Localaising Globalisation

Introduction:

• The dual supply and demand shocks from the Covid-19 pandemic are expected to cause a global recession. In the last several weeks, global supply chains have been disrupted as workers are locked down, factories shut, and closed borders and terminals block supplies and cargo. Aggregate demand has collapsed. The pandemic threatens to usher in a phase of economic insularity, through efforts at localization of supply chains and stricter immigration controls.
• There is a widespread belief that nothing will ever be the same after the coronavirus pandemic, with society, the role of government and the economy changing forever. Some predict we will see a society that shows more solidarity and a new economic model that works for all, and perhaps a greater spirit of international cooperation, for example on climate change.
• But increasingly the sharp falls in output are beginning to resemble the beginning of the Great Depression rather than a short recession. The epidemiological evidence suggests that it could be up to two years, rather than a few weeks or months, before all of the severe restrictions on economic activity can be lifted.
• The lessons of history suggest that a substantial economic recovery will require global economic cooperation. Continuing to put up barriers to protect national economies, as happened in the 1930s, could turn a national recession into an even longer-lasting global depression in our highly integrated world economy.

The scope of globalization:

• Since 1950, economic globalisation has transformed the world economy, contributing mightily to rising living standards but proceeding unevenly with many countries and individuals losing out. Globalisations scope extends from trade in goods and services to international migration of labour and, more recently, to finance.
• Each has involved international agreement (in the case of trade) or a consensus that reducing barriers to immigration and global investment will benefit all. Underpinning support for globalisation was a strong belief that international economic cooperation would reduce the chance of another war in the aftermath of the devastation of World War II. And the world’s leading economic power, the US, saw the opening up of the world economy as the key to economic growth that would counter the appeal of Communism.
• Globalisation produced both winners and losers. The economic miracle of European recovery in the 1950s and 1960s was followed by economic miracles in a number of Far Eastern countries, from Japan to Korea and China by the 1990s, raising the standard of living of urban residents to near-Western levels.
• The boom reduced global poverty by a billion, mainly in China and India. Globalisation seemed to have conquered the world.
• But since 2000, the political impetus for increasing global economic integration has slowed, as concerns about its effect on inequality have grown. Global trade talks started in 2000 failed to produce an agreement and the costs as well as benefits of financial globalisation became evident in the 2008 financial crisis.
• While the pace of globalisation may have slowed and political support for it has weakened, our world is more connected than ever. For American farmers and car manufacturers, China is their biggest market. Britain’s role as a global financial centre is the linchpin of its economy. Developing countries such as Bangladesh and Vietnam are increasingly dependent on clothing exports. And remittances from migrants are vital to the economy of many poor countries, from the Philippines to Nepal to Central America.
• The sharp slowdown in the two world’s biggest economic zones, the US and the EU, will reverberate throughout the global economy and probably have its biggest effect on poor countries.

Impact in Asia Pacific and India:

1.    COVID-19 crisis is a challenge never seen before and it is going to be a bigger shock for the world economy than the global financial crisis which was only driven by a demand shock.

2.    This entails a demand and supply shock and it is still unfolding. It is now clear that many economies are going to shrink developed countries as well as many in the Asia Pacific region that are highly dependent on tourism and commodities trading will also shrink.

3.    Commodity prices are at their lowest in the last 10 years. For India, however, there is a slight silver lining because of low oil and commodity prices as we are net importers and, also, since the government is not allowing a full pass-through of the lower global prices, it means that there is some fiscal space through commodity price reduction. Still, the disruption in work, especially in MSMEs that are the backbone of manufacturing, trading and services, is very serious. This is a very large shock to the world economy and many things will change after we come out of it.

Challenges for Self Reliance:

1.    Electrical equipment such as smartphones and computers are a key part of India’s import bill. The value addition in India’s electronics industry is limited to mostly assembly, while the country depends on imports to access most of the primary and critical components used to make them, including printed circuit boards (PCBs).
For instance, around 88 per cent of the components used by the mobile handsets industry are imported from countries like China.

2.    Over 60 per cent of the country’s medical devices are imported as well. Other products heavily imported into the country are cells and modules used by the country’s solar power industry.

3.    India’s pharmaceutical industry is capable of making finished formulations, and also has domestic manufacturers of several key ingredients used to make them. However, the industry also imports some key ingredients for antibiotics and vitamins currently not manufactured in India. The country is currently trying to encourage domestic firms to make these key ingredients, known as fermentation-based APIs. However, this may take a few years.

4.    India imported around Rs.249 billion worth of key ingredients, including fermentation-based ingredients, in FY19, and this accounted for approximately 40 per cent of the overall domestic consumption, according to CII.

5.    Medical devices like ventilators also rely on imports of several crucial components like solenoid valves and pressure sensors. Some auto manufacturers depend on imports for various components, while the country’s electric vehicles industry is dependent, to a large extent on Chinese imports for chemicals used to make cathodes and battery cells.

6.    Local dyestuff units in India are also heavily dependent on imports of several raw materials, while specialty chemicals for textiles like denim are also imported. For instance, when China initiated its lockdown of Wuhan earlier this year during the COVID-19 pandemic, nearly 20 per cent of India’s dyes and dyestuff industry production was hit due to a disruption in raw material.

Issues with scaling up production in import dependent sectors:

1.    The manufacture of some of the key products that India imports such as semiconductors, displays and other very capital intensive electrical equipment may not be possible soon as manufacturing these requires large, stable sources of clean water and electricity.

2.    They also need a high degree of policy certainty as these require high upfront investments. Indian firms can however begin producing less sophisticated components if certain policy measures are taken.

3.    The Indian industry faces much higher costs in inputs such as electricity and much higher logistics costs.

Conclusion:

• We have the capacity of becoming the manufacturing hub for our own country and not to become export dependence. A key issue holding back manufacturing in the country and a lack of flexibility in labour laws, high costs and low availability of land, high cost of electricity, expensive credit and too many taxes. Some states including UP and Madhya Pradesh have relaxed some labour laws with Karnataka likely to follow suit.

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