The Indian presidency of the G20 is happening it an extremely critical juncture. The global economy is facing multiple shocks and several G20 member countries are likely in the brink of recession. At the same time, the global economy has now entered what can be described as the beginning of a major structural transition.
The current economic challenge facing the global economy is a result of government policies for post-pandemic economic recovery that led to inflationary pressures in many developed economies, and supply-shocks resultant for the conflict in Ukraine that has severely disrupted energy and food supply-chains, and Covid resurgence in China that negatively impacted several manufacturing sector supply-chains given China’s disproportionate dominance in some key manufacturing sectors.
These immediate term challenges are in some ways indicative of the longer-term transition. Major economies are increasingly focused on addressing supply-chain vulnerabilities due to over-dependence on one or few suppliers, especially for critical goods and raw materials. They are also focused on developing new sources of growth and employment with a lot of focus on technology and innovation. A related but critical objective would have to be sustainability, i.e. economic growth cannot be at the expense of the environment.
Prime Minister Narendra Modi has clearly indicated that India will harness its G20 Presidency to forge constructive and consensus-based solutions to these multiple challenges, with promotion of inclusive growth and financial inclusion being a critical objective.
India, the world’s third largest economy in Purchasing Power Parity (PPP) terms occupies a central role in the longer-term transition, and provides a great example of pragmatic economic policy management to meet the more urgent challenges that has been facing the global economy in this post-pandemic period.
This paper would draw on some of the key themes in economic policy, both from the shorter and longer term perspectives that would be important for the G20 leadership to address, and the opportunity it represents for India’s thought leadership and policy design. It Is important to underline that India is unique in placing the G20 meeting in moral context of globalism driven by common values of shared humanism “One Earth, One Family, One Future.”
Efficient Management of Economic Shocks Through Effective Targeting
Realizing that the pandemic was a combination of both demand-shock that would have its most serious impact on India’s poor, and supply-shock that would lead to inflationary pressures that would again hit the most vulnerable consumers and businesses the most, it resisted a strategy based purely on income transfers, easing of credit, and increased government spending.
Instead, it paid serious attention to removing supply side constraints, supporting industry through increased liquidity, while also undertaking the world’s most ambitious and well targeted support to its poor through in-kind transfers of essential items to cushion the impact of the demand shock.
Three Important lessons emerge from the Indian approach, all of the three related to this simple idea of effective targeting. First, India chose not to simply pump money and provide credit and liquidity into the economy that has led to inflationary pressures in many G20 economies. An added disadvantage is that sometimes the most vulnerable participants in the economy, i.e., the MSMEs do benefit substantially from such a generic poorly targeted approach. Some of the key policy interventions during the pandemic was targeted at MSMEs, from easing access to credit, to ensuring that dues owed to MSME firms are cleared expeditiously to protect from extended negative cash flow exposure and therefore the vagaries of a high-cost short-term credit market. More on this would discussed later.
Second, was the micro-targeting of benefits to alleviate the demand shock. Direct transfer to beneficiaries using technology and focusing on in-kind transfers, i.e. food and other essentials ensured that the most vulnerable sections of society were cushioned to the extend possible for loss of livelihoods during the pandemic.
Third, was continuation of targeted government spending on projects with longer-term transformational benefits. Sustained push on infrastructure development not only help generate demand for a lot of key industries such as steel, cement, and heavy engineering, it was a source of job creation in local economies where such infrastructure push was taking place. But it was just not physical infrastructure. Key social infrastructure projects such as ‘Har Ghar Jal’ that aims to connect all Indian households with piped potable water were implemented in a war footing despite the pandemic. This is a great example where social inclusion goals were not sidelined due to economic crisis, and de-prioritized as a secondary agenda to economic growth.
All of these targeted interventions were made possible precisely because of the transformational Jan Dhan, Aadhar, and Mobile (JAM) initiative. The vision of the JAM initiative created the ‘infrastructure’ for inclusive growth leveraging digitalization, the topic of our next section.
