The New Growth Story

 

Since the pandemic showed signs of waning, there have been fresh winds blowing across India. The economic weather report is predicting sunny weather. The last two years have been extremely stressful for the economy. Manufacturing had almost stopped and there was hardly any economic activity worth the name in the country, save for the industry catering to health and essential commodities like food and FMCG.

But in 2021 things have begun to change. Economic activity had got several boosters in the last five years. The government had signaled its seriousness on economic reforms when it introduced the GST bill and the bankruptcy reforms. The law which imposed a retrospective tax on companies was also removed. It helped a lot of companies to turn the corner, prominent among them was Vodafone.

The sale of Air India was another milestone in the disinvestment journey of the Modi Government. Now the message is loud and clear to the world that this government means business.

India’s exports have reached a record level in 2021. They have almost touched $400m. The industry is encouraged by the government policies and is now willing to take more risks and invest in new business or expanding existing ones. The PLI scheme has helped incentivize production by offering compensation or incentives to the companies who meet certain production targets.

The growth story is not restricted to any particular sector either. He encouraging aspect of this growth is that, it is in non-traditional sectors like Specialty chemicals, garments, electronics, machinery, etc. India used to mainly export garments, raw materials and other low value goods.

The states also have chipped in. Land parcels to set up an industry have been made available in record time. Traditionally it used to take months to acquire land and other facilities like electricity and roads. The scenario has changed. States are competing among themselves to attract industry, domestic as well as foreign. One e.g. is that the states are now willing to pick up the tab on worker skilling to as an added attraction for new businesses to set up shop.

This flurry of economic activity and favorable government policies has entailed a flourishing ecosystem which has spawned even more industries. Upstream and downstream industries have mushroomed especially in the last year. The states have incentivized the factors of production of land, labour, capital and as an added incentive the central government’s PLI scheme has spurred the industry to improve production as well.

India has still a long way to go if it wants compete with the likes of China and South Korea. But there are opportunities on the horizon. China’s demographics are going against it. Its population is shrinking as a result of which, labour intensive manufacturing will have to move out of China. This is already happening as Samsung moved its entire cell phone plant to India recently.

One more reason why manufacturing is moving out of China is the policies of the communist government. After Deng Xiaoping opened the economy Chinese companies did business worldwide and became rich. The money also brought them power. They were seen to be breaking the party rules blatantly. The CCP has forbidden companies to make big money under the guise of an equitable distribution of wealth. The much touted ‘Common Prosperity.’ This means many big and growing Chinese companies have seen business growth severely dis-incentivized by the Party. This slowdown stems from the conviction in the top echelons of the CCP that the Party is supreme.   

In the near future, this could be an opportunity for India. But there is competition from countries like Vietnam, Malaysia, Bangladesh, etc.

Overall, however, it looks as if the India growth story may have begun in real earnest at last. For many years economists and commentators have talked of India having ‘missed the bus.’ This time it seems the country has got its act together.

Asia in Flux

Since the last two years, global geopolitics has pivoted around the continent of Asia and its fringes. A wide swath from Syria and Iraq in the west to the South China Sea, the entire continent has seen a lot of geopolitical upheavals.

Asia has become the most happening place in international geopolitics. Not surprisingly, all the countries in the continent are touched by this phenomenon. Even the smallest and politically insignificant countries has been affected in one way or the other.

Bhutan and Maldives have not hogged so much limelight in the past. Apart from tourism, these countries have never attracted attention for political reasons. But Maldives and Bhutan, are both victims of China’s Belt and Road projects. Maldives has incurred enormous foreign debt and Bhutan has seen some of its territory claimed and taken over by China. Most of the countries in Asia have been invaded by China using its One Belt One Road Initiative. Under the garb of trade development China has given enormous loans to these small countries.  When the countries were seen to be unable to pay these loans back, China has acquired some asset belonging to the countries as compensation. In this way China seems to be on a take-over spree in Asia.

