advisor (CEA) Arvind Subramanian pointed out at the India Policy Forum Lecture on Tuesday, the seeds of the destruction of the era of hyper-globalisation—exports-to-GDP rose to over 25% in 2008 as compared to 18% in the 1980s boom—lay in the fact that this phase coincided with what he called the weakening West and the rising rest. Between 2005 and 2014, the latest McKinsey report points out, real incomes in advanced economies were either flat or fell for 65-70% of the population while they rose for all but 2% of the population in these countries in the 1993-2005 period. The slowing of global trade and increasing protectionism is a logical consequence. In the glory days of 2004-07, when global GDP was growing at 5% per annum, global exports grew at 9-10%—by contrast, they contracted 13% in 2015; in volume terms, the growth was a mere 2.8%. Subramanian’s tentative conclusion that, while deeper integration of the EU-type is under siege, shallower globalisation of trade and capital flows would continue, needs to be validated by actual experience. Nonetheless, there are important policy implications of the new global order.
For one, as Subramanian argues, India simply cannot get a sustained 8% growth without significant export-growth. Not only has all growth of China and Asian tiger economies been driven by high exports-growth, even India’s own high growth years saw 24%+ export-growth. Can India get this growth and is the world ready for another China-style export behemoth? The latter, surprisingly, may not be too difficult since, as Subramanian points out, China’s exports add up to 3.3% of global GDP which is small compared to the global exports-to-GDP ratio of 27.3%. Since India’s share is a mere 0.5% and China’s rising wages and exchange rate will force it to vacate some of this space, the question is whether India will capture it? Keep in mind that, in the 2005-12 post-MFA period which was supposed to benefit India, our apparel exports rose just 3.7% a year versus 18% for Vietnam, 15.7% for Bangladesh and a healthy 6.9% for China which already had a very large export base by 2005. Certainly, the new textiles policy which brings in fixed-term jobs and tax breaks could help, but a lot more will be required.
China’s competitiveness didn’t lie in just its low labour costs or a cheap currency, it lay in it being an integral part of all global manufacturing chains while India is not a part of most manufacturing chains. Getting into this position requires India to aggressively woo FDI and shedding what, in an analogous context, the prime minister called the ‘hesitations of history’. While there has been progress, recent experience with Apple or even the so-called 100% FDI in the new aviation policy show India isn’t fully ready—half-steps are better than no-steps but it is not clear how much they really move the needle. Trade pacts have to be a significant part of India’s exports strategy and Subramanian rightly argues that, with incomes stagnating in the West, it is unlikely India will get away with anything less than full-reciprocity. So, while the US may have unfairly blocked access to some of its markets, it is unlikely to fix this unless India gives it more access. You can argue, as many did, with the CEA’s view of the inevitability of India taking up the space China vacates, but no one can doubt his prescription.