India has skin in the global game
Business Standard, 28 October 2024
Global economic conditions and Indian growth
After the second world war, we went through two phases. First, there was the cold war with an emphasis on nuclear deterrence coupled with controlled wars. Atter the collapse of the USSR, there were wars in anarchic conditions such as Afghanistan, Iraq and Syria.
Through all these years, the basic machinery of the world economy worked well. Most G-20 countries faced a relatively stable environment. The `Second Globalisation' which began in about 1982 featured a great wave of removal of government restrictions on trade, capital, and labour movements.
The connections between global conditions and Indian economics is often underrated: We tend to tell purely Indian stories about Indian growth episodes such as 1979-1989 and 1991-2011. But the influences of the world, and of global peace and economic success, have been strong:
- India has been a huge beneficiary of globalisation. In 2023-24, India got $441 billion by exporting goods and $341 billion by exporting services. These are vast gains compared with the conditions of 1991. India needs a sensible external environment to continue to obtain the gains from globalisation, as a defensive strategy (to protect the 2023-24 exports) and an offensive strategy (to support the next doubling of exports).
- With the increasing de facto integration of the economy into the globe, the Indian business cycle is more correlated with the global economy.
- Global shocks greatly matter. The Indian economy suffered from the oil shock of 1973 which followed the Yom Kippur war. The `Great moderation' is the period 1985-2008 where advanced economies did rather well through the adoption of sound macroeconomic policy (i.e. floating exchange rates and inflation targeting [EiE Ep67][EiE Ep68]). This period worked well for India, with the exception of Iraq's invasion of Kuwait which triggered off the Indian BOP crisis, which is also an example of external influences.
A new world of global difficulties
We are now facing a new daunting environment in terms of global security. Global conflicts have become significantly worse. Russia's invasion of Ukraine is the biggest conventional war since 1945. It is a remarkable return to `total war' -- the complete mobilisation of a society to wage war -- which was last seen in World War II. The conflict between Iran and the Middle Eastern status quo is simmering, and could escalate. Free navigation in the Red Sea has been compromised in an unprecedented way by the Houthis armed by Iran. China continues to escalate its military pressure upon Taiwan.
A wild card in this is the possibility of a Trump victory in November. This could be associated with greater American isolationism, lower American state capability, and more corrupt, personalised decision making in the US federal government. Many things on the global stage that are held together by American power will change in a Trump presidency, in often harmful ways. Strongmen like Xi Jinping and Vladimir Putin will matter more, worldwide, if Trump wins.
In the 2018-2024 period, we have seen the emergence of `the Third Globalisation' [EiE Ep17] where access to the core is more predicated on foreign policy and military alignment with the core. This has, of course, constituted a more limited environment when compared with the Second Globalisation where there was high freedom for cross-border activities. Looking forward, new kinds of military conflicts would kick off new aspects in this retreat from globalisation. This would, in turn, create a drag upon global growth.
This is a more difficult global environment in which growth of Indian exports or GDP is sought to be obtained.
The objectives of Indian foreign policy
India's interests lie in sustained high economic growth in India. The post-1991 Indian growth trajectory gives India an interest in the status quo: advanced economies providing technology, finance, management and markets were a key engine for Indian growth. Greater global chaos with the return to total war in more countries gives an environment of conflict in which trade and GDP will worsen. This will harm Indian growth.
Even though Indian foreign policy tried to resist Pax Americana in many aspects in the 1989-2008 period, the project of Indian growth greatly benefited from the American-led world order. What has changed is that we can no longer count on the West to adequately deliver these foundations for us to free ride upon.
Indian foreign policy must then find the strategic pathways, in this difficult global context, which help create the harmonious global environment that could best support Indian growth. Indian foreign policy needs to become a participant and supporter of the projects of global peace, stability and globalisation.
How could this be done?
How can Indian foreign policy play towards this goal?
- The global flashpoints (Ukraine, Taiwan and the Red Sea) should be sites of action for the Indian foreign policy. To the extent the Indian state can push global negotiations which restore the status quo ante, this will assist India's interests.
- A key part of this project is the emerging rules of the Third Globalisation. India has an interest in evolving the Third Globalisation into a true globalisation within the core and ensuring that India is a first class participant of this core. This requires participating in the global project of peace, stability and globalisation, and not resisting it.
- All the major economies of the world other than Russia, China and the US see eye to eye on this. It would be natural for India to participate in these tasks, going beyond tactical bilateral negotiations on narrow questions, but by making bilateral negotiations fit within the overall strategy of fostering a successful world economy.
- Such participation in improving the global environment will require reshaping domestic policy, in many respects, seeking to remove behaviour by the Indian state which is incompatible with the desired global movements towards a stable and successful security and economic environment.
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