Uncertain times for India

Strategic and economic risks have risen to unprecedented levels

US baseball legend Yogi Berra’s unintentional quips were hilarious. One of them is “it’s tough to make predictions, especially about the future”. At a briefing on February 12, 2002, referring to the situation in Iraq, the then US secretary of defence, Donald Rumsfeld, remarked “there are known-knowns … we also know there are known-unknowns. But there are also unknown-unknowns”. The accompanying table provides a sampling of imponderables India is facing. Guesses have also been made for the third column even though the heading of this column is “unknown-unknowns”.

Given the various uncertainties listed in the table, India’s top priorities have to be to tackle the Covid-19 pandemic and a faltering economy. As of today, it appears that it may take up to end 2021 to vaccinate a significant proportion of the population. As for the economy, it is clear that the moral hazard risk of printing money by getting the Reserve Bank of India (RBI) to directly subscribe to government bonds is way lower than the higher-underemployment, pandemic-induced misery for millions of less skilled workers.

The trade imbalance risks if India had retained a foothold in the Regional Comprehensive Economic Partnership (RCEP) were overstated. Since 2015 India has periodically raised import tariffs on electronic goods, textiles, and furniture. This protectionist trend would be costly for India. In 2019-20, about 47 per cent of India’s exports of goods was to Asian countries. Asean (Association of Southeast Asian Nations), China, Japan, plus Australia and New Zealand — all of which are part of the RCEP — are destined to be important partners for India. India could have carved out exceptions for itself even as it provides incentives to domestic manufacturing, thus boosting employment for the less skilled.

Illustration: Binay Sinha

Of course, the speed with which the Indian economy recovers would also depend on how soon the major OECD (Organisation for Economic Co-operation and Development) countries rebound from Covid-19-related distress. In the interim, the potential for social disharmony and violence, if incomes remain inadequate, are being underestimated. Any strategy of diverting attention by appealing to sectarian religious sentiments or hyping up the dangers posed by Pakistan and China would be counterproductive.

By end 2021 China would probably emerge stronger economically even as a lack of timely sharing of information about Covid-19 has made the rest of the world suffer grievously. However, China is likely to pay a price in terms of reduced access to Western technology. Chinese behaviour regarding Hong Kong and Tibet, and the country’s treatment of Uighurs may also be highlighted by the Western media, inducing China to be less aggressive in Ladakh.

The financial sector meltdown of 2008 had illustrated the extent to which elites in developed countries, particularly the US and the UK, were mesmerised by the phenomenal growth of financial services. Western governments bought into a myth that adequate levels of employment can be maintained merely with buoyant services sectors. The RBI has recently suggested that private industrial houses be allowed to own banks in India. Around 75 per cent of the gross non-performing assets of Indian banks are owed by large domestic companies. It follows that this is definitely not a well-thought-out RBI suggestion.

By contrast, China has done phenomenally well in manufacturing with direct government control over most of its onshore financial institutions. 

For the umpteenth time, urgent government action is needed to boost small-, medium-, and large-scale manufacturing, which is the only way to raise formal employment in India. If the Indian government ignores this maxim, annual GDP growth could stagnate at 4 per cent or lower. To recall another of Yogi Berra’s one-liners for us hapless Indians, it would then feel “like déjà vu all over again”.

j.bhagwati@gmail.com

The author is a former Indian ambassador and World Bank finance professional