Helicopter view on Impact of Covid-19 on Global Economy,China problem (Part 2)

Continuing from the Last article the question that needed an answer was how can India grab the opportunity for attracting,wooing foreign investors exiting from China.

For this to happen,India needs to focus on the following points.

1. Short to Medium term big immediate problem that needs priority is fixing twin balance sheet problem i.e Npa in bank,nbfc and the overhang of debt in public/private corporate which has dramatically constrained investments. Steps have been taken in this regard , but they have not been dramatic enough. Further Steps would include-:Privatization of banks as they have not been run well.And also cleaning up of balance sheet of Corp-orates, meaning giving the reins to the right people ,to some one more capable and Competent.
2. Deeper structural reforms would include improving the Education Sector. The biggest failure of India is the weakness of its education sector, and the weakness in the sector is one of the reasons why foreign business do not set up industries here compared to other south east Asian countries. The Overseas Business Investments are concerned about the availability of sufficiently large ,highly qualified, literate manual labor force (not IT graduates).
3. Trade policy-: India has consistently refused to get involved in the labor intensive,skill intensive,export oriented manufacturing world. In the 70’s it was Korea and then it become China. India never competed.Now business are going to Vietnam and even Bangladesh is doing better than India. For India to seize the Initiative it is much more difficult now as technology is shifting against this,labor costs are rising .We need first rate infrastructure.which china have been supplying to its foreign investments. We need world class infrastructure, world class internet connection,very hard working,very trained ,very discipline labor force which will do whatever we want.We need to organize this seamlessly without any interference from the bureaucracy whatsoever. Now there is a lesson here , China is a very bureaucratic country with a very powerful Govt.but they don’t get in the way of businesses at all,this is a question of mindset .
4. Nobody says it openly, but the Defacto-Consensus is that we do not want to be vulnerable to world like that, we do not want to open ourselves to the world. Modi is quite suspicious to foreign trade and has strong inward looking vision and the world knows about this.The world view is that India is a great potential consumer,a great rising market of 1.3 billion people ,lots of clever scientists,lot of technological improvement , but we do not want to move part of our supply chain here as it is it is too difficult to invest here.It will take a profound change in mindset .When PM Modi came, we thought that it will change but it did not.

Impact of Covid-19 on the Populist Government

This depends on the country and the circumstances around it,the sort of leadership it has.it is plausible particularly in America where very large highly,sophisticated, educated population live , And with a relatively competitive electoral scene coming up ,there is a strong view that trump has overshot himself .He has proved to be incompetent in handling the disease and this is very humiliating for many Americans. This will result in many Americans saying enough is enough and ouster him.

In UK , the Government is less populist and they have been forced back.They will effectively lose ground in the next elections. In some Countries populism has done well like in Hungary. The increasingly dictatorial Regime of Victor Urban in the heart of Democratic Traditions of EU has handled the disease quite well and its popularity is soaring. India has done well, the Populist Modi may have high handed it but did not ignore the science behind it.India has done better than many thought it would do.Again his popularity is soaring.

Some countries are not doing well. For example Brazil .There is a quasi civil war like situation wherein president and the opposition political parties are indulging in an political civil war . There is a lot of political uncertainty and there are chances of Brazil ceasing to be a parliamentary.

This crisis is test for any leader,whatever their ideology democratic,populism or autocratic.The public response depends on the political system of that country ,depends on how open,closed or competitive the Country is.

Commentary on Economic data of India.

For the first time,in last few years the economic data published by India is not authentic.This view is shared by many global economists and there are inconsistencies particularly in GDP data , sector GDP data,aggregate GDP data.

This affects the credibility of India. Is it incompetence or politics.?If this would have been incompetence then serious effort would have been made to explain the discrepancies and reconcile them. There must be some measure of deliberate interference.Initially it looked like a mistake but it is not plausible now. In Other areas data was not provided as expected like employment.

Historically for a huge and complex place,India had relatively credible statistics,vastly better than china which was truly not believed. This is bad for India’s brand, credibility and respect in the marketplace.This is also bad for policy making because if you do now whats going wrong how will you fix it. It is difficult to understand why policymakers have this attitude to fudge data,even in developed countries. If policymaker are fudging figures that does not represent the truth then the issue is very problematic,very serious for business, for everyone.The policymakers must prove that the data is fine or make changes to rectify it.But right now it is under cloud and it will prove to be very costly.

Anti-China mood is running high in India .Under these circumstance, Can India move away from using imported Chinese products and if possible substitute it with domestic manufacturing?How sustainable it is?

