Opinion | Uncertainty is the enemy of Indian business
India’s domestic environment has to be stable with a road map of policy, market movements
Indian businesses are being roiled by uncertainties on a daily basis. Between the periodic tremors caused by Donald Trump’s policy tantrums, the recent gyrations of the markets, soaring oil prices, seemingly ever-changing goods and services tax (GST) rates and a looming election season, we are truly in an age of uncertainty. Add to it the spectre of lower-than-expected rainfall, as well as the US Federal Reserve’s expected rate hike this year that could lead to further outflow of funds from India, and we have the portents of a perfect storm.
That’s a real pity, given that it is an opportune time for India to present itself as a viable option to multinationals looking to shift base or diversify outside China.
One consequence of the fierce trade war between China and the US, unleashed after the Trump administration hiked tariffs on Chinese products worth billions of dollars, is that global manufacturing, which for years has been drawn to China, is now looking at options.
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The US is targeting China’s high-technology exports, including flat-screen televisions, industrial robots and cars to nuclear reactor parts with increased tariffs.
Thus, the latest round of tariffs that hit nearly $200 billion worth of Chinese products include home modems, routers and internet gateways, part of a broad category that totalled $23 billion in US imports from China and $47.6 billion from the world last year (Home modems, routers hit by U.S. China tariffs as ‘smart’ tech goods escape)
As one of the world’s largest and fastest growing markets for telecom services, India is ahead of the curve in technology adoption. The government is already looking at spectrum auctions for 5G services, which will need an entirely different set of products, including the backbone infrastructure.
With China embroiled in a messy tariff battle with the US, India can set itself up as the alternative base for manufacturing for an emerging industry with massive potential.
Research firm Moor Insights and Strategy has estimated that infrastructure spending on 5G services will exceed $326 billion by 2025.
Simultaneously, there is also a chance for India to close its mounting trade deficit with China by moving into areas such as pharmaceuticals and agricultural products, in which a tariff hike by the US has rendered imports from that country unviable.
Nor is there any immediate end in sight to the tariff battles between the two largest economies.
The US insists that its fundamental problems with China related to alleged misappropriation of its intellectual property has to be sorted out before the on-off talks between the two can make any headway.
There is thus a clear and visible opportunity for India. But for that to happen, the domestic environment has to be stable with a clear road map of policy and market movements.
Ask a market man and he will tell you that volatility is the enemy he fears most. Bulls and bears alike fear the kind of market fluctuations we saw on 21 September when the Sensex first collapsed nearly 1,000 points only to recover most of the losses by close.
It is the reason why most small and medium businessmen suffered grievously following demonetization of high-currency notes in November 2016. As much as the event itself affected business, it was the suddenness of it that caused most damage. What’s worse, once bitten, they have no guarantee that another similar shock isn’t in the offing. For months now, rumour has been rife in the by-lanes of Fatehpuri in Delhi and Burrabazar in Kolkata that the two thousand rupee note is also going to be decommissioned soon.
This climate of uncertainty has already impacted potential investment in new projects, placing future growth in jeopardy. A research paper titled The impact of uncertainty shocks in emerging economies published in the Journal of International Economics concluded that “in comparison to the US and other developed countries, emerging economies suffer much more severe falls in investment and private consumption following an exogenous uncertainty shock, take significantly longer to recover, and do not experience a subsequent overshoot in activity”.
That’s a warning our policymakers need to pay heed to, especially at a time of challenging global headwinds.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider looks at current issues and trends in the corporate sector every week.
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