Analysis of India's economic situation has tended to conflate several different themes. The immediate problem is, of course, the Strait of Hormuz stand-off. The rupee's decline in value is its most visible symbol. An energy and commodities shortfall, remittances and exports concerns, amid demand destruction, have heightened fears of inflation and growth shock.
India is not alone. Across Asia and further afield, countries have suffered similarly. Petrol prices have spiked even in the US, which had presumed it was insulated. To be fair, India has managed fuel scarcity better than many others. Take LNG. Interruption in supplies from Qatar and the UAE has significantly - but not entirely - been made up by a diversity in sourcing: from the US to Nigeria and Oman.
The Modi government's economic diplomacy has been responsive. Relatively speaking, it has shielded India, at least so far. Not all assessments have been as generous. Some have brought up broader challenges. Others have been opportunistic and selective.
There have been calls for 'reforms' to make India attractive for FDI. But criticism has often been unclear and non-targeted as to what 'reforms' are being recommended. More to the point, even if every possible reform is implemented, is the global market conducive to rapid FDI inflows? Demand tepidness and uncertain business environment have made capital conservation a pressing imperative. This is true for nations, companies and families alike.
The trendline was apparent even before February 28. Since then, it has accentuated. Other than when politically unavoidable, as in the case of FDI into the US, ambitious investments are being delayed. The only sectors drawing money are the AI ecosystem, including the semiconductor stack, and commodities, driven by critical minerals and metals. India offers limited opportunities here.
FDI caution has been complemented by domestic investment wariness. There are many reasons for this. Repeated, post-2020 external disruptions are among them. There is also an intergenerational affliction that has hit India's traditional industrial families. Younger members are content being passive investors rather than entrepreneurial risk-takers, preferring the offshore family office to the shop floor. Concerns about being hoovered by better-connected national champions offer an additional and legitimate conundrum.
Finally, there is the elephant in the room: the 1991 model is, if not dead, on life support. The promise and principles of the liberalisation moment are not fit for purpose today. It could be argued that the 1991 reforms were never implemented in their truest social and economic expanse. Nevertheless, the essential bet that the state would build infrastructure, undertake factor market reforms, and construct an enabling environment for Indian and international companies to compete, industrialise and manufacture for an export market, in a world marked by trade idealism, no longer holds.
Given this investor caution, who takes the risk in key, long-term sectors, especially those with a strategic edge as well as challenge: energy, green tech, quantum, semiconductors, critical minerals and mining, even large defence platforms? A role for the state is inescapable. This might run counter to the orthodoxy of the past three decades but, as Keynes famously said, the facts have changed.
If industrial policy and taxpayer subsidies, such as through the PLI scheme, are an undeniable feature of the contemporary economy, shouldn't the public exchequer take some of the equity and, thereby, a more direct stake? When even the US government is acquiring a strategic shareholding in critical corporations, this is a workable proposition.
There are two points to consider:
- Domestic resilience needs to optimise both a horizontal spectrum and a vertical depth. Patient investment will require the state to absorb risk. There are several models before us, including the PSU approach that built three steel plants in a decade in the 1950s, but subsequently fell victim to bureaucratic and ministerial capture.
The Maruti Suzuki example of the 1980s offers another template. B2G technology sharing, as well as regulatory navigation for a project prioritised by the government, nurtured a components ecosystem that became the mainstay of a larger auto industry a decade on. To a degree, these impulses still hold.
Even today, the BPCL refinery in Andhra Pradesh - which will likely bring in a strategic investor from West Asia - is a case study in public assumption of a long-term bet. The Modi government's Bharat Global Port consortium is more likely to put public money behind part-ownership or management of ports in, say, southern Europe - as part of India-Middle East-Europe Economic Corridor (IMEC) - than a private player, constrained by capacity and near-term return on capital.
- If government monopolies were a bad idea, narrow-focused national champions, scaffolded by taxpayer subsidies and limited competition, are not the solution either. India needs industrialisation as well as competition. If private and international investment doesn't create it, intelligent state interventions should engineer it.
Will this lead to the bad old PSU era? Not necessarily. And the fear we can't craft a new model shouldn't inhibit us. Government stakes in strategic SPVs could eventually be dispersed to widely held ownership of professionally-run companies, deploying an IPO and equity market capability absent in an earlier age.
This might not be the only - or even the best - answer, but we need to start asking the question. The 'reform and they will come' architecture is past its sell-by date.
