The way forward for firms

Business Standard, 17 May 2021

While there is a health catastrophe playing out around us, the gloom about the Indian economy is a bit overstated. While vaccination is moving slowly, disease experience also protects individuals. And, the export sector is growing. It is now at dollar values that have exceeded pre-pandemic conditions. For decision makers in firms, the path to recovery lies in vaccination and exports.

Cross-country comparisons of vaccination

There is a lot of gloom in India today about the human catastrophe that has played out. Alongside this, there is an idea that vaccination is the only path to normalcy, therefore the countries which have made more progress on vaccination will bounce back before others. This is seen as a situation where there is a direct connection between state capacity (greater competence maps to greater vaccination) and economic outcomes (vaccination restores normalcy, starting with a euphoric stage).

There are two reasons why this perspective induces excessive gloom about India. The first problem is equating disease control with vaccination. But disease experience also generates protection. There are two pathways to immunity: through the vaccine or through the virus. A lot of India is becoming immune through disease experience.

The disease dynamics will revert, given the enormous spread of the disease in recent months. Alongside this, the policy frameworks for vaccination are getting better. Imports are kosher, many sub-national governments have put out tenders for vaccine purchase, and private persons have started vaccination. A great deal of energy is and will be in fray, augmenting and supplementing the state capacity of the union government. This will give gains in the number of persons vaccinated per day.

As of today, disease experience with the unimproved Wuhan variant, and the AZ vaccine designed for that virus, seem to be faring reasonably well at protecting against the strains present in India. This immunity might not last forever; new variants could generate breakthroughs. E.g. the "south african variant" is more effective against the AZ vaccine. There may be a moment, in the future, when breakthrough variants require commensurate booster shots. When that happens, institutional capacity for vaccination in each organisation, neighbourhood, city, and state will matter greatly. The people who are able to roll out vaccines against new variants will do better, at future dates, if the precise combination of new variants and new vaccines align themselves.

Export as the locomotive

The second source of strength lies in export demand. At present, in India, the government lacks fiscal space to enlarge demand. Private sector investment is at its lowest values since 2007 or 2011 depending on how this is measured. Household consumption demand has been hampered by disease, fears about income volatility and lack of access to borrowing; it will only slowly recover once the disease subsides, one family and one neighbourhood at a time. There is one part of the economy, however, which is faring well: export demand.

Most advanced economies are faring better than India on health policy and on fiscal policy. Superior health policy has given public health capabilities in keeping the disease under check, and superior frameworks on vaccination have given a larger fraction of the population vaccinated. Long decades of sound fiscal policy, in mature market economies, meant that governments had more space to enlarge the fiscal deficit when in need. The foundations for this had been laid in those countries with decades of sound economic thinking: the absence of financial repression, borrowing from all over the world, vibrant speculative price discovery in the bond-currency-derivatives nexus, running primary surpluses in normal times, sound macroeconomic data, and public debt management agencies. As a consequence, many countries have been able to bolster consumption using bigger fiscal deficits in a way that's infeasible in India. In the US, fiscal stimulus is at larger magnitudes than was seen during World War II.

This global economic recovery has given export buoyancy for India. In the table, we focus on recent 4 months vs. the last 4 months of pre-pandemic normalcy (Oct 2019 - January 2020).

Late 2019 Latest Change
(4mth avg., USD Bln) (4mth avg. USD Bln) (Per cent)
US goods imports
  Total 204.4 212.9 4.1
  From China35.9 38.8 8.2
  From India 4.7 5.1 9.0
India non-POL goods trade
  Imports 28.2 34.2 21.4
  Exports 23.4 26.3 12.5

Notes on the table: All values are average monthly goods trade data expressed in billion dollars. "Late 2019" is October 2019 to January 2020, the last days before the storm. In the case of US data, the "latest" data is December 2020 till March 2021. In the case of Indian data, the "latest" data is Jan-Apr 2021. The US data is non-seasonally adjusted and susceptible to errors of comparison. With the Indian data, exports is seasonally adjusted, while imports does not have seasonality and hence raw comparisons are permissible.

In the US, total goods imports from December 2020 to March 2021 were 4.1% higher than the pre-pandemic level. In these months, US imports from India rose by 9%, while US imports from China grew by 8.2%, in this period. In absolute terms, Indian goods exports to the US were up to a monthly value of $5.1 billion compared with pre-pandemic conditions of $4.7 billion.

Looking at overall Indian non-POL (petroleum, oil, lubricants) goods exports, the latest four months of data (January to April 2021) had a value of $26.3 billion a month, which was 12.5% bigger than the value of $23.4 billion a month under pre-pandemic conditions. Services exports are also likely to have fared well. The export sector is a unique spot in India today, where the numerical values today are significantly superior to those seen in pre-pandemic conditions. Many decades of battling autarkic thinking have brought us to a point where the Indian connection into globalisation is economically significant, and constitutes meaningful diversification against domestic difficulties.

When an export order appears, inputs are purchased (which are often imported), production takes place, and then goods are exported. As a consequence, when an export boom is underway, import growth is often greater than exports growth. We see this in India today where imports are 21.4% above pre-pandemic levels. Ordinarily, we would not be able to decipher whether this imports surge is on account of domestic demand or inputs associated with export, but we are at a moment where it's more likely that domestic demand is sombre.

Implications for firm strategy

For strategy thinking in Indian firms, this reasoning has two implications. First, every firm should take effort to vaccinate its employees, their family members and possibly its customers, and keep an eye out for variants that will require booster shots. Second, this is a time to prioritise the export market.

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