Trump could be the plot twist India’s new growth story needs

Illusions and Delusions

Donald Trump is marking his second term as president with slogans for making America great again. The US is shifting from its core credentials of being the champion of the free world. The protector is becoming the aggressor. Navigating between Trump and Xi Jinping in China will require countries to practise dexterous politics and economics. This may, actually, turn out to be a blessing in disguise.

It is often forgotten that Emerging Market Economies have benefited substantially from the globalisation era. The EMEs experienced about two-thirds of the ‘post-Cold War’ global GDP growth. In 1990, the combined share of EMEs in Global GDP was 20% at market exchange rates. Currently, it is 50.4%. Their share in global trade and FDI has increased to 46%. It had earlier been in the ‘teens’. Further, trade between developing economies has grown at the rate of 9.7% per year, almost twice as fast as global trade growth. The Indian growth story, post liberalisation, actually rode this globalisation boom. Our pre-liberalisation global GDP rank was a lowly 17th. We are now the 5th largest economy. Our growth story was primarily propelled by the excellence of our Services Sector and by the consumption booster, triggered by the ever-rising inward remittance flows (above $100 billion) of our migrant workers. This was more about individual entrepreneurship and less about active state initiatives that, so far, tended to focus more on supporting manufacturing, even though it never did actually perform to expectations. Our merchandise exports continue to languish in the ‘teens’ in global rankings.

However, that growth era has ended. This is primarily because efficiency gains from trade are not shared equally by all. In reality, ‘efficiency gains’ resulting from “reshuffling workers from less to more efficient producers” lead to closing down of some select jobs. So, while we in the emerging markets were celebrating growth achievements, several parts of the developed world witnessed a concurrent erosion of their lower productive manufacturing jobs. Also, productivity growth implies that the higher educated become better off but the lesser educated, in those very same higher per capita income countries, are hit, triggering anti-globalisation sentiments. This explains Trump’s concerns. Predictably, it is our weakness in manufacturing that has become the subject of his ire.

The question is, how should we strengthen our global competitiveness in the manufacturing sector? It is not suffering from inadequate government support or subsidies. Sharp improvements in World Bank Ease of Doing Business Indices have already happened. A bold push to attract large-scale greenfield investment in 14 priority sectors via the Production Linked Incentive (PLI) Scheme already exists. Significant gains in electronic manufacturing have also happened. Steps to correct our traditional weaknesses arising from the small scale and size of our manufacturing have been taken in the recent budget. So, what more is required to rectify the prevailing lack of entrepreneurial focus on export-oriented production?

The analysis is best done by examining what enhances/dilutes strengths elsewhere. Take sports – we were the world champions in hockey till the late 1970s. Youngsters preferred the sport to cricket. It was a low-cost sport and top employers (public and private) competed to attract hockey talent to their ranks. But we started losing after astro-turf was mandated for international competitions. It was expensive and unaffordable for most youngsters. Soon, the glamour disappeared; cricket took over. The bottomline is that while the hype and glamour matter, you cannot ignore the fields you play on.

Glamourising export competitiveness can be fiscally friendly. Substantial, across-the-board tax cuts were extended in the recent past to the corporate sector, irrespective of the source of profits. However, enhancing the playing fields, our industrial estates and our cities, is equally important. Schemes exist but no one in the officialdom either benefits or suffers for actual implementation successes/failures. This is the principal cause requiring attention – as Prime Minister, P V Narasimha Rao responded to the financial crisis in 1991 by dismantling the Licence Permit Raj. It was an entangled web of bureaucratic control, created by the craze for centralised decision-making which for long prevented India from realising its true economic potential. Trust had begotten trust. But Rao had then headed a ‘minority’ government. Allies were important; so, he retained the scaffolding, paraphernalia and lengthy decision-making chains of yore. This did not matter when external growth boosters existed. Now, it will be different. Our biggest trading partner will be unfriendly. We have to do better despite them, not because of them. Decentralisation of powers and accountability is essential to improve on- ground ease of business. The administrative talent hidden in our secretariats needs to be unchained and placed in field positions as CEOs of cities/industrial estates and suitably rewarded for performance. Trust will again beget trust. A new growth story will unfold.