Topic 1 : The numbers don’t add up
Introduction: The recent GDP data seems to have reinforced the cheerful prognosis of the country’s economic prospects. After all, the economy has grown at an average of 8.2 per cent in the first three quarters of the financial year. However, the gross value-added number’s sluggish performance is a cause of concern.
The GVA number in recent quarters
- Value added by all the sectors in the economy has slumped from 8.2 per cent in the first quarter to 6.5 per cent in the third quarter, and may well slow down further to 5.4 per cent in the fourth quarter.
- The drivers of growth are not as strong as many believe.
The drivers of the Indian economy’s growth
In recent years, there have been three distinct drivers of the country’s growth momentum.
1. Surge in exports in post-pandemic period
- During the pandemic-induced lockdowns, household savings in parts of the developed world, especially the US, had surged.
- These accumulated savings, supplemented by government transfers and loose monetary policies, helped stimulate the household demand for goods.
- As a consequence, global trade picked up pace.
- India’s goods exports rose to a staggering $422 billion in 2021-22, after averaging around $300 billion for many years prior to the pandemic.
2. The service exports have performed exceptionally
- India’s services exports also began to accelerate during this period.
- Exports grew at 23.5 per cent in 2021-22 and 27.8 per cent in 2022-23, touching a record high of around $325 billion.
- This spurt wasn’t just driven by traditional IT services.
- Demand, especially from the US, increased for a wide gamut of services like professional and management consulting.
- The country also became a centre for global capability centres — these are primarily service delivery hubs for multinationals.
3. The boom in the startup sector
- These years also saw a wave of funding to startups.
- As per a report by PWC, Indian startups raised around $35 billion in 2021 and $24 billion in 2022.
- While there was a great deal of enthusiasm about the growth potential of these new-age tech companies, and the prospects of the Indian startup ecosystem, this funding boom was driven in part by the loose monetary policies pursued in developed economies, especially the US Federal Reserve.
The impacts of growth on employment
- This dramatic growth in exports and the country’s technology sector had knock-on effects on job creation and household income and as a consequence on consumption and investment in the economy.
- The Indian IT sector went on a hiring spree.
- Just the five major IT firms — TCS, Infosys, Wipro, HCL and Tech Mahindra — saw their employee headcount rise from 1.15 million in March 2020 to almost 1.6 million in March 2023.
- A rapid increase in employment opportunities among the highly skilled led to a tightening of the labour market, causing wages to rise significantly in this segment.
- This, in turn, triggered a boom in investment (residential real estate) and consumption segments (passenger vehicles and other high-end goods and services) across cities that are more linked to the technology sector.
- It also led to healthy growth in the government’s tax collections.
The impact of US economy on India’s growth
Each of these drivers of growth is closely intertwined with the US economy.
1. US’s household savings were absorbing India’s imports
- Not only were goods exports more dependent on US households, but one could also argue that large parts of the Indian tech sector, the ones driving the formal economy, have, in a manner of speaking, detached themselves from the Indian economy and have joined the US economy, its labour market.
- After all, the services they export are major to US clients.
2. US monetary policy’s impact on Indian economy
- And even for parts of the technology sector whose markets are located in India, for instance, the new-age startups, their funding, in large part, flows from US-based funds.
- So, the ups and downs of the US economy, its labour and consumer markets, and the stance of the Federal Reserve, deeply impact these segments.
- As a consequence, changes in the US economy such as the drawing down of household savings and the tightening of monetary policy have impacted these drivers of growth.
- India’s goods exports have slowed down sharply, growing by just 6.9 per cent in 2022-23, and are actually 5 per cent lower this year (April 2023 to January 2024) when compared to last year.
- Services exports have grown at just around 6 per cent this year.
- Indian startups have been facing a funding winter with fresh flows declining to a mere $7 billion in 2023 according to reports.
- This weakness is reflecting in the broader economy.
3. The US’s slowdown led to laying off in the Indian IT industry and a slump in consumption
- In December 2023, the headcount of the five major IT firms was down to 1.53 million.
- There are reports of IT companies slowing down hiring.
- Reports also point towards the difficulties that engineering colleges and management schools are facing in student placements.
- As employment prospects get hit, so will household income and consumption.
- There may already be some indications.
- The average growth in home prices in 10 major cities has slowed down from 4.9 per cent in the first half of last year (January-June) to 3.7 per cent in the second half (July-December).
- Similarly, average growth in passenger vehicles was lower in the second half of the year as compared to the first half.
- Tighter domestic monetary policy could have also played a role.
Conclusion: The Indian economy is still not out of danger. The subsidy support to vulnerable populations shows that the fruits of growth have not reached most needy people. In all this scenario the high GDP number hides many things.
Topic 2 : Change & continuity
Introduction: Among the world’s major powers, India is arguably the least apprehensive about the presidential rematch in the US between incumbent Joe Biden and his predecessor, Donald Trump. Unlike most US allies, India has benefited from productive relationships with the administrations of both.
The historical bipartisan support for India from the US
- The bipartisan commitment — between the Democrats and Republicans — for a solid partnership with India has expanded since President Bill Clinton’s visit to India 24 years ago this month.
- The expansive scope and intensity of India’s relations with the US today stand in contrast to mutual indifference in the Cold War years and serious tensions in the 1990s over the issues of nuclear non-proliferation and Kashmir.
The contemporary shines in Indo-US relations
- In the 21st century, the US has emerged as India’s most valuable strategic partner, with growing engagement in trade, technology, investments, regional security, and global governance.
- Undergirding the new dynamic is unprecedented political comfort between India’s current leadership and the US establishment.
- Indian officialdom has built a working relationship with both Republican and Democratic policymakers.
Despite bipartisan support, the current presidential election must be watched carefully
- Yet, Delhi would be unwise to take the relationship for granted and underestimate the importance of the impending presidential election in the US that could accelerate the rearrangement of the global economic and political order.
- The last eight years under Trump and Biden have already heralded unprecedented change.
Both candidates are strict on China
- If Trump reversed the four-decade-old US policy of befriending China, Biden has persisted with his predecessor’s determination to confront Beijing’s expansionism in Asia and the quest to rewrite global rules.
- This shared understanding of China between Trump and Biden has boosted the India-US partnership amidst Beijing’s aggressive policies towards Delhi.
Both of them have differing views on trade with India
- India, however, has yet to come to terms with the changed US policy towards global trade under Trump and Biden.
- The two leaders agree that the mantra of globalisation, which the US has preached for decades, has not worked for the American working people.
- They also insist that global trade rules, defined by the World Trade Organisation, must be rewritten.
- India’s trade policy has struggled to deal with this new reality.
- While the Biden administration had not made trade policy a matter of confrontation with India, Trump will adopt a different tone and direction.
- Trump promises to impose a 10 per cent tariff on all imports into the US, demand greater access to partners’ markets and refuse to subordinate commercial interests to geopolitical considerations.
- The time is now for Delhi to develop a domestic reform agenda to effectively deal with the inevitable changes in the global economic order driven by Washington.
Both of them have differing views on alliances
- Biden and Trump, however, have significant differences in the nature of US alliances in Europe and Asia.
- Trump will demand that the allies pick up a more significant share of the security burden.
- Their views on multilateralism are radically different.
- Trump is bound to walk out of climate commitments made by the US and demand greater accountability from the UN and its agencies.
Conclusion: Whoever wins this election, the US role in the global order is about to change significantly. As a rising power, India has an opportunity to think creatively about this change and seize the possibility of elevating its own position in the global hierarchy.