The current US administration has been remarkable in its rejection of the post-World War II global order, from last year’s tariff wars (still continuing) to the more real war on Iran. This latter war is having much more serious consequences than the tariff turmoil, disrupting energy supplies, destroying infrastructure, and consuming substantial quantities of real resources (as any war does). The main economic beneficiaries of these wars have been those within and those close to the current US administration.
Most of the rest of the world has been trying to manage responses to minimise the economic costs being imposed by US policies. One reason that the US has not seen more political fallout or resistance is that the AI boom, truly extraordinary in its magnitude, has kept things afloat, from spending on data centres to elevating the valuations of a small number of AI companies. Much of this positive impact is within the US, along with a few companies in other countries, such as Samsung in the Republic of Korea and TSMC in Taiwan.
India is in a particularly vulnerable position, and the latest conflict initiated by the US administration is much more threatening than the tariff turmoil which pushed India to be more strategic—and potentially more open—in its approach to international trade and trade policy. The soaring cost of oil, and negative impacts on petroleum products such as fertilisers, can have enormous consequences for India’s economic growth. On top of this, analysts have been highlighting that AI will reduce job creation in India’s IT sector, which is service-intensive and is based on skills such as software development that are early candidates for AI automation.
In the overall scheme of things, the number of jobs in India’s software sector is relatively small, but they do have multiplier and spillover effects on ancillary services within the sector, and consumption spending on products and services outside the sector. Indian government officials have spoken about upskilling and reskilling, and one can guess that larger Indian IT firms are already pursuing this route—after all, they successfully demolished the early claim that they would remain providers of “techno-coolies” when the initial software boom began.
But the really consequential response from India and its policymakers has to come elsewhere. What are three things India must do?
First, India has to be more serious about its green transition. Many of its plans for this transition seem to have remained on paper. Pushing more aggressively on building solar power capacity, and on shifting to electric vehicles will reduce the country’s vulnerability to oil and its various derivative products. Of course, fertilisers and jet fuel are not going to be replaced, but there is plenty of room for reducing fossil fuel dependence in other cases.
Second, India needs to push harder in manufacturing certain kinds of products. The green transition and the ageing of the global population, especially in the West, are going to create new or higher demands for many products, from solar panels to health condition monitors to walkers.
Even in cases like solar panels where China dominates global manufacture, if one projects global demand based on what will be needed to reduce carbon emissions meaningfully, there is room for new entrants. Aside from making products, new jobs in maintaining new kinds of products and infrastructure will also be created. Therefore, a new manufacturing and services ecosystem has to be envisioned, and its development accelerated. Achieving economies of scale quickly is vital, and the benefits of learning by doing will reinforce that process if it is pushed hard.
The third thing India needs to do is educate its population more widely and effectively, especially in basic ways. Early childhood education (and health) is still below where they can be for a country of India’s per capita income levels. The needs are wide-ranging. Arvind Virmani has emphasised that India needs to provide upskilling in very prosaic professions, such as plumbers and electricians, not just high-end software jobs. Other research suggests that India does not have a shortage of doctors for its per capita income levels, but all the other human components of an effective healthcare system—including nurses, technicians, and other specialised support staff—are in short supply. At the other end of the spectrum, India is also underinvesting in research and innovation, both in the public and the private sectors—this also can be fixed with some policy attention.
Just as the US-initiated trade war reminded India of the need to be strategic in how it participates in the global economy, the war on Iran should bring more policy attention to how the world is changing, or is likely to change. Dealing with climate change and ageing populations are going to be major drivers of how the global economy evolves, irrespective of short-term impacts of conflicts (assuming that such conflicts do not escalate into annihilation). India can accelerate its own green transition, build an economy based on that, and on the needs of ageing populations, and give its people the education and skills to participate widely in that economy.
The author is Professor of Economics, University of California, Santa Cruz
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.