The economics of global disorder: Resilience to trump efficiency, growth

Over the next few weeks, the trickle will become a stream as more urban informal-sector workers return home. Garments, textiles, food processing, jewellery, and metalwork are some of the major segments of the informal sector where many units are heavily dependent on gas. So too are informal-sector employers like roadside eateries.

 

There have, no doubt, been admirable efforts by the government to cushion the energy shock emanating from the Gulf, but there is only so much it can do in such global circumstances. The current world order, or, better called, disorder, will have persistent, unpredictable economic consequences for India from global events.

 

India did not join in the Iran-Israel-United States war, yet it has been impacted quite adversely. India also kept a neutral position in the war in Ukraine, and first benefitted due to cheaper oil but later suffered due to US tariffs. India is also not directly involved in the Afghanistan-Pakistan conflagration, yet frequently goods get stuck at Wagah. It is not clear how and when these disturbances will subside, yet new ones can easily flare up in Africa, Asia, the Americas, and even Europe. And one way or another, directly or indirectly, they can all be expected to impact India.

 

Why is this the new normal?  The US has decided it does not want to shoulder the elder brother’s responsibility.  And as it withdraws from its erstwhile role, the institutions it created are steadily attenuating, whereas it will take some time for new ones to come up.  Meanwhile, a new non-Western power has risen, which does not have the long experience of dealing with the global order that the US and the West have had. 

 

Therefore, strengthening the World Trade Organization, investing in multilateral institution reform, and climate funding by the Global North are all dreams that will remain simply that.  The reality is, Western-designed multilateralism is approaching the end of its useful life, and a new one will take some time to come up. 

 

One of the major strengths of markets is that they build in expectations and consequently prepare for the future without a centralised directive; therefore, the current rise in prices, while profiting some people, is also a mechanism for disciplining use. In the process, however, it is always the poor who suffer more. While larger industries will find some, albeit costly, alternatives, the impact will be worse for some medium, many small, and most informal manufacturing enterprises.

 

Irrespective of when Donald Trump ends his gambit, many informal units will need to close shop and workers will have to return home for the summer. Fortunately, the informal sector is remarkably resilient, far more than the formal sector. And as the Covid and demonetisation experiences show, it will get back up after some time, albeit having suffered and absorbed the costs of someone else’s war.

 

Many formal sector units will also need to slow down, and the government will need to undertake unforeseen expenditures in the interest of price and macroeconomic stability.  While there is enough resilience in India’s macro-economy to absorb the ongoing shock, longer-term economic performance will be affected even in the best of ensuing circumstances.

 

The key challenge to focus on is not this war, but this new world order. A new normal has been created where security matters have become far more important than we have been used to, and such security concerns will impact economic policy in deep and existential ways. No more are we prioritising free trade, level playing fields, low-cost advantages, greater international investment, and global agreements on economic interactions. Instead, we are choosing specific winners and losers. They could be countries (free-trade agreements), products (production-linked incentives), technologies (electric vehicles), firms (semiconductors).

 

In this new model, the state either explicitly or implicitly identifies some parts of the economy that it supports and others that it opposes (Chinese apps). This is the new form of industrial policy that is driven more by strategic objectives and economic security rather than by a focus on growth. And it requires a different way of designing the economic environment. In this new economic regime, strengths such as resilience, adaptation, and flexibility will be more important than an unconstrained focus on productivity, efficiency, and growth.

 

When economic conditions are volatile, as they will be going forward, all of us who make up the economy will need to be flexible enough to change with the changing circumstances.  And flexibility requires the ready availability of alternatives. Hence, when trucks are stopped in Wagah, the existence of Chabahar helps in Indo-Afghan trade. When petroleum imports from the Gulf are affected, the existence of reserves becomes key to keeping the economy going, while also highlighting the importance of building other fuel sources, including biofuels and coal-based gas. And when a friendly US imposes massive tariffs on India, a free trade agreement with Europe helps sustain positive expectations.

 

Each ministry will, therefore, need to work on two fronts. First, remove the hurdles that prevent firms from switching between alternatives.  And second, help create alternatives where they don’t exist. 

 

But here is the central problem the government needs to think hard about. The more winners and losers it chooses, the more it introduces inflexibility.  Also, when we choose winners, we also inadvertently choose losers.  And more importantly, a winner in one environment will be a loser in another.  And therefore, the choice of winners and losers has to be extremely selective and well thought through because, to repeat, every well-meaning specific intervention reduces options for someone or another. 

 

But India’s economic policies are not only about choosing winners and losers, they are also about having very specific requirements for specific technologies, products and activities.  Whether it is goods and services tax rates, tariffs, trade barriers, direct taxes, rules governing labour, or those covering permanent establishments, all are highly specific to the task, product, owner, or technology. Firms cannot be flexible if the rules governing one activity, product, or technology are different from their alternatives.

 

Finally, we were caught by surprise because India had not invested in information. Whether the government wants to pick winners and losers, or wants to create alternative options, we will need to have the information on how that impact spreads across supply chains. Had we known how dependent some of these chains are on gas, the government could have taken prior steps to secure it. That information actually rests in the government’s computers, but whether it’s bureaucratic inertia or flawed arguments around data confidentiality, India refuses to play to its strengths. My advice? Use the GST data, decipher the supply chains, identify the vulnerabilities, do it in real-time, and share it with both firms and state governments.

 

I understand that the government can only do so much, and it is bound by political, economic, implementation, and global realities. But it does need to do things differently where it can.

---

The author heads CSEP.  The views are personal