Though China is responsible for many of these problems, it is not the only country which has caused trouble. The geopolitical dynamics in West Asia have experienced many upheavals lately. These problems go back a long way. Syria, Afghanistan and Pakistan have been constantly in the news. The problems in Iraq and Syria have been closely linked to those in Afghanistan. Since the 9/11 incident, the US has been involved in this region continuously, trying to bring about an elusive peace. Afghanistan and Pakistan have their own dynamics in this.

The US has not been able to bring about any significant change for the better in this region despite sending troops and economic aid for the last two decades. Pakistan looks like it will be an international pariah for some time to come as its economy teeters on the brink of collapse. Its support for terrorists countinues unabated despite being in the Grey list of the FATF. Afghanistan, under the Taliban is faring no better. Kazakhstan has also included itself in this list lately due to its political instability. China’s genocide of Uighurs in the neighbouring Xinjiang province is well known. China is worried about the fallout of the unrest in Kazakhstan.

The South China Sea has seen its share of troubles, mainly due to Chinese aggression and forceful takeover of some disputed islands. The Spratly and Mischief islands taken over by China are also claimed by countries like Indonesia, Vietnam and Malaysia. The Chinese claim on Taiwan cannot be ignored either. China also has a dispute with Japan over the Senkaku islands.

In contrast the continent of Europe and the Americas seem to be having a normal life. Most of the geopolitical action seems to be centered round Asia.  

The problems of Asia are going to stay for the foreseeable future. None of them looks like it will be solved anytime soon. Countries outside the continent are also getting involved. Britain, Germany France, all have sent their naval ships to the South China Sea and the Indian Ocean to show they have interests in the region. The US is already deeply involved in the region as it has had a considerable presence in Asia since the Second World War.

None of the problems listed above are new. They have been around for years. For e.g. the India, China or India, Pakistan border disputes go back to 1947. It will be extremely difficult to predict as to when Asia will sort its troubles. Not for some time at least. Even the most experienced analyst will be hard pressed to even speculate the outcome.

Africa has also felt the heat from Asia. Many African countries have been facing the Chinese debt trap diplomacy. Countries like India and the European Union are trying to blunt Chinese influence in Africa by offering better business terms to these countries. 

The geopolitical pot is boiling in Asia, and it will be an extremely interesting show. There are no spectators here. All are participants, willy-nilly. The powers that be, have already thrown their hat in the ring. The coming decades have been predicted to be Asian, where Asia will be the economic and political pivot. Well, it seems the pivotal times have started for Asia. 

RCEP – To sign or not to sign

 

India’s reluctance to sign the RCEP agreement has been debated nationally and internationally for a long time. However, the government has its apprehensions as regards the impact of the membership on Indian industries. The RCEP (Regional Comprehensive Economic Partnership) envisages reduction/abolition of trade barriers between member countries. Member countries will have to reduce or abolish custom duties, and other monetary/administrative trade barriers which will ensure a free flow of goods and services in all member countries.

In case of India the main reason for worry was that Indian industries are less competitive in terms of cost of production and in some cases quality. India had very little incentive to sign on the dotted line.

India already has signed Free Trade Agreements with most of the ASEAN (Association of Southeast Asian Nations) members, so entering into another treaty with the same countries jointly did not make sense. More importantly, RCEP membership would give large scale manufacturer like China an unrestricted access to the Indian market.

India aired some of its major concerns at the RCEP meetings:

RCEP does not allow anti-dumping duties on partner countries. Cheap goods will flood the market putting local industry in peril. The same applies to agricultural produce.

India did not get any assurances on access to market for its services sector like Software/Analytics/Backend work, Design, etc. where it has a lot of strength.

Non-Tariff barriers can be used by member countries. The Chinese have often used this to stop Indian goods entering Chinese markets. The barriers have resulted in trade deficit tilted in China’s favour.

