Opinion India’s second 1991 moment

The instruments for displacing the US and achieving hegemonic status are a large and educated population and a mercantilist economic policy. The dictionary (AI) defines mercantilism as “maximising a nation’s wealth by promoting exports, limiting imports, and accumulating reserves”. In 2010, China’s consumption-to-GDP ratio was 35 per cent. On every criterion, especially on the joint criteria of mercantilist indicators, China holds the world record for the level and the length of time it has maintained mercantilist policies.

These policies have been successful. In 1960, the US was the only country “standing” post the devastation of World War II. With the rest of the world either poor or devastated, the US share of manufactured goods exports (MGE) reached 25 per cent. In 1996, 18 years after China began its economic reforms, China’s MGE share was just 4 per cent. Today, this share is 30 per cent with the rest of the world richer and more advanced than it has ever been.

The US reaction to the emerging hegemon? Bipartisan support for actions against China’s trade policies via Trump I. In 2021, there was widespread expectation that Democrat Biden would abandon this anti-China inheritance. Instead, to the surprise of many, Biden doubled down on Trump’s China policy.

Then came April 2, “Liberation Day” (liberation from what, one might legitimately ask!), and mighty tariffs were announced for all countries — allies and foes, and even those with just penguins. It was only on April 9 that the anti-China focus of the tariffs became obvious. That is the day when the US policy of containing China became exposed. Ten per cent tariffs for all, and 125 per cent for China.

The one country for which April 2, 2025 can be a liberation day is India. Liberation from what? Our very own homegrown restrictive policies on trade (internal and external) and foreign investment.

Why has India not reformed policies related to trade and investment (FDI)? Lazy and deep comfort. India has grown at 6.2 per cent per year for the past 33 years, and our politicians and the Deep State oligarchs have noted that existing policies allow for good performance. “Don’t rock the boat” is the mantra.

As exemplified by our “new” FDI policy. From a level of 2-2.5 per cent of GDP for the past two decades, FDI has fallen to less than 1 per cent — the same level as in the late 1990s. What killed FDI? Comfort. The Modi government introduced a “model” bilateral investment treaty (BIT) in 2015 which required that if the two firms (one domestic and one foreign) wanted to divorce, they would have to go to an Indian court for the terms of disengagement. The assumption was that there was so much excess demand for investment in India (for much the same comfort reasons outlined earlier) that foreign firms would be willing to pay any price (including an Indian court arbitration!) to enter the Indian market. Super comfort. Now, it is well known (and recent events have reinforced this bias) that Indians prefer non-Indian courts. So why would foreigners not feel the same? They felt the same and exited in hordes.

In 2010, post the great financial crisis, China decided to move up the value chain, that is, leave the manufacturing of lower-valued manufactured goods to other countries, for example, Bangladesh, India, Mexico and Vietnam. Other countries accepted the challenge, we did not. Comfort.

Doubling the comfort of the Modi regime is the fact that the political Opposition is divided, in disarray and lacking leadership. Our major industrialists are not for reform because reforms provide competition and dent their existing easy profits.

Thus, our political economy is against economic reform. Non-economic reforms are needed and come with no cost; indeed, negative cost. Hence their popularity. Why take a risk with economic reforms? Recall how opposition to the farm laws in 2020-21 was able to prevent this much-needed reform.

But times are changing and forcing India to emerge from its economic comfort slumber. Trump is demanding industrial and agricultural reform. This exogenous shock provides a convenient “helplessness” excuse for the government to take the reform plunge. The risk for reforms is now reduced, if not negative.

The Western world needs India as a counterweight to the Chinese dragon. South Asia is the only region with a labour supply that is expanding, albeit at a decelerating rate. This is the demographic dividend, and it will last at least another decade. Pakistan and Bangladesh will take some time to join.

India now has the educated and AI-capable workforce to (nearly) match China. It is just a matter of a few years before India’s educated prime-age (25-54 years) labour force exceeds that of China. Never before have India’s economic stars looked so bright. China knows it and the West knows it. Does India know it?

The choice for India is clear. To keep comfortably growing at 6.2 per cent or accelerate GDP growth to the range of 7.5-8.5 per cent (given normal world conditions) by opening up on trade and FDI and ensuring deep deregulation. It is comfort that kills reform, and indeed induces anti-reform.

The wait for the reforms is likely to be short. India-US are negotiating a BTA that is scheduled to be completed in the next few months. The India-US BTA will likely be the model for BTAs with the UK and EU, which are also under negotiation. In a few months, India can move towards a reformed industrial order. My bet is that it will. The second 1991 moment is nigh.

The writer is former executive director, IMF. Views are personal