India has a potentially big role to play on the world stage but cannot do it without inclusive democracy at home.
The world in 2023 is altogether different from the world in 2022. In terms of global interest rate regimes, capital availability, the energy-climate configuration, geopolitics, and the premium impactful action by a nation puts on its internal, democratic cohesion. For India, this is both an opportunity and a threat.
In the context of a proxy war between the US and the successor state to its former Cold War rival, India discovered new-found salience for its long-standing policy of non-alignment and is today poised to play a catalyzing, if not decisive, role in ending the war in Ukraine. So, however, is China, with its far greater economic and military clout. What could give India a slight edge over China in playing peacemaker is its standing as a democracy. If that is exposed as being procedural rather than substantive, that edge will disappear.
Inflation in much of the world, particularly the US and Western Europe, has put an end to a regime of near-zero policy rates in these capital-exporting economies. At the beginning of 2022, the US Fed’s discount rate stood at 0-0.25 percentage points. It had risen by 4.25 percentage points by the end of the year. It could rise further, as inflation sustains. Low unemployment rates make for a tight labour market, in which workers wrest wage increases to offset inflation. Rising wages put pressure on companies to pass these on to consumers as higher prices for their products and services.
Only immigration can bring some slack in the labour market and ease upward pressures on wages, inflation, and the policy rates of central banks. However, immigration is a dirty word in Western Europe and the US, with Canada and Australia alone managing to take in people without too much opposition from their citizens.
This has implications for countries such as India. When the risk-free interest rates on government bonds in the US and Western Europe were very low, the rich world’s asset managers, saddled with the responsibility of generating decent returns on the pension funds of fast-aging populations, had the incentive to invest in economies like India, with high growth potential, even if relatively high inflation and consequent weakening of the local currency diminished the dollar return on such investments.
With the rich world government bonds yielding rates significantly higher than zero, the incentive to send capital to emerging markets comes down. China’s authoritarian government’s unpredictable policies towards the tech and real estate sectors and in dealing with Covid have made the world’s biggest emerging market lose appeal. India, with its democratic polity and more transparent, predictable decision-making processes, shines by comparison. Similar considerations apply in the case of FDI as well.
Last year, the energy-climate configuration regressed. Even as the effects of climate change are now more widely understood – killer blizzards, prolonged droughts, forest fires, heat waves, once- in-a-century floods, the sea’s voracious appetite for the coast and vicious cyclones have a way of making themselves noticed – green-minded Europeans have been burning lignite, thanks to the energy shortage caused by Western sanctions on oil, gas, and coal from Russia.
Europe has been buying up all available gas from West Asia and the US and locking up investment in long-gestation infrastructure for LNG. This prolongation of hydrocarbon-based energy makes a paradigm shift in combating climate change imperative: from curbing emissions to large-scale CO2 removal (CDR) from the atmosphere.
The rich world should shoulder the bulk of the responsibility for CDR. It will not do it on its own. Pressure must be mounted by the developing world. India would be an ideal candidate to lead such a campaign. Again, this hinges on India’s standing as a democratic giant, able to carry along other developing world majors and taken seriously by the rich world. To play this role, India needs not just electoral democracy but democratic social development, to realize its potential as a climate innovator.
Basic food security, freedom from malnutrition, clean air, and clean drinking water are prerequisites for public health. Healthy children need mental stimulation in their infancy and good instruction at school, to teach them to become lifelong learners.
India’s traditional attitude to knowledge is that it is finite, pre-existing, and disseminated by hierarchy and privilege. Only by replacing this with the modern understanding that knowledge is ever-expanding, and research, broad-based, can India produce scientific discoveries and innovations in technology and business models on the scale required.
India needs to be self-reliant in technologies vital to retaining and expanding strategic autonomy, without any delusion that someone would be ready to transfer vital know-how and kit when India needs them. This, again, calls for democratic, inclusive social development.
To stand up to the challenge posed by China, India needs broad-based, sustained growth, to generate the resources to invest in strategic capacity and economic growth. That is not possible, without internal cohesion and harmony.
This article was also published by The Sanjay Report as No Global Role for India Minus Substantive Democracy on January 4, 2023.
More by the author: As we enter 2023, Recounting the Watershed Janus faced 2022.