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09-12-2022, 08:50 PM
By Arvind Subramanian and Josh Felman
December 9, 2022
......
Without a doubt, India could be on the cusp of a historic boom—if it manages to increase private investment, including by attracting large numbers of global firms from China. But will New Delhi be able to seize this opportunity? The answer is not obvious. Back in 2021, we provided a sobering assessment of India’s prospects in Foreign Affairs. We pointed out that popular assumptions about a booming economy were inaccurate. In fact, the country’s economic rise had faltered after the 2008 global financial crisis and stalled completely after 2018. And we argued that the reason for this slowdown lay deep in India’s economic framework: its emphasis on self-reliance and the defects in its policymaking process—“software bugs,” as we called them.
One year later, despite the exuberant press, India’s economic environment remains largely unchanged. As a result, we continue to believe that radical policy changes are needed before India can revive domestic investment, much less convince large numbers of global businesses to move their production there. An important lesson for policymakers is that there is no inevitability, no straight line of causation, from the decline of China to the rise of India.
......
Why are global firms reluctant to shift their China operations to India? For the same reason that domestic firms are reluctant to invest: because the risks remain far too high.
......
Of the many risks to investing in India, two are particularly important. First, firms still lack the confidence that the policies in place when they invest will not be changed later, in ways that render their investments unprofitable. And even if the policy framework remains attractive on paper, firms cannot be sure that rules will be enforced impartially rather than in favor of “national champions”—the giant Indian conglomerates that the government has favored.
These problems have already had serious consequences. Telecom firms have seen their profits devastated by shifting policies. Energy providers have had difficulty passing on cost increases to consumers and collecting promised revenues from the State Electricity Boards. E-commerce firms have discovered that government rulings about allowable practices can be reversed after they have made large investments according to the original rules.
At the same time, national champions have prospered mightily. As of August 2022, nearly 80 percent of the $160 billion year-to-date increase in India’s stock market capitalization was accounted for by just one conglomerate, the Adani Group, whose founder has suddenly become the third richest person in the world. In other words, the playing field is tilted.
Nor can foreign firms reduce their risks by partnering with large domestic firms. Going into business with national champions is risky, as these groups are themselves seeking to dominate the same lucrative fields, such as e-commerce. And other domestic firms have no wish to tread in sectors dominated by groups that have received extensive regulatory favors from the government.
......
One of the key elements of the PLI scheme, for example, is raising tariffs on foreign-made components. The idea is to encourage firms relocating to India to purchase inputs in the domestic market, but the approach significantly hinders most global enterprises, since advanced products in many sectors are typically made of hundreds or even thousands of parts sourced from the most competitive producers worldwide. By attaching high tariffs to these parts, New Delhi has provided a powerful disincentive for firms contemplating investment in the country.
For companies such as Apple that plan to sell their products in India, high import tariffs may be less of an issue. But these firms are few and far between, since India’s market of middle-class consumers remains surprisingly small—no more than US$500 billion compared with a global market of some US$30 trillion
......
Recognizing the growing tension between its protectionist policies and its goal of enhancing India’s global competitiveness, New Delhi has recently negotiated free trade agreements with Australia and the United Arab Emirates. But these initiatives—with economies that are smaller and less dynamic—pale beside those of India’s competitors in Asia. Vietnam, for example, has signed ten free trade agreements since 2010, including with China, the European Union, and the United Kingdom, as well as with its regional partners in the Association of Southeast Asian Nations (ASEAN).
......
In any country, a well-known prerequisite for economic take off is having key macroeconomic indicators in reasonable balance: fiscal and external trade deficits need to be low, as does inflation.
......
Since well before the pandemic began, inflation has been above the central bank’s legally mandated ceiling of six percent. Meanwhile, India’s current account deficit has doubled to about four percent of GDP in the third quarter of 2022, as it struggles to increase exports while its imports continue to grow.
Of course, many countries have macroeconomic problems, but India’s average of these three indicators is worse than in any other large economy, save the United States and Turkey. Most worrisome, India’s general government deficit, at around 10 percent of GDP, is one of the highest in the world, with interest payments alone accounting for more than 20 percent of the budget.
......
Aggravating the situation is the plight of India’s state-run electricity distribution companies, whose losses are now about 1.5 percent of GDP, over and above the fiscal deficits.
......
In other words, India faces three major obstacles in its quest to become “the next China”: investment risks are too big, policy inwardness is too strong, and macroeconomic imbalances are too large. These obstacles need to be removed before global firms will invest, since they do have other alternatives. They can bring their operations back to ASEAN, which served as the world’s factory floor before that role shifted to China. They can bring them back home to advanced countries, which played that role before ASEAN countries. Or they can maintain them in China, accepting the risks on the grounds that the Indian alternative is no better.
If the Indian authorities are willing to change course and remove the obstacles to investment and growth, the rosy pronouncements of pundits could indeed come true. If not, however, India will continue to muddle along, with parts of the economy doing well but the country as a whole failing to reach its potential.
Indian policy makers may be tempted into believing that the decline of China ordains the dizzy resurgence of India. But, in the end, whether or not India turns into the next China is not merely a question of global economic forces or geopolitics. It is something that will require a dramatic policy shift by New Delhi itself.
https://www.foreignaffairs.com/india/why...lace-china
December 9, 2022
......
