This was published in The Times of India on 1st July 2021
In March 2020, Rabbi Jonathan Sacks, the former Chief Rabbi
of the United Kingdom, provocatively said that Covid19 is “the nearest we have
to a revelation, even to atheists. We’ve been coasting along for more than half
a century…and all of a sudden we are facing the fragility and the vulnerability
of the human situation”. More than a year hence, the metaphor rings true. Even
the most affluent have been starkly, brutally made to come face to face with
human fallibility and mortality. That has been the Black Swan. Several of the
outcomes facing the world today, however, are white(r) swans – increasing
inequality, higher trade barriers, increasing geopolitical tensions.
Indian economy, already cratering on growth even before the
rolling lockdowns started in March 2020, is confronting the same challenges
both internally and in its external engagement. Growth had touched a
multi-decade low of 4% even without the impact of the virus. Traditional growth
drivers had sputtered down, and the country was looking for new imagination and
ideas. A big traditional driver of growth that has been morphing itself
fundamentally is open-ness of the Western world to free trade.
The growth of Asia post second world war has been a stunning
success story of free trade. Or perhaps more accurately, a success of the model
where the West (primarily the US) traded one-way market open-ness for political
support (against the USSR) – the grand bargain of the 20th century
with Asia. Non-reciprocal access to the large consumer markets of the West was
a “one-two” punch for Asia – it protected domestic industry from larger, more
efficient western firms and incentivized the latter to set up bases in Asia to
export back to the West. Japan, the Tiger economies of East Asia and China have
all been beneficiaries of this grand bargain. India had been rather late to
this party, having decided on a “non aligned” political stance for much of the
20th century on one hand; and focusing on an internally-focused,
import-substituting industrial architecture on the second. Post liberalization,
India too jumped on the same global trade bandwagon, and the trend-break growth
of the last thirty years has a lot to do with India’s global engagement. Most
spectacularly in the areas of Information Technology outsourcing.
The free trade consensus, however, has been fraying at the
edges for quite some time. Triggered partially by China’s increasingly
polemical politics, protectionism has grown in its political seductiveness in
the US. Much before the pandemic, President Donald Trump’s MAGA campaign at its
policy-core raised trade barriers and tariff levels, mostly against China (and
a few small ones against India too). Coming out of the pandemic, the strategy
has not met the full measure of its advertised objectives. Prior to Covid19, while
exports from China to the US came down a tad, it only seemed to mean a shift in
trade chains – from China to other countries in East Asia. Firms, including
Chinese firms, relocated from mainland China to Vietnam, Thailand and Taiwan.
As a result, aggregate US trade deficit has only grown since 2016. The new
Biden administration has now finessed the strategy further, via the Securing
Supply Chain review exercise, released earlier this month. In a range of key
areas – from pharmaceuticals to semiconductors – the US government would now
look to build redundancies and sacrifice efficiencies in the process. The
redundancies are meant to be built, putatively, around more onshore production
and/or those based in “trusted partner” countries.
For good measure, China too, with less fanfare, rolled out
its own version of self-sufficiency last year. Confusingly christened Dual
Circulation, it identified “internal circulation” - the domestic cycle
of production, distribution, and consumption – as the main pillar for its
development. “External circulation” – trade and commerce – is expected to play
a supportive role only. Details and sketchy and scarce, but it smells, walks
and quacks more like a duck (read, greater trade protection) than not.
Last but not least, there is a growing tide of
anti-immigration sentiments in the West. It has always been tough for India to
trade the area of its comparative advantage – labour, for its area of
comparative disadvantage – capital (and market access). Its gotten a whole lot
tougher now.
India’s Atmanirbhar Bharat programme provides a somewhat
serendipitous potential policy response to the current global group think. Post
1991 reforms, India’s policy framework has generally opted to favour increase
in overall cost efficiencies of the economy and attract capital in areas of
relative competitive advantage. As a result, whole swathes of manufacturing,
where Chinese imports provide cheaper and more efficient alternatives to
domestic consumers and industrial users, Indian manufacturing simply does not exist.
This is true even for sectors that have no great technology barriers. As a
result, India’s biggest trade deficit is not in the area of hydrocarbons (which
is usually the most closely monitored variable), but in manufactured goods.
Source: ASKWA Research
As can be seen in the table, manufactured goods represent
the biggest deficit hole in India’s trade account. Much of the manufacturing
lines don’t need ponderous “reform” measures, nor are they hostage to
proprietary technology access. Recently, during the first flush of the
pandemic, India realized the strategic weaponization potential of some of these
manufacturing lines. Active Pharmaceuticals Ingredients (API), eg, a key
pharmaceutical intermediate, had shifted almost wholesale to China (from India
even 10-15 years back). A potential choking of API supplies could potentially
jeopardize several key and life saving drugs in the country. Similar, even if
somewhat less dramatic, strategic potential lies in other areas like
electronics, rare earths and semiconductors. The government’s Performance
Linked Incentive (PLI) programme – now rolled out across multiple sectors – has
sought to specifically target these sources of strategic vulnerabilities.
In short, despite a lot of initial flak, Atmanirbhar Bharat
seems to be in lock-step with the global fashion. China’s rise, no longer
considered benign by anyone around the world, has had literally bloody
repercussions for India. The old compact of the West, around free trade and
non-reciprocal trade access is breaking down. Like rest of the world, India too
needs to craft a new paradigm.
With trade being intermeshed a lot more with politics, and
focus firmly pivoting on trade as a club rather than a global
commons (as represented by WTO principles), opportunities and threats
have arisen in equal measure. India’s praxis as a leading democracy, member of
the Quad and potential bulwark to China opens trade club opportunities. The
easy status quo of non-reciprocity with the West, however, is gone. It’s a more
complex world, one which is a bit more dog-eat-dog rather than what End
of History would have assumed.
