Solving India’s Income Problem (Part 9)

Global Backdrop

India needs many doublings on its path to prosperity. But the favourable global conditions of the past four decades which helped the rise of China (and many others) are not likely to be there going forward. The post-World War peace in Europe has been broken by the Russia-Ukraine war; an energy crisis looms for much of Western Europe; free trade is being replaced by trade wars, onshoring, friendshoring and protectionism; leaders talk of decoupling and deglobalisation; inflation is at multi-decadal highs and interest rates are rising in Western nations leading to possible recession; fertility rates are falling in much of the developed world; polarisation is increasing and tolerance is decreasing; autocracy, authoritarianism and totalitarianism is on the rise; Western liberal democracies face simultaneous challenges from the far-right and far-left. As Russell Napier put it: “We’re in for a long social and political journey. What you have learned in market economics in the past forty years will be useless in the new world. For the next twenty years, you need to get familiar with the concepts of political economy.”

Here are two charts from Wall Street Journal on the new order (or disorder) in world trade and inflation. As the introduction to the article states: “The post-Cold War order promised a globe stitched together by markets and cooperation between nations. That system has fallen into disorder, and left the world with rising inflation, trade conflict, military confrontation and gnarled supply chains.”

From a recent special report in The Economist: “A great policy reversal is under way in the rich world. The tight fiscal, loose monetary policy mix that defined much of the 2010s is being upended into a loose fiscal, tight monetary policy one. The likely result is a tug-of-war between hawkish central banks and spendthrift governments that will make inflation harder to fight. It will lead to a reckoning about just how much short-term pain societies are willing to bear in the name of long-term economic stability. But it could, ultimately, help economic policy into a beneficial reboot.”

It writes: “The immediate difficulty is that big spending by governments will make it harder (and perhaps impossible) for central banks to hit their 2% inflation targets. Governments are unlikely to stand idly by as central bankers inflict pain on their economies in the name of getting inflation down. They could instead unleash fiscal stimulus before the disinflationary task is complete. The danger is even greater when economies are already buffeted by supply-side shocks, notably the energy crisis. Without fixing the underlying shortages, it is not within the gift of governments to stop the economic pain they cause—they can only redistribute to protect the poor. If politicians try to protect everyone’s living standards, they will cause prices to rise further. The long-term challenge is to avoid fiscal crises. Ageing societies are a challenge spanning the whole of the 21st century. If governments do not control their spending on the old, eventually they will run up against fiscal limits, whatever their cost of borrowing. It would be a mistake to accumulate debts simply in order to put off hard choices, using up fiscal space that may be needed in future crises.”

Bloomberg Businessweek writes: “A world where the US and its allies are in retreat is a world where illiberal states are empowered and destabilizing shocks follow…The current weakness in the global economy provides another way of thinking about the short-term effect of geopolitical shocks. Russia is already in recession. Europe is about to follow, largely because of the cutoff in gas supply. In the US, inflation—also in part a consequence of the Ukraine war—has pushed the Federal Reserve onto its most aggressive tightening trajectory since the 1980s. A Bloomberg Economics model suggests that’s very likely to tip the economy into a downturn in 2023,throwing millions out of work…The lesson of the past few years, though, is that anyone waiting for a return to geopolitical stability may be waiting a long time. History is back, and that’s bad news for prosperity.” It has the chart below.

Niall Fergusson writes: “The world today is dominated by two empires: the US, which originated in the British colonization of North America, and the ethnic-Han-dominated Middle Kingdom we call the People’s Republic of China. But a number of former empires continue to play disproportionate roles in world politics: The Russian empire limps on in the guise of the Russian Federation; the Persian empire is now the Islamic Republic of Iran; one might say the Holy Roman Empire has been reincarnated in the form of the European Union, at once extensive, German-centered and weak. It is not civilizations that clash, but empires.” He adds, in the context of the US-China tensions: “If we pursue Cold War II to the extent of stumbling into World War III.”

Against this backdrop, what should India do? What is India’s path to wealth creation and prosperity?

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Rajesh Jain

An Entrepreneur based in Mumbai, India.