Digitalization and Economic Development
Digitalization has become central to solutions for equitable growth and inclusive public response, whether in dealing with emergency situations like the pandemic (for e.g., Arogya Setu), or in general addressing issues of inequity in access to public services (for e.g., JAM trinity). Digital technologies are also central to global value-chains in manufacturing and services. The pandemic only expedited the range of digital solutions being used in the workplace, whether it is the office or the factory floor.
Digitalization represents a huge opportunity for all G20 economies. Today, occupational functions ranging from remote monitoring of patients, managing large engineering systems in factories, diagnosing patients, or managing an arbitration process can all be done online. This extends to providing tuition lessons or yoga instruction, editing a film, or being an executive assistant. All this can all be remotely done. Much of this is already happening and getting mainstreamed.
Add to this the increasing use of apps and big data analytics in day-to-day lives. Entire industries such as travel, leisure, urban transport, food, retail, and entertainment are dependent on such digital solutions. All of this requires human resources in the IT and advanced specializations like AI and data analytics. This means that countries with younger skilled populations like India will leverage digitalization to leverage job opportunities anywhere in the world while continuing to stay and work out of their own country. On the other hand, developed economies with ageing populations and worker shortages will be able to hire workers globally without having them physically immigrate to their countries.
But digitalization has its own challenges that need to be overcome. Digital systems like Aadhar and associated Jan Dhan accounts represent sensitive personal and financial data that can be misused by unscrupulous elements. Similarly, apps that provide services, entertainment or social media interaction can all be potentially used by unscrupulous elements to steal data that compromises individuals, firms or even governments.
The challenge for digitalization is therefore how to protect data but without impeding its flow that is crucial to developing the solutions that lead to innovation, growth and inclusion. Here too, Indian digital governance models can offer interesting examples. The use of simple measures like OTP and biometrics in a large-scale in applications
Preventing the cross-border flow of data is simply not an option. Some studies indicate that a combination of strict data restrictions and localization could lower GDP by as much as 2%. But complete free flow of data without necessary due diligence possible as this could not only compromise personal data leading to instances of fraud, online theft, identity theft that can be used nefarious activities like digital terrorism, it could overall compromise on national security.
Some regimes have actively backed digital piracy, data theft and theft of technology and digital innovation as a policy for economic gains, or at least have shown intentional indifference to controlling such activities emanating from their countries. India has again shown a pragmatic but firm approach to this question of data. It has shown itself willing to consider free flow of data with some necessary restrictions with countries based on mutual trust, it has also not been shy in banning certain apps and service providers-the most popular example being TikTok, to protect its digital sovereignty and national security. Not surprisingly, fellow democracies like the US are now endorsing the move and following suit.
The G20 therefore offers India an excellent platform to drive the trajectory of the global digital economy which will be integral to future manufacturing and services value-chains and expected to be worth between 16 to 20 trillion USD by 2023. Most importantly, it also allows India to provide a voice for digital inclusiveness, and for demonstrating the power of digital innovations to help citizens at the grassroots. In a world defined by endemic digital inequity-4 billion global citizens do not have access to digital resources and close to 2 billion global citizens do not have bank accounts even today, India’s leadership can provide a bridge for a more inclusive digital economic revolution
An Equitable and Fair Global Trading System
Developing an genuinely equitable and fair trading system requires development of institutions that restrict unfair practices and reduce barriers for small and medium enterprises from participating and gaining from the global economy. This would require reforming existing institutions that have often failed to address unfair trade practices, especially by large dominant economies and firms.
It will also require providing financial inclusion for MSMEs. Without access to capital at competitive interest rates, MSMEs will not be able to upgrade, upscale and manage the costs of participating in a global economy with all its complexity.
An increasing concern for India, shared by many other G20 member states is that dominant economies like China have often skirted around international rules of the trading system and indulged in unfair practices. This is especially true in non-market economic setting where the state is integral to business. A non-market economy with a dominant state does not have to use market based instruments like export controls or import duties to regulate access to their domestic markets or prevent exports. This means that international trade agreements under the aegis of the WTO will be in no position to act against such measures as they are hidden and largely executed through informal channels of control as opposed to explicit public policy visible to all.
