Editorial 1 : Steady in a changing world
Introduction: The Indian economy appears to have done quite well in the first half of this fiscal year amid rising global risks. After a strong growth of 7.8 per cent in the first quarter, the second quarter may surprise on the upside, the RBI governor noted last week.
Signs of Indian economy’s better performance
- High-frequency data such as the Purchasing Managers Index (PMI) for manufacturing and services remain in strong expansion zone, in contrast to weak manufacturing PMI globally.
- Tax collections are robust, public investment push continues and financial conditions have been supportive.
- Healthy private corporate sector balance sheets and well-capitalised banks add to India’s resilience.
- The domestic momentum and strengths seem to have offset the headwinds from high food inflation and weak exports in the second quarter.
- Consumption has held up, too.
- Urban India leads here with about two-thirds of service sector activity.
- Bank credit growth remains strong at over 15 per cent, with retail credit growth at over 18 per cent, fuelling consumption.
- Inflationary conditions, which created some instability in the July-September quarter due to transitory spike in food inflation, have calmed down.
- Fresh food supplies entering the market and timely government intervention to tame food price spikes have brought the headline consumer price inflation (CPI) within the RBI’s upper comfort limit of 6 per cent.
- Non-food inflation has been quite subdued, benefitting from lower commodity prices and easing supply chain pressure.
- Core inflation (calculated by stripping food and fuel from headline inflation) dropped to 4.5 per cent in September.
- Headline CPI, however, remains above the monetary policy committee’s target of 4 per cent.
- India’s external account has continued to display relative resilience.
- The current account deficit is in the safe zone and foreign exchange reserves remain sufficient at over $580 billion.
- India’s resilient performance in the first half of the fiscal has played out in the backdrop of mixed trends in key economies.
- While Europe and China are experiencing a growth slowdown, the likes of the US have exhibited resilience.
Interaction of Indian economy with global economy
- Economic prospects will be shaped by interaction of local and global developments, which can take the shape of cyclical factors, shocks and structural changes.
- Cyclical aspects such as high interest rates, slowing global growth and persistent shocks (the latest is the Middle East conflict) have a more pronounced impact on the near-term outlook.
- These are set to test the resilience of the domestic economy in coming quarters.
- Globally, inflation remains the dominant concern and threatens to keep already high interest rates higher for longer.
- S&P Global believes this will result in sub-par growth in the US next year and the year after.
- Europe is on weak footing this year and weakness will persist.
- Data for four decades show domestic growth cycles have got synchronised with advanced countries because of greater integration of trade and financial flows.
- The share of India’s exports to the European Union (EU) and the US have risen and those to the Asia Pacific region have fallen over the last four years.
- Greater trade exposure to the US/EU means a cyclical slowdown there will have a bearing locally.
- The two ongoing geopolitical conflicts — the Middle East and Russia-Ukraine, can lead to a flare-up in crude oil prices and create stress points for growth, inflation, public finances and external accounts.
- Adding to them, the domestic developments such as the adverse impact of erratic weather on agriculture and the lagged impact of interest rate hikes by the RBI on interest rate-sensitive segments, growth is likely to be moderate in coming quarters.
- PMIs for services and manufacturing, while still in strong expansion zone, have come down in October.
India’s medium to long-term growth prospective
- India’s medium to long-term growth narrative will be influenced by structural developments taking place on an unprecedented scale, such as shifting globalisation, technological disruptions, climate action and demographic transitions.
- Shifting globalisation — which includes supply-chain diversification, tariff wars — together with an ageing population is pulling down global growth potential.
- According to a recent World Bank report, global growth is expected to fall to a three-decade low of 2.2 per cent a year between now and 2030, down from 2.6 per cent between 2011-21 and 3.5 per cent in the preceding decade.
- While India’s economic cycles have got synchronised with those of advanced countries, its long-term trend rate of growth follows a divergent path.
- The trend growth in advanced countries has been moving down even as India’s has moved up due to opening up and economic reform since the early 1990s.
- As growth potential across advanced countries slows, India can retain and perhaps improve its growth prospects by building infrastructure — both digital and physical — and undertaking growth-enhancing reforms to improve ease of doing business, besides latching on to the tailwind from diversifying global supply chains.
Challenges to Indian economy
- India is trying to make infrastructure and manufacturing — both carbon intensive — its key growth engines. Climate change-related action will, therefore, pose a unique challenge.
- The second challenge is making growth labour-intensive, with focus on improving women’s participation.
Conclusion: On balance, India can sustain about 6.7 per cent per year growth till the end of this decade, only a tad higher than 6.6 per cent per year in the decade preceding the pandemic. This will make India a $6.7 trillion economy and catapult it to middle-income status by 2030-31.
