Global Macro Backdrop:
We are living in a period of transition of the global power centre. Global economy is moving through difficult times. It has not yet recovered from the pandemic, another crisis started looming, Risk of War. Many believe this is the beginning of World War 3, some believe this will be restricted to Ukraine and Russia and other countries will stay away though supporting from outside as risk of catastrophe or full-blown war are very high. Whatever the case may be, the entire world is paying the price in the form of higher energy, commodity and agriculture prices. Inflation is across the board. All central banks are raising interest rates to tame rising inflation which raises recessionary fears. Infact steep rise in USD on account of sharp interest rate hikes has put many emerging market economies on the brink of default.
Under this backdrop, I would like to discuss three global themes and how is India placed under these?
Global Themes and How is India placed?
1. Deglobalization
After the onset of Covid, the supply chain has been hit severely across the globe. Movement of people and goods were hampered. This led to shortages of goods which resulted in high inflation. War between Russia and Ukraine has further squeezed the supply chain. There is political rhetoric across the globe to move back production at least for essential goods locally. Populism, nationalism, financial re-regulation and national security concerns have usurped economics as the priorities of international relations.
China is the manufacturer of the world. Due to supply chain destruction on account of covid, the world is re-assessing the risk of concentrating supply chain to one country. They are looking for alternatives to China for manufacturing. India being the large economy with a huge consumer base has an opportunity to project itself as an alternative. Even before the pandemic, China was shutting down low value industries as it is moving to high valued added industries. India needs to create enablers to bring manufacturing industry in India.
Sensing the opportunity to become a global manufacturing hub, India has undertaken many reforms. The Indian Government has started a program; Aatam Nirbhar Bharat (Self Reliant India); to incentivise industries for setting up manufacturing base in India. In 2014, India started the Make in India program with the objective of facilitating investment, fostering innovation, building best in class manufacturing infrastructure, making it easy to do business and enhancing skill development. This program was rebranded in 2021 as Make in India 2.0 under Aatam Nirbhar Bharat Program with the focus on 27 sectors.
Further, to boost manufacturing capabilities in specific important sectors to reduce reliance on imports and to increase export potentials, under Aatam Nirbhar Bharat program, Government has announced productivity linked incentive (PLI) program. The scheme invites foreign companies to set up units in India, however, it also aims to encourage local companies to set up or expand existing manufacturing units and also to generate more employment. Even further, the Government has reserved 70% of defence procurement locally to promote Make in India.
Logistics cost is very high in India compared to other industrial economies that makes India’s manufacturing sector uncompetitive. Logistics cost in India is roughly around 14-15% of GDP which is 7-8% in developed countries. The Government has announced the National Logistic Policy and PM Gati Shakti program with the aim to reduce logistic cost to 8% in the next five years. Earlier the government has also announced the Sagarmala program to promote port led development which will help to reduce logistics cost.
Apart from the Infrastructure build up program, the Government has also implemented Goods and Service Tax (GST) and Insolvency and Bankruptcy Code (IBC) which has helped India in improving ease of doing business in India. Further to make India competitive, the Government has reduced direct taxes on setting up of new manufacturing units to 15%. This will boost manufacturing capability in the country.
Though the Government has undertaken many reforms to make India a manufacturing hub, there is a lot more that needs to be done. To make India a vibrant manufacturing hub, the Government needs to undertake labour reforms, work towards reducing power cost and provide uninterrupted power supply to manufacturing units, reduce bureaucratic delays in approvals, create skilled labour force etc.
2. Climate Change
Climate change is a real threat that the world is perceiving. Recently we have seen extreme weather conditions and some resulted in disasters like floods in Pakistan. The impact of climate change on the financial system manifests through various risks, for example, loss or damage to tangible assets arising from frequent natural disasters and financial stability implications emanating from volatility in food prices due to erratic weather trends, elevated credit spreads and greater precautionary saving. There is greater stress on going green to achieve net zero carbon emission. India is also a signatory to the Climate Accord and committed to achieve net zero carbon emission by 2070. To achieve this goal, it needs investments of around USD 10 Trillion in:
- renewable energy,
- storage and transmission of renewable energy,
- Infrastructure set up for green mobility
- Waste Management
- Agriculture,
- Real estate etc.
To achieve short term carbon emission targets by 2030 to reduce greenhouse gas (GHG) emission to 50%, India needs investment of USD 2.6 Trillion. Only in the renewable segment it needs USD 350 Billion by 2030.
India’s banking sector cannot meet these requirements as their shorter dated liability structure cannot support long infrastructure projects. So, there is an urgent need to tap green financing and alternative structures to finance infrastructure projects.
Regulators and Government are working to create enablers and set-up infrastructure to develop the green financing market. The Indian Ministry of Finance (MoF) has set-up a Sustainable Finance Task Force to a) develop a taxonomy of sustainable activities, b) recommend reporting and disclosure policies, c) determine appropriate financial policy and regulations, and d) devise relevant measures for market development. The work of the task force and resulting policy support is likely to lend additional momentum to the market in the medium- to long-term. Based on these developments, the Indian GSS (Green Sustainable and Social) debt market is poised for accelerated growth to support sustainable investment and create an economy fit for the future.
3. Digitalization
With the rise of Artificial Intelligence, robotics and efficiency in large data processing, organizations are adopting digitalization of operations and services to improve efficiency gains and reduce cost.
Despite rising adoption of digital technologies and the IT industry, India’s digital divide is deep and is creating economic disparities between those who can afford technology and those who cannot. Hence it affects the country’s overall digital growth. To bridge this gap and put India on the path to a digitally empowered society, The Government of India is thrusting upon digitalization by undertaking many initiatives and making digital infrastructure as public good. Aadhar is the basis of the digital infrastructure story where the identity layer of Aadhar is embedded with payment layer and data empowerment layer. Embedding Aadhar with payment and data empowerment layer is known as India stack. With each passing year, its scope is increasing, like linking Aadhar with bank accounts, UPI payments, Account Aggregator Open Credit Enabled Network (OCEN), CBDC etc.
Digitalization will be the new growth driver for the economy. It will not only reduce cost for businesses but also help in financial inclusion. With initiatives like account aggregator and OCEN will help in availing credit for the gig workers and people who were not eligible for credit earlier. CBDC will enhance financial inclusion and formalization of the economy. Hence digitalization will provide growth impetus to the economy.
Conclusion:
Turbulent global environment has opened up new opportunities for India. The government has taken many initiatives to capture the opportunities. However, the key to success is the execution of initiatives and programs announced. Further, the government and regulators continue to work on putting in place necessary enablers for the economic development.
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