The Russia-Ukraine conflict portends a reshaping of the world order. Ever since the fall of the Berlin Wall in 1989, a paradigm of free societies, frictionless borders and open economies evolved to be the governing order in many nations.
This catalysed freer movement of people, goods, services and capital across the world. Global trade and per capita GDP nearly doubled in this period, marking an era of general peace and prosperity.
Societies and economies in the world became intertwined closely in the pursuit of shared global prosperity. Such tight inter-dependence among nations will lead to fewer conflicts and promote peace, was the established wisdom.
The Russia-Ukraine conflict has dismantled this wisdom. If inter-connectedness and trade among nations were mutually beneficial, then it follows that its disruption and blockade will be mutually harmful. Retaliatory economic sanctions imposed on Russia have hurt all nations, albeit some more than the others.
Egyptians are reeling from food shortages due to their dependence on Russian and Ukrainian wheat, Germans suffer from high costs of heating in winter due to their dependence on Russian gas, Americans face a shortage of electric cars due to unavailability of car batteries that are dependent on Russian nickel, Sri Lankans have taken to the streets on economic woes and Indian farmers run the risk of high fertilizer prices triggered by a global shortage.
‘Global Village’, a lived reality
‘Global Village’ is not just an academic term but a lived reality for the nearly eight billion people on the planet. This ‘Global Village’ was built on the foundation of advanced transportation networks, cemented with the U.S. dollar as the reserve currency and fenced by integrated payment systems. Any disruption to this delicate balance runs the risk of plunging the ‘Global Village’ into disequilibrium and derailing the lives of all.
India too has benefited enormously from being an active participant in this interconnected world, with a tripling of trade (as share of GDP) in the last three decades and providing vast numbers of jobs. Trade with other nations should and will always be an integral cornerstone of India’s economic future. A reversal towards isolationism and protectionism will be foolhardy and calamitous for India.
The Russia-Ukraine conflict is a global geo-economic conflict that threatens to hark back to the Cold War era of two dominant power blocs. Nations that did not condemn the Russian aggression in the United Nations constitute more than half the world’s population but a quarter of the world economy versus nations that condemned Russia, account for three-quarters of the global economy.
The former, the Russia-China bloc, are large producers with rising consuming power while the latter, the western bloc, are today’s large consumers. Any new curtain that descends between these two blocs and divides them will cause major upheavals to the entwined global economic equilibrium.
A trade opportunity
During the Cold War, when India pursued a prudent foreign policy of non-alignment, trade was a small part of India’s economy. Now, trade represents a significant share of India’s GDP.
India’s trade is dependent on both these power blocs and on the current global economic structures of free trade, established reserve currency and transaction systems. As the western bloc of nations looks to reduce dependence on the Russia-China bloc of nations, it presents newer avenues for India to expand trade.
The western bloc of nations has expressed its desire to embrace a new paradigm of ‘free but principled trade’ that values both morals and money. While one may reasonably quibble about this new doctrine, India, as the largest peace-loving democracy, stands to gain enormously from this ‘principled trade’ aspiration of the western bloc.
It presents a tremendous opportunity for India to become a large producing nation for the world and a global economic powerhouse. However, to capitalise on these opportunities, India needs free access to these markets, an accepted and established global currency to trade in and seamless trade settlements.
The American dollar has emerged as the global trade currency, bestowing an ‘exorbitant privilege’ on the dollar, much to the justifiable consternation of other nations. But a forced and hurried dismantling of this order and replacing it with rushed bilateral local currency arrangements can prove to be more detrimental for the global economy in the longer run.
Needed, ties on either side
Now, with India’s robust external sector, a flourishing trading relationship with many nations and tremendous potential to expand trade, such bilateral arrangements are unsustainable, unwieldy, and perilous. Opportunities to buy discounted oil or commodities may be enticing but if it entails a prolonged departure from the established order of dollar-based trade settlement or jeopardises established trading relationships with western bloc markets, it can have longer term implications for India’s export potential.
In the long run, India stands to gain more from unfettered access to the western bloc markets for Indian exports under the established trading order than from discounted commodities purchased under new bilateral currency arrangements that seek to create a new and parallel global trade structure.
India thus needs not just a non-aligned doctrine for the looming new world order but also a non-disruptive geo-economic policy that seeks to maintain the current global economic equilibrium. By the dint of its sheer size and scale, India can be both a large producer and a consumer.
With rising inflation, volatile crude oil prices, global uncertainty, weak domestic private investment and deteriorating fiscal situation, expanded external trade in the changed global situation presents the best opportunity to salvage India’s economy and create large numbers of jobs for our youth and women.
To best utilise this opportunity, India needs not just cordial relationships with nations on either side of the new divide but also a stable and established global economic environment. It is important for India to adopt a strategic economic self-interest doctrine within the larger paradigm of its non-alignment foreign policy.
Social harmony is a must
Just as it is in India’s best interests to balance the current geo-economic equilibrium, it is also imperative for India to maintain its domestic social equilibrium. To be a large-scale producing nation, India needs millions of factories with hundreds of millions of people of all religions and castes across all States to work together.
Social harmony is the edifice of economic prosperity. Fanning mutual distrust, hate and anger among citizens, causing social disharmony is a shameful slide to perdition.
The reshaping and realignment of the world order will be a unique opportunity for India to reassess its foreign policy, economic policy and geo-political strategy and don the mantle of global leadership. Strengthening India’s global economic might through a cautious geo-economic strategy in the aftermath of the Russia-Ukraine conflict can potentially mark a pivotal turn in India’s economic history.
India can be the fulcrum of this new global order, as a peaceful democracy with economic prosperity.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.