Mohamed A El-Erian & Michael Spence
India’s recent economic success, solid momentum, and promising prospects are making the country ever more influential both regionally and internationally. But the experience of other countries suggests that such rapid influence and robust progress can be tricky to manage. An action that makes sense domestically may conflict with what other countries expect from a systemically important economy. Meanwhile, actions that make sense internationally could complicate domestic economic progress.
Poised for continued growth China plays an important role in India’s recent growth story. Its high middle-income levels imply that it was destined eventually to shed labour-intensive manufacturing and assembly jobs. But that process has been accelerated by the rapid diversification of global supply chains. Most likely, there will be demand-side inducements for India to expand its tradable sector, with manufacturing for export providing employment opportunities for the lower-income rural sectors.
Apple, for example, is expanding iPhone assembly in India, in collaboration with partners like the Taiwanese manufacturer Foxconn. India already accounts for 7% of iPhone production, and much of that is for export. That said, net foreign-direct-investment (FDI) flows into India declined sharply in the current fiscal year, and it remains to be seen whether there will be a wave of export-driven investment in manufacturing sectors.India also already has a thriving digital and financial sector. With a large and growing domestic economy, it has a natural advantage in large-scale digital innovation, owing to the fact that such technologies tend to have relatively high fixed costs, but low variable costs.
As with manufacturing, recent developments in China bear on this issue. Owing to changes in China’s economic and governance model and its deteriorating relations with some advanced economies (most notably the US), external capital has been leaving, leading to an influx of capital into India. If not managed carefully, these inflows could complicate economic policymaking by impacting the currency and competitiveness.
Cautionary tales
With India expected to remain the world’s fastest-growing major economy, policymakers face the increasingly complex challenge of balancing external and internal interests, while still maintaining the country’s growth and development trajectory. Multinational corporations have also faced this dilemma when considering whether and how to change where they operate. Such changes can create many operational and reputational challenges. Whether the lesson comes from China or Big Tech, India should heed it.
Recent history shows that the necessary internal course corrections, as well as the ability to shape international perceptions, can come late or be insufficient. As a result, a country’s (or a company’s) secular transformation can end up being more complicated than it needs to be. India’s multinationals are increasingly looking abroad for growth opportunities. The increased influx of foreign companies and other foreign investment flows will heighten the focus on domestic labour conditions, as will the larger volume of incoming FDI. India also is attracting more foreign portfolio capital, partly due to more investors growing worried about geopolitical tensions and the prospect of China becoming un-investable. India’s impressive recent technological successes will also add to its global systemic importance.
Its thriving digital economy has allowed it to offer a superior open architecture for digital finance, making it a prime example of a massive country where money can move quickly and cheaply. Moreover, India’s multilingual technical capabilities are especially suitable for greater exports to many other countries undergoing similar technology-driven development.
No time to waste
Given India’s growing systemic importance across so many dimensions, current and future generations alike would benefit from early steps to minimise the risks and maximise the opportunities presented by a larger global footprint.On the domestic front, India is on the cusp of an even greater inflow of FDI and portfolio investors. Such capital has many benefits, of course, including job creation, technology transfer, and greater access to cheaper funding. But as other countries’ experience shows, large inflows require rapid adaptation of policies and policymakers’ mindsets, as well as measures to overcome internal resistance from domestic incumbents.
Otherwise, the benefits will be more than offset by the serious threat of macroeconomic instability, severe resource misallocation, excessive risk taking, and corruption.Looking outward, India needs to foster much deeper cooperative interactions with key bilateral trading partners, regional institutions, and international platforms. Its status as a founder of the New Development Bank—established by the BRICS grouping in 2014—does not preclude the need for closer ties with the Asian Development Bank, the World Trade Organization, the International Monetary Fund, and other global institutions. Given its success and outlook, India can no longer claim to be an economically small developing country with few global spillovers. Its growing systemic importance will bring a larger set of risks and opportunities. India today is near where China and Big Tech were before they inadvertently triggered reactions that have complicated their growth strategies and undermined their reputations.
India must lose no time in managing its growing footprint, so that its domestic priorities align with international realities. When China was at a similar stage of economic development 16 years ago, it ran a current account surplus of 10% of GDP. With Chinese policymakers focused on the stock-market bubble in 2007, they ignored growing external concerns about mercantilism and “unfair” competition until it was too late. The lesson is that a purely reactive approach, with its inevitable delayed response, is much less effective than a balanced approach combining proactive and reactive elements. The current Indian government, under Prime Minister Narendra Modi, appears to understand this, and has been generally praised for how it has navigated today’s highly complex and tense global environment.
But there is more work to be done. India should seek to play a larger role in the world’s multilateral institutions, where it could be a strong voice for constructive reform. But like it or not, China and India are both destined to be giants in the global economy. Working gradually toward a more constructive relationship that is consistent with its other geopolitical priorities (including vis-à-vis the US) should be an objective for India. It is also a key element in both countries’ ability to manage their expanding global footprints.
(The authors are respectively, Professor, Wharton School, University of Pennsylvania; and Nobel laureate in economics and emeritus professor, Graduate School of Business, Stanford University)
Copyright: Project Syndicate, 2024.