Opinion Two sides of a coin

Any global company will tell you that dealing with the state as a customer is not easy at the best of times. The Indian defence establishment has its own biases flowing from legacy issues. Some of the American frustration in this regard is evident in the WikiLeaked conversations on the India-US engagement.

So here is the paradox. A capitalist system,which America characterises,is having to deal with the Indian state as a prime customer to bring about a quantum leap in its trade with India. In sharp contrast,communist China will increase its trade with India to $100 billion by 2015 largely by selling power,telecom and other infrastructure equipment to our top private sector companies. In fact,private sector power companies are even getting loans on easy terms from Chinese banks to buy power equipment from their leading state-owned companies. So much so that the Indian government is now apprehensive that Chinese banks could have a lien on massive power sector assets that India would build over the next decade. A rough estimate suggests that nearly 20 per cent of all power capacity over the next five years could be based on Chinese equipment,much of it funded by their banks. Also,most of the leading Indian telecom companies are placing orders with Chinese 3G hardware manufacturers as they are the cheapest and the best. It is obvious that the Chinese companies are far more competitive and have taken leadership position globally in many sectors which were dominated earlier by the US,Europe and Japan.

However,the scary after-effects of the 2008 global recession,with persistent unemployment in America and large parts of Europe,is making the West rethink the way it traditionally looked at the global economy. For instance,when Obama visited New Delhi recently,one clearly got the sense that the US wanted a special knowledge partnership with India to ensure that America maintains its technology leadership in the next few decades with India benefiting equally from that. The Americans now fear only one thing — that China with its ever increasing expenditure in cutting-edge research in new technology frontiers like green energy will skew the global economic balance further away from the West.

Similarly,the European Union has also figured that it has to open up far more to enable movement of capital and labour across Asia in order to stay in the global growth game. It is this realisation that has made the EU negotiate a comprehensive economic cooperation agreement with India which would involve a much more liberal work visa regime for Indians seeking to provide temporary services in Europe. This would have been unthinkable a decade ago when Europe thought it was enough to be engaged in trade and investment interaction with the US,its biggest trading partner. This mindset has undergone a 180-degree change.

After the global crisis,the biggest attitudinal shift has happened in the case of Japan. Suddenly Japan has also realised that much greater openness may be needed on its part to bring the global economy back on the rails. Japan is also close to finalising a comprehensive free-trade agreement in goods and services with India. Again,it was unthinkable a decade ago that Japan would open up its labour market to Indian workers. The Japanese are also open to allowing Indian generic drugmakers to sell in their country,which has an increasingly ageing population. In some ways global demographic changes are also causing old attitudes to be reviewed comprehensively. The massive reconstruction project following the devastation of that country caused by the recent earthquake and tsunami will only further reinforce Japan’s need for a deeper economic engagement with the rest of the world.

Overall,there has been a decisive change in the mindsets of the OECD nations as they are being forced to think differently to stay entrenched in the global economic sweepstakes. The US will be particularly conscious of some key lessons it has learnt from history. This has been brought out very lucidly in an article in Foreign Affairs by Liaquat Ahmed. He talks about how global policy-makers can avoid the pitfalls of the 1930s when the Great Depression had caused nations to look inwards as they erected trade and investment barriers,imposed capital controls and this ended up deepening the crises further. The global economy could not be repaired for a full 12 years until 1942 when the Marshall Plan finally came to the rescue of a vastly damaged Europe and US.

Unemployment levels in many Western economies were above 25 per cent then. Things are not so bad today but we do have unemployment levels of 10 to 20 per cent persisting in many developed economies. Besides,Ahmed says a truly visionary leadership has to be displayed by some big economic powers to ensure the current currency war in the midst of an uneven global economic recovery does not degenerate into nations erecting fresh barriers to trade and capital flows. So far there are no signs of this happening and the US has shown appreciation of lessons learnt from the 1930s. Of course,the joker in the pack remains China which has no capitalist history to learn from! And India is in the middle of all this action.

The writer is Managing Editor,‘The Financial Express’