Home / Politics / Policy /  Riding the next wave of globalization: Policy priorities for India

India’s policies are being crafted to help strengthen its competitive advantage in a globalizing world. But what happens if the basis of that globalization changes? The UK’s recent decision to exit the European Union—popularly termed Brexit—has been touted as an indicator of the end of globalization. While we at the BCG Henderson Institute believe this view is rather extreme, our research concludes that the nature of globalization is indeed changing. In order to thrive in the next phase of globalization, India needs to act quickly—and differently.

India was a big beneficiary of the globalization phase, starting in the late 1980s, that led to rapid economic growth in emerging markets (EMs) on the back of outsourcing and trade. This phase witnessed the widespread adoption of the Internet, the outsourcing of low-cost manufacturing and services, and the development of globally integrated supply chains.

Consequently, India’s gross domestic product (GDP) expanded at a compound annual growth rate of 6.5% between 1990 and 2010, representing a significant improvement over the 4.3% average economic growth recorded between 1970 and 1990. Export of services to developed economies accounted for the bulk of this expansion, with the share of services jumping from 40.3% of GDP in 1980 to 45% in 1990, and to 55% in 2010. Services export growth almost quadrupled, from 4.5% during the 1980-90 period to 17.5% between 1990 and 2010. India’s integration with the global economy was made possible by the liberalization reforms initiated as a result of the International Monetary Fund’s (IMF’s) structural adjustment programmes in the early 1990s. Further, institutions such as the World Trade Organization (WTO) which were set up to create uniform “rules of the game" enabled greater trade between countries.

This model of globalization prevalent since the late 1980s was, however, not unique. Our study of globalization, spanning the late 1800s to date, shows that globalization has phases of growth and periods of transition, usually triggered by a crisis event. Although each phase differs from the previous one, all of them follow the same model. This model comprises three forces (see below).

• First—a new “technology" (referred to in the broadest sense) was leveraged by a country or a set of countries to boost productivity and output.

• Second—one or more countries served as an economic “pole", which became the global growth engine. Western European countries, the US and China played this role in the first, second and third phase of globalization, respectively, driving 20-25% of world GDP growth, and around 15% of the growth in global trade. This, in turn, fuelled economic activity in other countries, especially the trading partners of the “poles".

• Third—a favourable system of global governance facilitated cross-border financial flows and trade through the enforcement of stable “rules of the game".

Together, these forces have fostered a virtuous cycle of economic growth and greater global integration, ensuring that global economics took precedence over local politics.

However, our research shows that this model of globalization is unlikely to repeat itself. New, emerging technologies are expected to see fundamentally different adoption patterns from those seen in the previous waves. And, governance structures will undergo transformative changes, necessitating compliance with multiple, often conflicting, global rules.

Technological disruption: While new digital “technologies" (robotics, digital services, global platforms) are emerging which are beginning to impact productivity, they will not be able to create the same virtuous cycle of rapid economic growth through trade of goods to create a new global growth pole. Unlike in the past, digital technologies are not “dominated" by one or few countries. This marks a major deviation from previous cycles, where countries such as the US and China leveraged their competitive advantages in mass manufacturing and low-cost production, respectively, to emerge as the world’s economic “pole". Further, the adoption of digital technologies across various industries will result in more localized manufacturing and globalized services, giving rise to very different trade patterns. Additionally, rapid, large-scale replacement of old manufacturing technologies by newer, digital ones is unlikely, given the growing unavailability of enough skilled workers like robot programmers. Rising income inequality and the need to protect jobs could also bring in stringent regulations, slowing the adoption of disruptive technologies.

New governance structures: The stable “rules of the game" set by the Bretton Woods institutions and the Group of Seven nations are now changing, with the Group of 20 states playing an increasingly influential role. This is likely to create new winners and losers. In the previous phases of globalization, there was a fair degree of long-term alignment between economics and politics. Today, the WTO-governed free trade regime is making way for more bilateral and regional partnerships and possibly mega-regional and sub-regional trade agreements like the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership, although the latter has been stalled. There is growing protectionism across both developed and emerging markets. The multilateral financial architecture is getting decentralized, with China and other prominent developing countries teaming up to establish new institutions such as the Asian Infrastructure Investment Bank (AIIB) and New Development Bank (NDB). There is also growing influence of state capitalism on capital allocation worldwide, through multiple levers such as direct acquisition of private companies, investments via sovereign wealth funds, and loans and subsidies for the development of certain domestic industries.