Editorial 2 : An important punctuation
Introduction: India will host the next 2+2 ministerial dialogue with the US tomorrow (November 9) wherein the Indian Defence and External Affairs ministers Rajnath Singh and S Jaishankar will receive their American counterparts Lloyd J Austin and Antony J Blinken.
Current significance of the meeting
- The agenda of the current meeting will seek to build on the progress already made in defence, diplomacy and technology.
- While the wars in Gaza and Ukraine are urgent issues, the more abiding challenge for both the US and India relates to China and its revisionist orientation.
- Recent developments in the South China Sea (SCS) that have pitted the Philippines against Chinese intimidation are illustrative. This is a matter of considerable relevance to ASEAN as also to the four Quad nations — Australia, India, Japan and the US.
- If the proposed Quad summit is convened in Delhi in January 2024, the current 2+2 meeting will have to address a contested matter: when and how to resist assertive China.
China’s belligerence in SCS and Philippines’ resistance
- In the current context, Manila accused Beijing (November 2) of “intruding” into its part of the SCS.
- This was in response to an earlier Chinese claim that a Philippine naval vessel had “illegally entered” the Scarborough Shoal — a water-body that China has unilaterally included in its ten-dash-line.
- The trigger for the current tension is what is perceived to be a deliberate collision by a Chinese Coast guard vessel with a Philippine logistics boat on October 22 in those waters.
- Both nations accuse the other of transgression and violation of sovereignty.
- In unusually firm language, the Philippine Department of Foreign Affairs added that the Chinese assertion had “no legal basis and only serves to raise tensions” in water spaces over which both nations have staked their claim since 2012.
- At that time, Manila took its case to international arbitration and when the Philippine claim was upheld in the Hague in 2016, Beijing brusquely rejected the verdict.
- Subsequently, it imposed de facto physical control over its claims in the SCS that include the disputed Scarborough Shoal and the Spratly Islands.
- Claimants to different sectors of SCS include China, Taiwan, the Philippines, Vietnam, Brunei, Malaysia and Indonesia.
QUAD and Philippines versus China
- If the current situation were to escalate either by accident or pre-meditated design, the US could also be drawn into this dispute and thereby expand the scope of the conflict.
- This is an exigency that must be avoided — one more war would exacerbate an already bleak global security scenario and a US-China war would be very costly for the world.
- Over the last decade, domestic politics in the Philippines have resulted in Manila, which was an ally of the USA during the Cold War, moving closer to China when President Duterte was in power.
- Consequently, Manila remained muted about its 2016 award and sought to downplay the Chinese claims and the creeping assertiveness in both the Scarborough Shoals and the Spratlys.
- However, under President Ferdinand Marcos Jr, the Philippines is slowly distancing itself from China and has revived its military cooperation with the USA, including joint naval exercises.
- Japan has also increased its military engagement with the Philippines and has supplied 12 patrol vessels to Manila. In a symbolic visit, Japanese PM Fumio Kishida boarded a Japanese built vessel in Manila on November 4 and reiterated Tokyo’s commitment to a “free and open Indo-Pacific”.
- This normative reference to a FOIP and respect for international law has become a mantra but it remains rhetorical and an elusive aspiration in the face of China’s belligerence in the SCS.
- India also upholds this formulation but has been reticent about naming China explicitly.
- PM Modi, in his address to the US Congress in June noted, “The dark clouds of coercion and confrontation are casting a shadow in the Indo-Pacific.”
Dilemma among security strategists against China
- The dilemma for China’s interlocutors is the trade dependency on one hand and the security-strategic dissonance on the other.
- Australia, which pushed back against Chinese interference in its domestic politics, was subjected to a costly trade boycott by Beijing, forcing Canberra to repair its ties with China.
- The Philippines could face this dilemma.
- India is in a similar conundrum and the Galwan setback has to be managed with the huge trade deficit in China’s favor ( $77 billion) — in both domains, Beijing remains intransigent.
- It is either the Chinese way or the highway.
Way forward
- The maritime domain provides alternate options to deal with Chinese bellicosity and the trilateral partnership between Australia, UK and the US (AUKUS) is one such nascent initiative.
- China’s “Malacca dilemma” may provide options to ensure compliance through compellence but these will have to be calibrated in a careful and collective manner.
- The degree to which Beijing’s intimidation is to be either accommodated or appeased is problematic for policy makers.
- While the US has voiced its support for the Philippines and reaffirmed its “iron-clad” defence commitment, no other nation has been as forthcoming.
Conclusion: The ultimate denouement of this US-China contestation will be shaped by the contour and content of the bilateral relationship that both these nations have with India and the current 2 + 2 meeting leading to the Quad summit could be an important punctuation.