The Big Picture: Localising Globalisation

• 29 Apr 2020

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 localisation of supply chains and stricter immigration controls.

Trends in Globalisation in Recent Times

• Global financial crisis: The financial crisis that began in August 2007 and intensified in the fall of 2008 pushed the global economy into a severe downturn that came to be known as the Great Recession.
  
  • World trade collapsed at a pace unseen since the Great Depression of the 1930s.
  • The protectionist instincts invariably come to the fore and concerns rose that it may lead to deglobalization—a reversal of globalization.
  • With few exceptions, the trend of slowing world trade and growing protectionism has since continued and the pandemic threatens to make it worse.
• US-ChinaTariff war: US President’s imposition of tariffs on China resulted in the US-China trade war.
  
  • This disrupted the global supply chains and gave birth to the possibility of these supply chains outside of China to more competitive markets.
  • The pandemic will now ensure further diversification of global supply chains.
• COVID-19 induced disruption to global supply chains: The geopolitical watchdogs at The Spectator Index noted that Japan’s government would spend upwards of $2 billion helping its multinationals leave China.
  
  • U.S. companies are leaving, too, even though there is no official push to do so.

Globalisation

• It refers to the economic, social and political integration of nations. It entails the spread of products, technology, information and jobs across national borders and cultures.
• In economic terms, it describes an interdependence of nations around the globe, fostered through free trade.
• Globalisation can be further divided into subcategories based on its time frame and focus areas:
  
  • Globalization 1.0
    
    • It was pre-World War I globalization, which was launched by a historic drop in trade costs.
    • This globalization came with almost no government support and was without global governance.
  • Globalization 2.0
    
    • It is the post-World War II phase where trade in goods was combined with complimentary domestic policies.
    • The market was in charge of efficiency while the government was in charge of justice.
    • It saw the establishment of institute-based, rule-based international governance, specifically the United Nations (UN), International Monetary Fund (IMF), World Bank, World Trade Organisation (WTO, earlier GATT), International Labor Organization (ILO) etc.
  • Globalization 3.0
    
    • It created a new world of manufacturing in which high-tech was combined with low wages.
    • This was achieved through establishment of global supply chains as factories crossed international borders.
    • It was variously called New globalization, Hyper globalization, Global value chain evolution.
  • Globalization 4.0
    
    • It is the latest stage of globalization which involves cutting-edge new technologies like artificial intelligence (AI) that powers forward with the explosion of information technology.
    • These technologies shrink distances, open up borders and minds and bring people all across the globe closer together.

Self-Reliance: Possibilities and Challenges

As the majority of the businesses worldwide face disruptions and economic fallout after the COVID-19 pandemic, India will have the opportunity to build an economy that is more resilient, diversified, and attractive to the global manufacturers and services. India with its large population has a big potential to become the manufacturing hub of the world.

• Identify Core Sectors: Indian companies need to re-look at their supply chain and start building domestic capacity for essential products to reduce dependence on China.
  
  • There is a need to identify and enlist core sectors in which India can become self-reliant and design a strategy to replace too much reliance on China for the imports, particularly Pharma APIs.
  • Shifting the supply chains from China may also offer FDI opportunities.
  • Such industries where we have to become more independent and where there is too much monopoly for example- APIs, support needs to be provided in the form of limited, sector-specific, and focused protection.
• Automation: With COVID-19 every industry will become less labour dependant and more automated.
  
  • Labor-intensive sectors will take a hit.
  • Therefore there’ll be a need to produce more and more skilled labour force that could handle basic machines.
• Liquidity crunch: Businesses have started facing massive working capital/cash flow issues due to lockdown and they will continue even post that because of reduced demand. MSME and startups are the worst hits.
  
  • The liquidity needs of companies need to be addressed to help them remain solvent. Though the government has started taking steps via SIDBI to help MSMEs, we still need to do more.
• High taxes and competitiveness: The issue of higher taxes, credit risks, and liquidity crunch will be some of the glaring issues that need to be resolved in a time-bound manner.
  
  • The new policy to offer a reduced corporate tax rate of 15% to new manufacturing facilities set up after October 1, 2019, should attract people to set up manufacturing in India.
  • Cheaper credits and lesser taxation needs to be provided to ensure the level playing field for manufacturers in India.
  • India needs more open trade and investment policies to drive competitiveness

Way Forward

• De-bureaucratisation: India needs to put in place such policies that improve its competitiveness, de-bureaucratise some sectors such as agriculture, and make labour laws less complicated. A holistic and easily accessible ecosystem, from the procuring of raw materials to the outlet of finished products, must be made available.
• People-centric policies: The only way to trigger employment is to step-up value addition in the local area. There is a need for such people-centric and sector-specific policies in order to accelerate growth.
• Alternative global alliance: India has till now lead by example in its handling of the pandemic. The sudden call for a video-conference by Indian Prime Minister, with SAARC leaders to chalk out a common strategy to fight COVID-19, sets an example to the world.
  
  • India needs to now move beyond regional alliances and look forward to a cooperative alliance between like-minded countries in terms of trade such as the USA, EU, and Japan, to figure out an alternative to break the hegemony of China in the global supply chain.
  • India needs to expand its cooperation programs into a global effort by engaging in the multilateral development of solutions to global policy challenges and share lessons and experiences to progressively strengthen public systems and state institutions worldwide.
• Promote R&D and capacity building: There’s a need to prioritise building capacity and policy framework to become cost-competitive and quality competitive.
  
  • Enhance domestic consumption as well as put thrust to increase exports and promote research to become more independent. India needs to plan now for the next 20 years.