But even large market economies can use an array of sophisticated technical barriers to trade based around product standards, environmental measures, and consumer protection that substantially increase the cost of accessing their markets, especially for MSMEs from developing countries. Such behind the border regulatory measures also act as major barriers to services trade.
While the international trading system, especially the WTO, has been very adept at addressing tariff barriers, it has largely been unsuccessful in addressing the costs imposed by technical and regulatory barriers. It has also completely failed in identifying and addressing the ‘hidden’ non-market trade barriers that depend on ‘instructions’ from a dominant government as opposed to explicit legal directives in public domain.
The Indian G20 presidency provides a platform to develop dialogue and cooperation on these issues, and to convince dominant players in the global economy that investing in a fair and transparent rules-based trading eco-system is in global interest. Predatory unfair practices or reliance on technical and regulatory barriers can only backfire. It also provides an opportunity to move the narrative away from focusing entirely on tariff based protection, which is the most transparent way of restricting market access, to the more sophisticated and less transparent trade barriers. The focus on tariff disproportionately impacts developing economies and LDCs who do not have the regulatory strength or sophistication to impose non-tariff controls.
Inclusive Globalization: Supporting MSMEs
The Government of India under Prime Minister Narendra Modi launched the MUDRA scheme to address the long-standing challenge of MSME access to credit at fair and transparent interest rates. MUDRA was announced in April of 2015. In November same year at the Antalya G20 Summit in Turkey, the G20/OECD High-Level Principles on SME Financing was announced. There are 11 high-level principles included in the declaration. These include:
- Evidence based identification of SME financing needs
- Strengthen SME access to traditional banking sector
- Enable SME access to non-traditional, non-banking financial services
- Promote financial inclusion for SMEs, including for informal SMEs
- Design regulation that supports development of adequate financial instruments for SMEs, but also protects investors
- Improve transparency in SME finance markets
- Improve SME financial skills
- Adopt principles of risk sharing for public supported SME financial schemes
- Encourage timely payments in commercial transactions and public procurement
- Design user-friendly and cost effective public program for SME finance
- Monitor and evaluate public programs to enhance SME finance
The MUDRA scheme, that was launched 7 months before these high-level principles were announced at the 2015 G20 meeting, not only included all of these principles in its design, but goes beyond in terms of leveraging technology and data to inculcate much greater transparency in SME credit transactions and ensure that SMEs have a much better chance of getting a fair assessment from lenders. India’s thought leadership on this issue in the G20 is fundamental fact.
It is critical to note that PM Modi took personal leadership in pushing public sector entities to clear MSME dues in timely manner to ease their cash flow and reduce their need for credit. The innovative use of digitalization to provide user friendly loan application processes or develop comprehensive credit ratings represent the effective use to technology to create a more democratic and equitable business eco-system that allows even small entrepreneurs to dream big and aspire for growth.
As the world grapples with ‘poly-crisis’, the urgency to find the right solutions for robust, inclusive and sustainable growth is an acute necessity. India is leading the G20 at this critical juncture in history where we are witnessing the final stage of upending of the global economic order that emerged from the ashes of the Second World War. India is ready to stand tall and take up this responsibility, not just in terms of mere words or slogans, as it often used to during the high-point of ‘third-worldism and non-alignment’ of the 1960s and 1970s, but in action. India’s lived policy experience, and PM Modi’s ability to bring different perspectives together to form action-oriented agendas bode well for positive outcomes. This is not arrogance or self-assumed importance, as some pseudo-intellectuals seem to think, but self confidence of a nation claiming its rightful place under the sun. After decades of top-down economic policy direction and guidance from the ‘west’ to the ‘rest’, it is time for change. And what better platform then the G20 that was formed precisely because of the first major shocks to post World War economic structure in 1999, and regularized as an annual summit after the next jolt that came in form of the financial crisis in 2008. And what better chair than India that has consistently upheld its right to an independent course, in thought since its inception as a modern nation state in 1947, and in action since 2014.