Decline in global trade doesn’t bode well for globalisation

It could very well be argued that any discussion of the economy is to be deferred till the 2024 Lok Sabha elections are over because the flavour of the second half of 2023 and the first half of 2024 would be politics, the ‘war of all against all’, to use the Hobbesian phrase. However misplaced a look at the economic trends at this time of the year might be, and however necessary it may be to replace ‘it’s the economy, stupid’ with ‘it’s politics, stupid’, there are significant changes and trends showing up in the global economy which cannot be ignored.

First, the good news. India is exporting more made-in-India mobile phones than importing them. The article written by the Reserve Bank of India (RBI) researchers, GV Nadhanael et al, on ‘The State of the Economy’ in the central bank’s June bulletin, notes that in 2022-23, mobile phone exports have doubled to $11.1 billion and that their import has fallen from $2.6 billion in 2017-18 to $1.4 billion 2023.

This exhilarating bit of news is accompanied by a rather sobering view of globalisation and what it would mean for global trade. Nadhanael et al write, “From a medium-term perspective, the secular shrinking of openness that took hold from 2012 and intensified from 2018 may be signalling the ending of the glorious era of globalisation that had powered the global economy since the 1980s.” Most of the starry-eyed economists in the governments of Manmohan Singh and Narendra Modi were singing praises of globalisation at the very time when the rug was being pulled from under their feet. Indian economists of all reformist hues had refused to take note of the crisis of capitalism that marked the Great Financial Recession of 2008.

And what are the implications of the decline of globalisation? The authors say, “The growth prospects of emerging market economies (EMEs) are particularly at risk as the trade engine sputters after decades of energising their integration into the global economy and lifting them to higher trajectories of growth and productivity than when they were relatively closed.” And they point out, citing Organisation of Economic Cooperation and Development (OECD) projection, that global trade would shrink by one-third in 2023 compared to 2022, and the World Bank projection that the global trade in goods and services would shrink in 2023 to 1.7 per cent from 6 per cent in 2022. And they pinpoint the basis for such a decline in world trade and what it means in larger terms: “World trade is suffering, under the brunt of fissures opened up by rising protectionism in industrial and trade policies, reordering of global value chains and the fragmentation in finance and technology flows that is also impacting foreign direct investment.”

Is there then a contradiction between the rise in India’s export of mobile phones and the general scenario of the ‘shrinking of openness’ outlined in the article? The Indian export scene is not all that exuberant and the figure of the export of mobile phones is only the proverbial silver lining of a grey cloud. Prime Minister Modi and his aides seem to have anticipated the global trend of rising protectionism when he expounded the idea of Atmanirbhar Bharat in May 2020 amid the Covid-19 pandemic. And he indulged in sophisms, like a good politician, when he said that India would produce goods for itself and for the world and the flippancy of the formulation is much too evident.

If India wants to be the sole manufacturing hub of the world, then it is replicating the faulty model of China of being the crucial hub of global supply chains. Finance Minister Nirmala Sitharaman had tried unsuccessfully to assure that Atmanirbhar Bharat does not mean that India is closing its doors. But Indian protectionism reared its ugly head through the glib policy of Productivity Linked Incentive (PLI). The authors of the article acknowledge that the better performance of Indian mobile phone manufactures is partly a fallout of the PLI scheme. In many ways, this is hidden subsidy.

The global political and economic scenarios are showing too many cracks and fissures, and it would be dangerous to continue to indulge in the rhetoric of globalisation. India First will be competing with America First, and it cannot be a win-win situation, as applause-driven political leaders would want to believe. India and China, as emerging economies, there is more than irony in the fact that China, the second largest world economy, believes that it is not a developed economy but a developing economy still want an open system of global trade because they stand to benefit by it. But these two economies would want the developed economies like North America and the European Union to keep the doors open for their exports. If the developed economies are shrinking, they cannot absorb exports from countries like India and China.

The challenge then is to increase domestic consumption to match domestic productivity. And it can happen only when the purchasing power of the domestic consumers in these two countries increases. Wages cannot remain low to score on labour competitiveness and it is this competitive edge that the two Asian countries are advertising as their USP. India’s obsession to become a global supply chain alternative to China is flawed because global supply chains are confined to mass-produced goods with low price tags.

It is the frontier technology like semiconductor chips and Artificial Intelligence (AI) products that command the higher price, and these are the areas that the US is dominating, and it retains the commanding heights of the new economy. Indian leaders and economists must give up the talk of doing things at a lesser cost and greater efficiency than in the West because it will keep India at the lower end of the value chain. India is already at the lower end of global information technology sector value chain. India has to look beyond the dream of being a global hub of manufacturing, or even that of services. It has to think of being at the head of frontier technology. It is not enough to replicate ChatGPT. There has to be an original breakthrough of the ChatGPT kind if India wants to be the global economic leader.