India has compelling reasons to move away from a textbook framework of open economy macroeconomics. It strives for strategic autonomy in a geopolitically riven world, in which one superpower sits astride the northern border, has built supercharged industrial muscle that can smother Indian industry, and casts a covetous eye on Indian territory.
India can find ready support, vis-a-vis China, in the US. However, if the US finds that India is reliant solely on American support, it would have it where China has Pakistan – by the scruff of the neck. India would have to give up all dreams of strategic autonomy.
If India wants to countervail China’s ambition to dominate the Indo-Pacific, it must be able to draw strategic support from the US, Europe, Russia and Japan, based on its own strength in terms of overall economic heft, technology and military-industrial capability. Fiscal action, trade policy, industrial policy, education – in terms of structure, quantity and pedagogy – must dovetail into building the wherewithal of strategic autonomy.
Rising yields around the world have persuaded many that global savings are drying up. This is premature. Rates are responding to inflation-targeting monetary policy, not crimped supply. Retirement savings of the rich world and its largish elderly population still scour the world in search of high returns. India can, and should, safely target to draw in external savings to the tune of 2-2.5% of GDP – that is, it should aim for that level of annual current account deficit.
Indians, apart from a tiny elite, are relatively poor. India cannot afford to squeeze consumption to generate the savings needed to keep investment high, the way China did, undervaluing its currency and exporting savings.That means two things: one, inflation must be kept moderate – not so high as to erode consumption, and not so low so as to choke growth; two, the share of wages in national income must rise – the propensity to consume of profit-earners would be lower than that of wage-earners. That means that trade unions must be recognised as friends of growth, rather than enemies of production.Unions bridge the gap between rationality at the micro-level, which sees wages as a cost to be kept down, and the macro-level rationality of boosting aggregate demand, for which wages have to rise, along with the leisure time within which people consume movies, TV, cricket, books, music, art, gaming, eating out and travel, all vital parts of the economy. And that means ever-rising productivity.
Productivity comes not by flogging workers till they drop dead, but by making capital investments that boost productivity, including in training.
Indian producers must compete with the global best. Import duties must be low and uniform across the board, so as to give equal effective protection to all value added. Producing steel bars deserves neither more nor less protection than producing wire, nail or coat-hanger.
How does this square with boosting strategic sectors? A carefully chosen set of sectors – advanced silicon, rocket and aircraft engines, quantum computing, for example – should be walled off from mainstream trade policy, given subsidy and protection from imports.
The world seals off certain items from the normal rules of trade, by controlling them by the likes of Nuclear Suppliers Group (NSG), Missile Technology Control Regime (MTCR), Wassenaar Arrangement for dual-use goods, and Australia Group on chemical weapons and their precursor chemicals. India should formulate a list of items of strategic interest for preferential treatment – call it Strategic Autonomy List (SAL), and tell the world we are open for business for the rest.
India must build formidable capacity to determine, at speed, if certain import prices are the result of unfair practices that warrant countervailing tariffs. Such capacity, along with SAL, should take care of the China problem, while providing Indian producers with inputs at globally competitive prices and a positive, minimal level of protection.
AI would make very many labour-intensive sectors – from cutting fabric to polishing diamonds – amenable to automation. Planning to boost yesterday’s labour-intensive sectors to generate jobs is futile. With productivity-boosting investment, all production would become relatively more capital-intensive.
How about jobs? The coming world is likely to offer work opportunities, rather than steady jobs. The point is to focus on people as human beings, heirs to the entirety of human knowledge and aesthetic experience built up till now, capable of arming themselves with this legacy to respond creatively to the emerging world. Education must aim for such realisation of the human potential of every being.
India must spend on R&D. Instead of wasting billions as subsidy for foreign chipmakers to set up shop in India, that money must be used for R&D, by funding research-focused startups that will produce indigenous technology at low cost. GoI could fund global capability centres – with brilliant staff and cutting-edge equipment – that compete for funded research assignments from Indian startups and other companies. Technical and managerial expertise from the Indian diaspora can be tapped for this.