17 August 2024, NIICE Commentary 9431
Vaishali Basu Sharma
Demographic shifts, de-globalisation or ‘slowbalisation’, global warming, technological changes, shocks such as the pandemic, the protracted war in Ukraine, the Israel-Gaza war and fluctuations in energy supplies have brought to fore the inherent fragilities in international systems. The result has been mounting global inflation and public debts, advent of populist and divisive politics, and the erosion of international institutions.
In these current and extremely volatile times, nations and business leaders face a unique confluence of crises, a cluster of interrelated geopolitical, economic, and climate threats collectively called “polycrisis”, a term popularised by historian Adam Tooze. While the term ‘polycrisis’ is now being used by a growing number of commentators, why is it different from a systemic risk? Cascade Institute provided a reasonable description of ‘global polycrisis’ as the ‘causal entanglement of crises in multiple global systems in ways that significantly degrade humanity’s prospects’ and one wherein the crises are intertwined in vital ways emphasising the complexity of the systems in which the risks develop.
Amplifying the post-pandemic, climate-afflicted, strife-ridden international polycrisis are the more recent intensified tensions in the Middle East, with rising concerns of a direct conflict between Iran and Israel, falling oil prices, the likelihood of a recession in the US, volatility to oil markets and dramatic drops in Asian stock markets complicating the outlook even further.
The World Economic Forum’s Global Risks Report 2023 which highlighted the risks from polycrisis, anticipates that the next decade will be characterised by environmental and societal crises, driven by underlying geopolitical and economic trends. It suggested that experts look across three time frames – the key risks that are unfolding today, what might be happening two years out and then what might happen 10 years out in order to shore up resilience and start investing for the future rather than having a short-term crisis mindset. The Global Risks Report 2024 states that environmental risks continue to dominate the risk landscape over all three-time frames. The report stresses that economic uncertainty will weigh heavily across most markets due to domestic factors in some of the world’s largest markets as well as geopolitical developments.
So how are the ongoing shifts and shocks of the global polycrisis impacting India? One of the severe tangible risks that appears to be more material and relatively near-term for India is the detrimental impact from climate change and induced natural disasters. The narrative that flows from the developed world is that global challenges such as pandemic and climate are the same as development challenges. But that’s not necessarily true because India will have to put more efforts into adaptation and resilience and address its development challenges so that it can actually contribute to addressing the global challenges. The entire narrative on energy transition and climate change is also both a geopolitical and a geo-economic challenge that demands suitable economic convergence.
Given this energy security and energy transition challenge, whether growth will be able to accumulate debt and pay it down as easily as other countries did when they were in the growth phase is a big question mark for countries like India. There is increasing optimism that India is on the cusp of a long-awaited economic take-off.
Whether India is able to enhance its debt ratios and grow is a question mark. India’s public debt ratio was about 81 in 2005 and is now about 83 per cent of GDP. In fact India is one of the very few countries, other than Indonesia and Germany that have seen their debt ratios barely move in the last 15-20 years, a period which saw the pandemic and the global financial crisis of 2008. The current government debt at almost 56% of the GDP is certainly elevated. A policy intent reiterated by Finance Minister Nirmala Sitharaman are plans to keep the future fiscal deficit such that the central government debt moves on a declining path as a percentage of GDP. In terms of debt sustainability, it must be kept in mind that different governments have varying absorptive capacities to sustain a particular level of debt, based on the structure of their economies. Relative to other economies, India has grown even post-pandemic at a fairly steady rate. Although the trajectory of the government’s fiscal deficit will decide on the direction of sovereign ratings, the International Monetary Fund (IMF) and global investment bank Nomura predict a 7% GDP growth for India in 2024.
Compared to other countries India’s peak inflation rate was 7.8 percent. As inflation surged way beyond the central bank’s 4% target, the Reserve Bank of India raised the benchmark policy rates by only 250 basis points since May 2022, compared to other countries which still have to keep on raising interest rates. Capital investments are now 30% of India’s GDP, the highest in a decade. In terms of financing renewable projects, India is accelerating with banking institutions focusing on green financing as a huge opportunity.
Another reason for relative constructive optimism is India’s strong digital infrastructure which has provided room for innovation and applications. India’s success in creating a comprehensive Digital public infrastructure (DPI) through its essential set of open Application Programming Interfaces (APIs) – the Aadhaar (a 12-digit unique identity number), Unified Payments Interface, digital verification by financial institutions or eKYC, and DigiLocker for digital access to documents. India is continuously leveraging this network of digital infrastructure for financial inclusion targets and profound economic transformation.
According to a recent Bloomberg report, “foreign investors pulled a record amount of money from China” in the April-June period, reflecting deep pessimism about the world’s second-largest economy. Given the trend of decoupling from China, as nations look to supply chain decentralisation options, mitigating risk from a geopolitical perspective is their priority. In addition to Southeast Asian nations India is considered the best place to manufacture. There is speculation that India could see the highest foreign inflows among countries in the Asia Pacific region. In a bid to strengthen economic alliances, India is pushing for free trade agreements and in some cases local currency settlements.
In addition to India’s digital infrastructure, its huge consumer base makes it attractive for investors and manufacturers. India must make more broad-scale investments in climate mitigation, education, and skill development. These will be critical for India’s future growth. Overall India is one of the few areas where the world can look to find a source of optimism, investment, innovation and the right kinds of future investment when it comes to human capital
In an interconnected world, India may not remain immune to the global downturn, be it financial or those triggered by conflicts. As the size of India’s economy grows, its interactions with global economic processes are becoming more complex, and it needs to prepare. India is trying to balance out issues like technology uncertainty, value chain complexity and strategic requirements. For now, it looks as if the polycrisis may delay, but not deter India’s economic advance.
Vaishali Basu Sharma is an analyst on Strategic and Economic Affairs and she has worked as a Consultant with the National Security Council Secretariat (NSCS).
