Many factors seem set to converge that may offer India a chance to play a bigger role in global growth
A world in which oil, India’s biggest import, is in free fall while technology services, its most significant export, will increasingly be in demand gives the country a once-in-a-generation opportunity to catch up with countries that lead the global economy. The caveat: We risk blowing it unless we are prepared to be innovative, sharply focused on a clear plan, and ready to dump ideological baggage.
The example of this century’s rising power tells us why that last bit is most important. China turned around its fortunes in 1978 when Deng Xiaoping began the process of economic reforms, shutting the doors on his predecessor Mao Zedong’s ill-fated excesses, including the Great Leap Forward and Cultural Revolution, which had brought nothing but misery to the average Chinese. The new policies were practical and based on ground realities, rather than some shibboleths in the communist manual.
As a consequence, the last 42 years of China’s history have been marked by a fierce mercantilism that has largely served its people well. Look at the ruthlessness with which the country has gone back to business, with factories in Wuhan now working round the clock. This, after faltering on a virus that resulted in exposing the world to the most lethal pandemic of the last hundred years.
But, ultimately, China could get hoist by its own petard. First, US President Donald Trump warned of “consequences" for China because of its actions that led to the outbreak, and then German Chancellor Angela Merkel, known for her measured responses, told reporters, “I believe the more transparent China is about the origin story of the virus, the better it is for everyone in the world in order to learn from it."
For years, global companies made a beeline for China’s well-integrated industrial zones, ignoring its awful human rights record and its arbitrary as well as opaque decision making, since they wanted a foothold in the world’s fastest-growing market and its cheapest sourcing base. Following the shutdown in Wuhan, after China finally accepted it had a serious viral crisis on its hands, there was a belated realization that any such disruption can shut down a multinational company’s operations throughout the world. Even if the pandemic hadn’t spread beyond China, large companies like Apple and Ikea would still have suffered massive disruptions over the two odd months that the district was locked down.
There is also the outing of China’s quality standards. For long, the poor quality of Chinese goods has been a loud whisper across consumer markets. But now, with so many countries suffering from faulty test kits imported from China, it is out in the open.
With China’s wage cost advantage fading over the last few years and now the rising risk of having operations in the country, companies based in Japan and South Korea are looking at alternatives. Therein lies India’s great opportunity if the country can get its act together and eliminate the pain points that have so far inhibited large investments from abroad.
The position of the other superpower, the US, is also vulnerable. The country, which now has more cases of covid-19 than the next five countries on the most affected list, finds itself in a health hole of its own making. This stems from the mistaken belief that public health is also a commercial service like any other and should be subject to the same market dynamics of prices being determined by demand and supply. The results have been catastrophic.
If that’s not enough, the country faces another potential threat arising from the shocking fall in US oil prices, which dropped into negative territory this week despite the output-cut deal it recently brokered with Saudi Arabia and Russia. This could lead to the bankruptcy of many shale oil and gas producers in the US that are already heavily leveraged and typically need crude oil selling at about $40 a barrel to stay in business. According to Haynes and Boone’s Oil Patch Bankruptcy Monitor of 6 April 2020, the cumulative debt of exploration and production companies in the US had climbed to $130 billion by the first quarter of this year, sharply up from around $18 billion five years ago.
A big beneficiary of the slump in oil prices will be India, which gets to record a lower current account deficit and shore up its government finances. Undeniably, the coming economic ice age will spare no country, with business confidence dropping to a 12-year low, but the main issue is which country will emerge from this crisis first and how strongly. India’s corporate sector, which has been sleep-walking for a while, has shown signs of promise in the past two months . The speed with which its drugmakers moved to supply the world with chloroquine and its pharma labs prepared to test people is a healthy sign. India’s information technology (IT) services companies also used the occasion to test their levels of preparedness for a new world order. As their operations in Bengaluru, Pune, Kolkata and Gurgaon were crippled, thanks to the lockdown, they had the enormous task of moving thousands of people to work from home while simultaneously allaying the security concerns of their global clients.
Paradoxical as it sounds in the midst of a global meltdown, a concatenation of forces might offer India a historic opportunity. But to make something of it, our companies need to go well beyond back-end IT services and reverse-engineered drugs, which have been the drivers of their past success.
Sundeep Khanna is a former executive editor of Mint