Even before the coronavirus, India was at a crossroads. At roughly $2,000 a year, per capita income in 2018 was half of what the country needed to become an upper-middle-income economy. Catching up with advanced nations posed a more daunting challenge.
Should India strive to break free of the middle-income trap by becoming a factory to the world, taking over from China? Or would it be better off prioritizing the domestic economy, expanding its rather narrow base of mass consumption?
The answer in the post-pandemic world may support the second strategy, with health infrastructure as its centerpiece.
JPMorgan Chase & Co. economist Jahangir Aziz stirred up a debate late last year when – taking his cue perhaps from the US-China trade tensions – he said that the “game is over” for emerging markets that were “addicted to globalization”. India, he argued, refuses to accept that it’s just another developing economy that grew on the back of globalization.
No going back to full on globalisation
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The coronavirus outbreak has only deepened India’s vulnerability. Trade in goods has slowed the world over. Movement of people has halted. Even the dollar, the lingua franca of global commerce, is finding it hard to go where it’s needed.
India’s edge in software services will be blunted if swathes of Western industrial capacity get rescued by taxpayers, who will demand that firms stop outsourcing and create jobs at home. Indian startups will struggle to raise money from global private equity firms, which are busy angling for a public bailout of their portfolio companies.
Then there’s geopolitics. The mistrust between Washington and Beijing has gone up several notches because of the blame game around the pandemic. To the extent the East Asian model of export-led growth requires a wealthy core economy buying cheap widgets from a periphery it hopes to be able to control, it has run its course. There won’t be a next China.
So how should New Delhi navigate this scared new world? In dealing with the virus and its aftermath, the Indian government is bound to shed fiscal restraints, and rely on the central bank to fund its spending.
Make public spending pay off
Once it’s on the gravy train of deficit monetization, neither India nor the rest of the world will want to get off. This won’t matter as long as India can demonstrate that public spending is boosting productive capacity.
One way to do that, as a senior financial services executive put to me, was to make public health the engine of a state-funded investment drive.
A highly contagious outbreak can overwhelm even the most sophisticated of medical systems, but as Fitch Solutions says, with 8.5 hospital beds and 8 physicians per 10,000 people, India’s healthcare industry is particularly at risk. By comparison, Japan and South Korea have 120 to 130 beds for 10,000 people.
That explains the severity of Prime Minister Narendra Modi’s 21-day shutdown, which has caused enormous hardship for the urban poor and migrant workers.
Source: Gulf News