Base year for tariff reduction was taken as 2013 when Indian duties were less as compared to 2014 when the current government increased the duties.  India could not agree to this as the duties in 2013  are less compared 2014 as the base year.

The ‘rule of circumvention’ problem has not been addressed in RCEP. With the free flow of goods, it becomes difficult to identify the country of origin for a particular product. Products are assembled in many countries where value is added and then shipped to the market. China has in the past re-diverted its goods through third countries to take advantage of trade agreements which it itself does not enjoy.  

India already has trade deficit with 11 of the 15 RCEP partners. Thus, opening up the Indian economy by signing the agreement would hurt the nascent Indian industry which cannot compete with the manufacturing powerhouses of ASEAN. The trade imbalance would become even more unfavourable.

Considering India’s earlier FTAs with ASEAN members, signing into the RCEP treaty would be like agreeing to give the partner countries, especially China, an unrestricted access to the Indian market. Moreover, in a free trade environment, a country's industry needs to be extremely competitive to derive any benefits from the membership.   As the way things stand, India cannot compete with China in manufacturing in terms of volume or price, so this would have been a one-way road with India getting no benefits from the agreement. Hence India took the decision to not become a member of the RCEP.

India – Ticking all the boxes

 

Among the many concerns being aired about India the ‘whether India can make it’ is the most popular. From the time of independence this question has being doing the rounds in all seminars, think tanks, and the opinions of political gurus and economists.

The country has consistently ‘missed the bus’ when it comes to economic development. Maybe the government did not give enough push to the industry or did not follow aggressive development policies, India consistently failed to perform.

It became fashionable to talk on this subject in economic forums around the globe. India too obliged by showing consistent failure.

Come 2014, and things began to change. It started with the basics. Government officials were asked to report on time to their office. And to not play golf after attending office for a few hours. The new administration campaigned to end open defecation in the country by providing toilets to all households.

Basics out of the way, the government took up the next priority. Weeding out corruption and ensuring that the government schemes delivered. Last mile delivery was always a problem in India. So the Jan-Dhan Yojana was implemented. This scheme necessitated that all poor Indian citizens who had been out of the economic mainstream had his or her own bank account, so that electronic money transfers could be undertaken.

The Ujwala Gas scheme also envisaged that all the poor households in India received a cooking gas connection. Many middle class people responded to the government request to give up their own connections in favour of a piped gas connection. The released connections were re-diverted to the Ujwala Scheme.

The government then proceeded with some long pending political decisions. Issues like Article 370 for Kashmir, construction of Ayodhya Temple, Triple Talaq bill, were resolved. Disinvestment in government PSUs was undertaken. A milestone was reached when Air India was bought by the Tata Group.

Infrastructure development has been undertaken on a war footing. Roads, railways, shipping have received considerable attention from the government. The Digital India scheme, the GST system, the Bankruptcy bill, have been implemented.

The changes the country is witnessing are transformative. Unlike the situation earlier where the politicians only used to talk about development, this time there is action on the ground. People have actually received money disbursed by the government schemes.

Industries are being developed at a rapid pace. The much needed policy push to the startup industry has materialized. The PLI (Productivity Linked Incentive) scheme, and the recent government announcement for developing the semiconductor industry is evidence of the determination with which this government is pushing development.

The current government has been working steadily towards its set goals, and by the next decade India could to become a $ 5-10 trillion economy. With rising affluence India could lose some long standing problems it has been facing. 

Social fissures like caste, class and religion will disappear or will diminish in importance politically as the wealth of the people increases. Politicians will not be able to exploit this factor during elections to polarise the voters. Money mindedness may take over the caste system which in India’s case could be a whole lot better. India’s population is showing signs of stabilising its growth rate, which could increase per capita incomes exponentially by the end of this decade.

All economic parameters point towards rapid development. The government of the day in the country will need to steer the right course to build the momentum and sustain it.