These shifts in geopolitics, and the trade and financial architectures point to a growing divergence between economics and politics. This has the potential to create greater uncertainty and volatility, as well as a country-region centricity in decision-making, hindering global integration. The market is losing ground to the state and labour advantage is giving way to digital advantage. These trends are driving the emergence of a new model of globalization.

It is unlikely that export-led trade growth, a core feature of the old model, will continue to be the primary driver of GDP growth going forward. The new model will be different on all three key dimensions

Growth: The new model will see a shift away from the “pole" model of economic growth, and vocabulary of developed economies versus EMs, to that of a multipolar world. Countries will have varied growth trajectories, with many EMs becoming less reliant on exports and focusing more on boosting domestic demand. Meanwhile, developed economies and China are likely to grow through greater increases in productivity and de-bottlenecking of the economy through internal structural reforms.

Technology: In the previous phase, global value chains were designed to be cost-optimized and relied on a dominant “technology" of low-cost manufacturing driven by labour cost advantage in emerging economies. In the next phase, these will give way to complex multi-technology value chains that blend digital technology with the earlier low-cost technologies. We will also see greater integration across products and services. Moreover, global platforms (for example, marketplaces like Amazon and Alibaba) are likely to assume increasing importance, as companies rely on these platforms for exchange of goods and services, rather than investing in their own asset-heavy supply chains.

Governance: The “rules of the game" will become more complex with the emergence of a multi-institutional governance architecture, wherein regional and local regulations will coexist alongside global rules, balancing national political interests with global multilateral economic agendas.

New policies are currently being enacted that will allow India to build a global competitive advantage going forward. However, these policies are unlikely to yield maximum payoffs unless they can be reset for the next phase of globalization. The emerging fourth wave of globalization requires India to dramatically rethink its policy priorities for the next 15-20 years.

Shifting income pyramid, digital boom and expanding urban agglomerations will drive India’s economic growth in the next decade

What are the policy implications of the aforementioned trends for India’s GDP growth? The most important one, perhaps, is that the low-cost manufacturing driven growth model—based on exports to developed countries—followed by China and many other developing countries since the 1990s is likely coming to the end of its “lifecycle". Hence, for India to ensure sustained, medium-to-high level of growth, the primary policy thrust has to be on shoring up domestic demand, as opposed to relying on external trade. This does not mean that international trade will stop playing an important role, especially since the wide-ranging impact of ongoing technological shifts will take at least 10-15 years to play out. Stimulating domestic demand will require identifying services sectors ripe for a “local production for local consumption model", such as tourism and healthcare, and incentivizing investments by improving the ease of doing business and driving greater fiscal consolidation. Large-scale, internal reforms will be the most critical driver for boosting domestic consumption, and ramping up domestic investments will be as important as attracting foreign direct investment.

What will be the key drivers of India’s economic growth over the next decade? We foresee three fundamental shifts taking place on this front.

Shifting income pyramid: The proportion of households belonging to the bottom two income quintiles fell by 1.5% in the last 10 years, whereas that of the top two quintiles grew by 2.5% over the same period. Per capita incomes are projected to rise by 5% per annum, with average household incomes expected to grow by 1.5x over the next decade, leading to a surge in domestic consumption power.

Digital boom: Rising adoption of digital technologies and associated services is another potential growth driver for India. While GDP has grown at 6% per year over the last four years, services’ share of GDP during this time frame increased by 3.6%. The IT and ITeS (information technology and IT enabled services) sector’s share has increased to 9.5%, implying rapid growth in digital technologies and associated services. Export of digital enabled services has grown by 12% annually over the last 10 years, also pointing to this trend as a key lever that will drive growth.

