As another black swan event has engulfed the world with Russia and Ukraine at loggerheads, it is a clarion call for economies like India to learn from it. The world in the first two decades of the 21st century has witnessed several man-made disasters, starting with the global financial crisis of 2008, multiple conflicts and instability across continents except the Covid -19 in progress that has consumed the entire world like never before.
Planning to successfully address these concerns is a major challenge for policy makers, but one that needs to be addressed urgently. Delineate here some aspects that India can increasingly focus on due to its strategic interest, in the process of becoming more indigenous, and perhaps a more indispensable force globally.
Using the service industry
As India plans to improve its cross-border trade in goods, it should focus on services, which have consistently performed well. India’s global share of the services sector in 2005 stood at 2%, which increased to 3.1% in 2011 and 4.1% in 2020. The share of the services sector in GDP of India fell from 45% in 2001-2002 to 49%. percent in 2011-12 and hit 54 percent in 2020-21; and this in the midst of the pandemic.
In fact, the contribution of services exports to India’s total exports has surpassed that of goods—from 59% in FY17 to 64% in FY21. Net income from services trade has supported India’s current account by partially offsetting the merchandise trade deficit over the years. RBI says upbeat IT-led services exports are expected to keep the current account deficit well below 2% of GDP in FY22.
Since the pandemic, the world has changed, providing the service sector with opportunities to create more income, jobs, investment and trade. Given its proven strength in this segment, India has huge room for growth. For example, globally, the new normal is witnessing remote onboarding of new employees, conferencing from remote locations, telehealth across geographies, and a big leap in e-commerce. , among others.
With access to mobile connectivity, the service sector in India can work wonders in less developed, developing and developed economies at a fraction of the cost, allowing India to earn much more foreign exchange. Mutual recognition agreements on legal services with countries could open a market for India by offering services at a rate that will be unmatched globally.
Reduce reliance on crude
India’s dependence on crude remains high and has increased more than 165 times, and with an average annualized growth rate of 5%, between FY01 and FY21. Crude Oil grew from $14.4 billion in FY01 to $62.2 billion in FY21, an average annualized growth rate of 11%. . With the current crisis in Europe, high oil prices will translate into domestic inflation and rising commodity prices.
The exploration and use of unconventional energy will not only help the country save billions on imported fuel, but will also protect it from energy price shocks. The government must step up its efforts to encourage investors to look into alternative fuels like natural gas, solar, coal bed methane and fuel cells, among others.
The growth of electric vehicles (EVs) would require widespread availability of electricity, ideally generated from hydroelectricity, and the expansion of battery charging stations on arterial roads and highways. India could save billions on crude oil imports if electric vehicles gain a significant share of new vehicle sales by 2030.
Diversify sources of defense
India accounts for 3.7% of global military spending, making it the third largest military spender, with defense’s share of the FY23 budget reaching 9.7%. Nearly 70% of India’s military hardware is of Russian origin. This poses a high concentration risk, and India needs to diversify further.
The government has launched two defense industrial corridors and hopes to attract investments of ₹20,000 crore by 2024. Every effort should be made for the production of defense equipment in India and necessarily the sharing of technological know-how. India should use its strategic position in Asia to leverage and incentivize some of the biggest defense companies to produce in India.
After the start of the Russian-Ukrainian crisis, SWIFT sanctions against Russia caused the blocking of payments, including from India. In January 2022, 40% of all SWIFT transactions by value were in dollars, followed by the euro at 37% and the pound at 6%. Given the extremely volatile situation and uncertainty in the world, India should also consider setting up a similar mechanism, an alternative to SWIFT, which could facilitate trade with countries by offering incentives to reduce operating costs beyond SWIFT. Both Russia and China had developed alternatives to SWIFT – China’s Financial Message Transfer System and Cross-Border International Payments System – a few years ago.
Apart from the current crisis in Europe, it also showed the dependence and impact of the suspension of popular global platforms such as MasterCard, Visa and American Express. Instead, Russian banks may eventually issue cards with UnionPay in China. In 2012, the National Payments Corporation of India (NPCI) introduced RuPay as India’s multinational financial services and payment services system. While RuPay has made significant inroads in the domestic market, it still has to compete with the global majors.
India could work with its South Asian counterparts to promote such financial instruments for the common good.
High domestic consumption
India is expected to help boost household consumption as this would boost the growth cycle and to some extent insulate India from global economic turmoil. Household consumption constitutes the largest part of aggregate demand. The level of consumption of each household depends mainly on its level of income.
The latest data shows private consumption as a share of nominal GDP fell further to 57.5% in FY22 from 58.6% in FY21 and 60.5% in FY20. Increased domestic investment would facilitate consumer market growth, which would have a multiplier effect on the economy. This will force businesses to expand their businesses and in doing so create jobs, leading to higher income levels and a strong and self-sufficient internal market.
The author is an economist at India Exim Bank. Views are personal
March 13, 2022