China is worlds largest manufacturer. It produces more than any other economy in manufacturing by far.It has a huge range of manufacturing products which is generally cheap and high quality and there is not any single country in the world that could displace all of that at a competitive price .The whole of Europe could not, whole of america could not, certainly for India it is going to be more difficult.Obviously ,it can be done but it has effects on producers and consumers here in our country.it is very costly thing to do and in american case they tried but found it unbelievably hard to do and their capacity is definitely more then ours.But relations between china and major trading partners is getting worse for both political and economic reason.It is affecting western countries and also japan. So countries and people in a way will try to substitute Chinese products and some of that is definitely going to happen but there will be real cost associated with it and one must be prepared to bear them.

For a long time it is clear that the path on which xi jinping is taking china domestically and internationally is profound strategic mistake. Combination of greater authoritarianism in china and increasing assertiveness abroad risks sapping economic dynamism in china, risks inuring the wrath of the expectation of increasingly prosperous and educated citizens domestically and uniting the rest of the world against it.Only one significant ally that china has is Russia. Every body else that matter in the world, or has any real weight in the world is against china or neutral. China is undoubtedly a great power but not as great as everybody else put together, not even closer to it.How this will play depends on great deal of coherent alliance.Under trump the chances are very small. Under Joe Biden it will be very different America and he will try to reach a common position on this with Europe and america and relatively will be able to unite the world to provide an economic and political coalition against China. It can be strongly assumed that Mr. Biden will have similar diplomatic relationship with India as it is currently having and India will be a de-facto part of this alliance.At the same time economic relations with china are important, and the other issues ,concerns are also important but hopefully it will not led to a complete economic breakdown as this would result in a very precarious situation which will be difficult to handle.

Very few of us know anything about china , about what is going on at the highest level of Government .Xi has created a very strong position for himself and has got rid of everybody who could be a rival.But you can’t rule china all on your own. Moreover he does not have the same charisma of Mao or dong who were founders , charismatic leaders .He is a powerful bureaucrat but its not the same thing. But of course there are people who must be thinking to themselves that this is not what we want to happen .But it wont lead to any sudden change unless if Xi takes china into a very difficult and impossible situation , which his regime is not being seen as taking currently.Partly because his rivals are weak and inconsistent , unable to raise a voice against him. But that might change soon.There are instances in past where powerful leaders were ousted. Nikita Khruscheva was one such leader who was ousted by Communist party of Soviet Union on 1964 as he was seen increasingly dangerous by the highest echelons of his party. It may not happen with Xi but we must understand that regimes like these are not as strong as they appear to be from outside.If things go badly wrong Xi can be vulnerable , anybody can be vulnerable and then nationalism wont be enough to save Xi.And things can go wrong if trump is not elected as he divides the west against Xi and Putin.

Finally what should be like India’s trade Policy ?

There is going to be a lot of trade friction between west and china.This will create problem and opportunities for India.It is for India to exploit the opportunity. Apart from the china problem,broadly speaking, the trade system as a whole will remain reasonably open and the cold war with China will make it open further.This will definitely give much opportunity to India to grow.

Further more,it is impossible for India to grow in the long run by 7-8% consistently without exports growing at least as fast. We can’t have exports shrinking as part of GDP while GDP is growing 7-8% .Export must grow 10 % per year in real terms,which is at least three times as fast as growth of world trade .Now this is a very big challenge for India to grow this fast, for then it has to grow faster than world trade. For this to happen India has to be very competitive and open, allowing imports in , making it easy to export, building up export capacity and integrating it to the world economy. These concept is very foreign to India .The consensus in India most of the time is that trade is very dangerous. While economy was doing really in early 2000 ,trade was exploding. It also exploded after the great liberalization in 1991 .However the export has stagnated for the last 6-7 years and this is not compatible with fast growth.We can not grow as fast as we want to grow without trade not growing at least as fast if not faster and more faster than world trade.We have to bet on trade, there is no serious alternative. We cannot grow by being self sufficient .No economy in the world in the last 80 years has grown fast by being self sufficient .We have to change our policy.We have to become a big player in trade negotiations.We have to be dynamic in way we develop and create our opportunity. We have to be Forward looking,outward looking and open.Historically it is missing but sometimes we had it ,but there is always too much hesitation. This is why we lagged behind and other countries seized the initiative like south east Asia.Even if we are big country, we have a large population and a very modest economy.To become developed with such a large population we need to have world class business .developing world class products. India needs serious determination to succeed economically and for that India should let the world know that she is not a part of the economy but instead is a leading part of the economy and can shape the world economy the way she wants to. We can do it and we should do it.