Without a doubt, India could be on the cusp of a historic boom—if it manages to increase private investment, including by attracting large numbers of global firms from China. But will New Delhi be able to seize this opportunity? The answer is not obvious. Back in 2021, we provided a sobering assessment of India’s prospects in Foreign Affairs. We pointed out that popular assumptions about a booming economy were inaccurate. In fact, the country’s economic rise had faltered after the 2008 global financial crisis and stalled completely after 2018. And we argued that the reason for this slowdown lay deep in India’s economic framework: its emphasis on self-reliance and the defects in its policymaking process—“software bugs,” as we called them.
One year later, despite the exuberant press, India’s economic environment remains largely unchanged. As a result, we continue to believe that radical policy changes are needed before India can revive domestic investment, much less convince large numbers of global businesses to move their production there. An important lesson for policymakers is that there is no inevitability, no straight line of causation, from the decline of China to the rise of India.
......
Why are global firms reluctant to shift their China operations to India? For the same reason that domestic firms are reluctant to invest: because the risks remain far too high.
......
Of the many risks to investing in India, two are particularly important. First, firms still lack the confidence that the policies in place when they invest will not be changed later, in ways that render their investments unprofitable. And even if the policy framework remains attractive on paper, firms cannot be sure that rules will be enforced impartially rather than in favor of “national champions”—the giant Indian conglomerates that the government has favored.
These problems have already had serious consequences. Telecom firms have seen their profits devastated by shifting policies. Energy providers have had difficulty passing on cost increases to consumers and collecting promised revenues from the State Electricity Boards. E-commerce firms have discovered that government rulings about allowable practices can be reversed after they have made large investments according to the original rules.
At the same time, national champions have prospered mightily. As of August 2022, nearly 80 percent of the $160 billion year-to-date increase in India’s stock market capitalization was accounted for by just one conglomerate, the Adani Group, whose founder has suddenly become the third richest person in the world. In other words, the playing field is tilted.
Nor can foreign firms reduce their risks by partnering with large domestic firms. Going into business with national champions is risky, as these groups are themselves seeking to dominate the same lucrative fields, such as e-commerce. And other domestic firms have no wish to tread in sectors dominated by groups that have received extensive regulatory favors from the government.
......
One of the key elements of the PLI scheme, for example, is raising tariffs on foreign-made components. The idea is to encourage firms relocating to India to purchase inputs in the domestic market, but the approach significantly hinders most global enterprises, since advanced products in many sectors are typically made of hundreds or even thousands of parts sourced from the most competitive producers worldwide. By attaching high tariffs to these parts, New Delhi has provided a powerful disincentive for firms contemplating investment in the country.
For companies such as Apple that plan to sell their products in India, high import tariffs may be less of an issue. But these firms are few and far between, since India’s market of middle-class consumers remains surprisingly small—no more than US$500 billion compared with a global market of some US$30 trillion
......
Recognizing the growing tension between its protectionist policies and its goal of enhancing India’s global competitiveness, New Delhi has recently negotiated free trade agreements with Australia and the United Arab Emirates. But these initiatives—with economies that are smaller and less dynamic—pale beside those of India’s competitors in Asia. Vietnam, for example, has signed ten free trade agreements since 2010, including with China, the European Union, and the United Kingdom, as well as with its regional partners in the Association of Southeast Asian Nations (ASEAN).
......
In any country, a well-known prerequisite for economic take off is having key macroeconomic indicators in reasonable balance: fiscal and external trade deficits need to be low, as does inflation.
......
Since well before the pandemic began, inflation has been above the central bank’s legally mandated ceiling of six percent. Meanwhile, India’s current account deficit has doubled to about four percent of GDP in the third quarter of 2022, as it struggles to increase exports while its imports continue to grow.
Of course, many countries have macroeconomic problems, but India’s average of these three indicators is worse than in any other large economy, save the United States and Turkey. Most worrisome, India’s general government deficit, at around 10 percent of GDP, is one of the highest in the world, with interest payments alone accounting for more than 20 percent of the budget.
......
Aggravating the situation is the plight of India’s state-run electricity distribution companies, whose losses are now about 1.5 percent of GDP, over and above the fiscal deficits.
......
In other words, India faces three major obstacles in its quest to become “the next China”: investment risks are too big, policy inwardness is too strong, and macroeconomic imbalances are too large. These obstacles need to be removed before global firms will invest, since they do have other alternatives. They can bring their operations back to ASEAN, which served as the world’s factory floor before that role shifted to China. They can bring them back home to advanced countries, which played that role before ASEAN countries. Or they can maintain them in China, accepting the risks on the grounds that the Indian alternative is no better.
If the Indian authorities are willing to change course and remove the obstacles to investment and growth, the rosy pronouncements of pundits could indeed come true. If not, however, India will continue to muddle along, with parts of the economy doing well but the country as a whole failing to reach its potential.
Indian policy makers may be tempted into believing that the decline of China ordains the dizzy resurgence of India. But, in the end, whether or not India turns into the next China is not merely a question of global economic forces or geopolitics. It is something that will require a dramatic policy shift by New Delhi itself.
https://www.foreignaffairs.com/india/why...lace-china
![[+]](https://sgtalk.net/images/bootbb/collapse_collapsed.png)
