For India, war shrinks political and economic space for easy solutions

The first wave of globalisation from the 1870s, after the opening of Suez Canal and laying of a permanent transatlantic cable connecting Europe and North America, resulted in the US becoming the world’s economic superpower. It maintained that position even during the war and depression years (1914-45), when global trade collapsed and recovered gradually over the next three to four decades. The second wave, following the disintegration of the Soviet Bloc in 1989 and lasting till the 2010s, led to China’s emergence as the “world’s factory” and “mega-trader”. This decade ought to have been India’s, given its favourable youth demographics (like China’s during the 1980s to the 2010s) and policy initiatives spurring digitisation (through Jan Dhan-Aadhaar-Mobile), formalisation (GST and demonetisation) and investments in physical infrastructure, from ports and airports to highways and renewable energy. Sadly, the demographic dividend from a labour force “bulge” hasn’t materialised due to successive disruptions — Covid, wars in Ukraine and Iran, and US President Donald Trump’s unilateral tariffs.

The basis of globalisation — founded on the free movement of goods, services, capital, people and ideas across borders — has been upended. Today, the assumption of wars being a near-impossibility in an age of hyper-economic interdependence between countries lies in tatters. The current decade has seen two major episodes of migrant workers in big cities and industrial centres leaving for their villages and hometowns, the first exodus during the Covid lockdown and the second on account of cooking gas shortages triggered by the Iran war. In short, while China rode the second wave of globalisation to realise the economic growth potential from its high working age-to-dependent population ratio, India has been relatively unlucky on that score.

Whether these setbacks are temporary or not, Indian policymakers and firms will have to factor geopolitical risks into their growth strategies. It would mean diversifying energy and raw material supply chains, and building buffers (fiscal and physical) against unexpected shocks. No less important is staying the course on reforms and macroeconomic stability, which are the best possible insurance against market volatility and a guarantee of investors returning once the panic has subsided. The energy supply and price shocks from the war, reverberating across sectors, call for policy actions beyond picking low-hanging fruit. Reforming the fertiliser subsidy regime that promotes imbalanced nutrient use — especially over-application of urea — and fixing the losses of state discoms can wait no longer. The war has shrunk the economic and political space for easy solutions.