Expanding urban agglomerations: India’s urban population has nearly doubled since the start of the third phase of globalization in 1990, from approximately 220 million to 420 million currently. In comparison, the overall national population grew by 50% only over the given time frame. The number of million-plus urban agglomerations increased from 35 in 2001 to 53 in 2011, pointing to the rapid scale of urbanization.

These structural shifts will result in a significantly different GDP growth trajectory, driven by new consumption and production patterns, and necessitate answering key questions to drive policymaking.

How do we drive growth? The ambitious Make in India initiative, geared towards establishing the country as a low-cost manufacturing hub, has to evolve from a 20th-century mindset and strategy to embrace the opportunities presented by the digital 21st century. The industrial landscape of the future will see a large number of small-scale, reconfigurable plants closer to home markets, coexisting alongside large, asset-intensive and highly automated plants with very few workers. Highly competitive small and medium enterprises will be central to the growth of the manufacturing sector over the next two decades. A supportive policy regime that not only addresses the sector’s myriad problems but also incentivizes adoption of digital technologies collectively called Industry 4.0 will be critical for their success.

Where will jobs be created? The conventional wisdom, based on the experience of many EMs has been that manufacturing will create jobs in India, given its current levels of economic maturity. However, we believe India needs to recalibrate its job creation strategy. Industrial activity will continue to create jobs but not at the same pace as in the past. As manufacturers big and small embrace digital technologies to remain competitive, they will shed jobs. At the same time, there will be a dramatic growth in both digital and non-digital services, centered on manufactured products, as the boundaries between products and services blur. Understanding this huge structural shift and putting in place a policy framework that facilitates their growth will be critical. Under-penetrated non-manufacturing services sectors such as construction, tourism and healthcare will have to be at the forefront of this push for creating both growth and new jobs. To illustrate the immense potential of services, consider the tourism sector. In 2015, worldwide tourist receipts outpaced global GDP growth to rise by 3.6%, to over $1.2 trillion, driving income growth in multiple sectors including accommodation, food and drinks, shopping and entertainment.

●How do we create a future-ready workforce? Skilling must continue being a critical focus area for the government. However, skill development needs to move away from the traditional model of “vocational training". With the rise of digital technologies, job profiles of the future will be very different. As traditional labour tasks get automated, workers will need to do increasingly complex activities and need the skill set to learn quickly and on the job. We will see the need for people who are drone programmers, robot worker managers and so-called “professional tribers"—those who assemble freelance teams quickly. Policymakers must revamp India’s skilling programmes to prepare the domestic workforce to deal with these requirements.

●What kind of infrastructure is needed? Infrastructure investments will be critical for India to sustain its pace of economic growth. The country needs to develop a plan for leapfrogging traditional infrastructure into the 21st century. How can we leverage newer technologies such as 3D printing to bypass conventional methods of infrastructure development, and become future ready faster—and on the cheap? Beyond physical infrastructure, large-scale investments in technology backbones will be required to ensure competitiveness—be it robots, sensors and cloud computing for manufacturing, or high-speed connectivity and data pathways for supporting the global services industry.

How will changing geopolitics impact us? Global trade is increasingly being governed by bilateral and multilateral trade agreements that are altering market dynamics. For example, if the planned TPP passes, it will shift manufacturing competitiveness as additional trade benefits will be provided only to companies located in member countries. Additionally, intra-EM trade is becoming the fastest growing trade route and the driver of global commerce. Against this backdrop, how should India think about its own membership in key agreements? Should we consider extending our links with key regions such as South-East Asia and the Middle East? As new development banks and infrastructure investment funds such as AIIB and NDB become more powerful and strategically relevant, India must assess its representation in such forums vis-à-vis traditional multilateral ones like the World Bank and IMF.

The fourth phase of globalization will play out over the next 15-20 years. Navigating this phase requires key policy changes and a new set of policy priorities in order to maintain and build competitiveness. The time is ripe to develop the 15-year vision that Prime Minister Narendra Modi has asked NITI Aayog for, and it is critical that this plan is built to win in the fourth phase of globalization.

Arindam Bhattacharya is senior partner and director at BCG India and head of BCG Henderson Institute Asia Pacific.

Catch all the Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Recommended For You

Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout