Emerging global trends and how is India positioned? | Daily News Byte

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Harish

Global Macro Background:

We live in a period of transition of the global center of power. The global economy is going through difficult times. It has not yet recovered from the pandemic, another crisis has begun, the risk of war. Many believe this is the start of World War III, some believe it will be limited to Ukraine and Russia, and other countries will stay away, although support from the outside is very high, as the risk of catastrophe or all-out war is very high. Whatever the case, the whole world is paying the price in the form of higher energy, commodity and agricultural prices. Inflation is everywhere. All central banks are raising interest rates to tame rising inflation that is fueling fears of a recession. In fact, the steep rise of the USD due to the sudden increase in interest rates has brought many emerging market economies to the brink of default.

Against this backdrop, I would like to discuss three global themes and how India has been placed under them?

Global topics and how does India fare?

1. Deglobalization

After the emergence of Covid, the supply chain has been severely affected around the world. The movement of people and goods is hindered. This led to a shortage of goods which led to high inflation. The war between Russia and Ukraine further squeezed the supply chain. There is political rhetoric around the world to move the production of at least basic goods to the local level. Populism, nationalism, financial reregulation and concern for national security have usurped the economy as the priorities of international relations.

China is a world producer. Due to the destruction of the supply chain due to covid, the world is reassessing the risk of concentrating the supply chain on one country. They are looking for alternatives to China for production. India, as a large economy with a huge consumer base, has an opportunity to project itself as an alternative. Even before the pandemic, China was shutting down low-value industries as it shifted to high-value-added industries. India needs to create incentives to bring manufacturing industries to India.

Sensing an opportunity to become a global manufacturing hub, India undertook many reforms. The Indian government started the program; Aatam Nirbhar Bharat (Independent India); to encourage industry to establish a manufacturing base in India. In 2014, India launched the Make in India program to facilitate investment, encourage innovation, build best-in-class manufacturing infrastructure, ease of doing business and enhance skill development. This program was renamed as Make in India 2.0 in 2021 under the Aatam Nirbhar Bharat program focusing on 27 sectors.

Further, to boost manufacturing capabilities in certain key sectors to reduce import reliance and increase export potential, under the Aatam Nirbhar Bharat programme, the Government has announced a Productivity Linked Incentive (PLI) programme. The scheme invites foreign companies to set up units in India but also aims to encourage local companies to set up or expand existing manufacturing units and also create more jobs. Moreover, the Government has reserved 70% of defense procurement locally to promote Make in India.

Logistics costs are very high in India compared to other industrial economies, making the Indian manufacturing sector uncompetitive. Logistics costs in India are approximately 14-15% of GDP, which is 7-8% in developed countries. The government announced the Prime Minister Gati Shakti’s National Logistics Policy and Program with the aim of reducing logistics costs to 8% over the next five years. Earlier, the government also announced the Sagarmala program to promote port-led development that will help reduce logistics costs.

Apart from the infrastructure building programme, the Government has also implemented the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC) which has helped India in improving the ease of doing business in India. To make India competitive, the government has reduced direct taxes on setting up new manufacturing units to 15%. This will increase the production capacity of the country.

Although the Government has undertaken many reforms to make India a manufacturing hub, a lot more needs to be done. To make India a vibrant manufacturing hub, the Government needs to undertake manpower reforms, work to reduce electricity costs and ensure uninterrupted power supply to manufacturing units, reduce bureaucratic delays in approvals, create skilled manpower, etc.

2. Climate changes

Climate change is a real threat that the world is seeing. Recently we have seen extreme weather conditions and some have resulted in disasters like floods in Pakistan. The impact of climate change on the financial system manifests itself through various risks, for example, the loss or damage of tangible assets arising from frequent natural disasters and the implications for financial stability arising from the volatility of food prices due to erratic weather trends, increased credit spreads and greater precautionary measures. savings. There is a greater emphasis on going green to achieve net zero carbon emissions. India is also a signatory to the Climate Agreement and is committed to achieving net zero carbon emissions by 2070. To achieve this goal, it needs an investment of around USD 10 trillion in:

  • renewable energy,
  • storage and transmission of renewable energy,
  • Installed infrastructure for green mobility
  • Waste management
  • agriculture,
  • Real estate etc.

To achieve short-term carbon emission targets by 2030 to reduce greenhouse gas (GHG) emissions by 50%, India needs an investment of $2.6 trillion. Only in the segment of renewable sources, 350 billion dollars are needed by 2030.

The Indian banking sector cannot meet these demands as their shorter term liability structure cannot support long infrastructure projects. Hence, there is an urgent need to leverage green finance and alternative structures to finance infrastructure projects.

Regulators and the Government are working to create drivers and establish infrastructure for the development of the green financing market. India’s Ministry of Finance (MOF) has established a Task Force on Sustainable Finance to a) develop a taxonomy of sustainable activities, b) recommend reporting and disclosure policies, c) determine appropriate financial policies and regulations, and d) design relevant measures for market development. The work of the task force and the resulting policy support is likely to provide additional momentum to the market in the medium to long term. Based on these developments, India’s Green Sustainable and Social (GSS) debt market is poised for accelerated growth to support sustainable investment and create a future-proof economy.

3. Digitization

With the rise of artificial intelligence, robotics and big data efficiency, organizations are adopting the digitization of operations and services to improve efficiency and reduce costs.

Despite increasing adoption of digital technologies and the IT industry, India’s digital divide is deep and creates economic disparities between those who can afford technology and those who cannot. Therefore, it affects the overall digital growth of the country. To bridge this gap and put India on the path of a digitally empowered society, the Government of India is pushing for digitization by undertaking many initiatives and making digital infrastructure a public good. Aadhar is the foundation of the digital infrastructure story where the identity layer of Aadhar is embedded with a payment layer and a data empowerment layer. Embedding Aadhar with a payment and data empowerment layer is known as the India stack. With every passing year, its scope is increasing, such as linking of Aadhar with bank accounts, UPI payments, Open Credit Aggregator (OCEN), CBDC etc.

Digitization will be a new driver of economic growth. This will not only reduce costs for businesses, but also help in financial inclusion. With initiatives such as the account aggregator and OCEN, it will help leverage credit for gig workers and people who were previously ineligible for credit. CBDC will improve financial inclusion and formalization of the economy. Therefore, digitalization will give an impetus to the growth of the economy.

Conclusion:

The turbulent global environment has opened up new opportunities for India. The government has taken many initiatives to take advantage of the opportunities. However, the key to success is the implementation of announced initiatives and programs. Furthermore, the government and regulators continue to work to establish the necessary drivers for economic development.

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