Axis Bank's chief economist Neelkanth Mishra on how India can navigate through the global reset

Over the past four centuries, there has been a major reset in global power relations every 75 to 100 years. Now, 80 years after World War II, another major reset is due, given the shift in the world’s economic centre of gravity.

The signs are clear: post-WWII institutions like the UN and the World Trade Organization are diminishing. Different forums are now used for seeking common ground, like the G20, BRICS+, APEC, etc. Bilateral trade pacts are emerging, as are new multi-lateral arrangements. If two hot wars, reigniting old territorial disputes (like between Venezuela and Guyana), were not signals enough, there are now drone attacks on ships within 200 nautical miles of the Indian coast, a US-led front is now actively bombing Houthi territories in Yemen, and the number of parties involved in the conflict continues to rise.

This ongoing global reset in power balances poses several challenges for India on four major external dependencies: demand, capital, technology, and energy. Healthy external demand means stronger exports of goods and services. Capital inflows help firms and the economy scale faster. Technology transfers, either through inbound foreign direct investment (FDI) or trade, accelerate productivity improvement. Lastly, GDP growth is difficult without higher consumption of energy. Rising geopolitical uncertainty imperils all of these.

First, external demand. Having pulled forward growth through fiscal and monetary measures, the US and Europe may slowdown. China is hitting the limits of its growth model, Japan has stagnated, and Latin American GDP (in USD terms) is still where it was nearly a decade back. The policy coordination seen after 2008 is very unlikely now; trade wars and growing distrust are additional headwinds.

Second, capital inflows may be constrained by the US policy inversion (they adopted a loose-monetary, tight-fiscal stance after 2009, but post-Covid reversed course to a tight-monetary, loose-fiscal policy), implying higher capital costs in the coming decade than in the previous one. Slow global growth and conflicts also increase investors’ risk aversion, raising the cost of capital.

Third, several large economies are adopting industrial policies promoting local production, and restricting access to technology. Given how far India is from the cutting edge in several fields, access to technology may not be a challenge immediately, but it must start investing in intellectual property to obviate risks from future restrictions.

Fourth, access to critical materials has been central to geopolitics since ancient times, and India is currently most vulnerable to energy-related materials, given that it imports nearly half of its dense energy needs.

India has a relatively narrow three-decade window to get rich before it gets old. An open and rapidly growing global economy could have added the extra one to two percentage points of growth annually: The difference between ending up as a middle-income country and an upper-income one.

That said, the environment today also provides opportunities. Just as the US pivoted from dismantling the “zaibatsu” (Japanese conglomerates) after WWII to supporting them with technology transfers, seeing Japan as a balancing force in the region once the Korean war started, it now views India as a counter-balance to China, and is deepening technology partnerships. Chinese firms are also interested in investing in India, mainly due to its market, but also as a source of supply.

Further, global firms, which still export more than a trillion US dollars of goods from China, are trying to shift production out. India is emerging as an alternative in electronics assembly, but is missing the shift in textiles , among others. Infrastructure is improving and states have made it easier for firms to get land, and eased some labour regulations. Simplifying approvals further, making taxation more predictable, improving availability of skilled labour, and engaging directly with global majors to incentivise and facilitate the shift of their value-chains to India are necessary for success.

Global services trade is another opportunity. India’s share of global modern services exports is already 8% and growing. While this helps growth and dollar inflows, there are strong second-order effects on productivity too. One reason India’s total-factor productivity growth is among the highest globally is the diffusion of global best practices as firms transfer know-how as they outsource services.

The surge in productivity that Generative AI can drive poses risks, but can also help. A major challenge for India is to reduce unit costs to improve penetration. For example, till transaction costs of banking were reduced by technology, financial inclusion was a hard challenge. Till sachets came, shampoos were inaccessible to many. Digitised maps allowed taxi drivers from distant locations to rapidly transform urban transport in major cities. Such progress in education, healthcare, and even software development can help deepen access within India.

Risks exist too. In addition to the drop in the number of workers needed for exports, the use of foreign-developed models by Indian firms would mean dollar outflows. Industry bodies and governments must proactively monitor such risks.

Even as we monitor global factors, though, there is opportunity within. A domestic cyclical revival should boost estimates of India’s trend growth above 7%: from being at 8% till 2012, they had drifted down to around 6% by 2019, primarily due to a deleveraging corporate sector and a real-estate downturn. Both these cycles are now turning. Deft macroeconomic management that supports growth without increasing volatility is essential, with fiscal prudence a necessary condition. 

The author is Chief Economist of Axis Bank. Views are personal