“Expecting the unexpected”
Indeed, while wars do reflect the worst in humanity, the desperate circumstances surrounding them have historically triggered or kick-started many path-breaking innovations/ developments, arising from ingenuity of the human mind. As the war drags on in Ukraine, there are jitters being felt across all walks of life. Scourge of inflation means that Central Banks have had to tighten monetary policies, even as the global growth outlook is clouded by geo-political uncertainties. However, what’s worth remembering is that if one goes by history, the world will not only find a way to tide over this crisis but would also come up with game-changing ideas along the way.
Looking back at Covid and its repercussions, as things stand, the next few years could actually define the course of history for a prolonged period of time. First few months of this ongoing conflict have already shown that going forward there could be less reliance on physical warfare and more on the economic one. This, in turn, could result in formation of newer economic blocs and change the course of globalisation as we know it. Supply chains disrupted due to the pandemic have been further strained owing to the conflict and countries around the world are increasingly averse to the idea of economic dependence on countries with divergent security interests and differing ideologies. In this regard, India stands out as one of the natural alternatives to fill the void left on the front of food security, by Russia and Ukraine, and in manufacturing, by the post-pandemic China+1 tilt.
Apart from the threat to food security, another major fallout from the war has been the threat to energy security. The sharp spike in energy prices has had a crippling effect on many economies. Consequently, this could compel everyone to rethink how energy is produced and consumed; and more importantly, lay emphasis on reduction of dependence on fossil fuels.
This, in turn, could accelerate tailwinds for renewable energy at a time when concern over climate change is already making the world sweat. Goes without saying that this change will not happen overnight as the immediate focus will be on energy security instead of clean energy.
For instance, the recent power crisis has made India turn once again to coal. Notwithstanding the recent softening of commodity prices; years of underinvestment may keep prices structurally elevated. Higher commodity prices, energy transition, supply chain re-alignment, along with the political desire for higher defence spending, by almost every country, could trigger a significant capex push.
In a side story of sorts, the fate of the US dollar has become the cynosure of all eyes in the world of finance. Recent turn of events, coupled with the US’s declining share in global trade and changing geo-political equations have raised apprehension about dollar’s hegemony. However, the US dollar has benefitted from the apparent lack of alternatives at this point in time. The relative preference of most countries to politically align with the US, instead of an alternative like China, along with relative ease of access to American capital markets and a hawkish US Fed have aided the dollar’s cause. All said and done, one may have to “reserve” one’s judgement on the world’s reserve currency for now. India’s sizable forex reserves should help stave off a significant threat to rupee stability. While India won’t remain insulated from global developments, India continues to remain better positioned as compared to other emerging markets at this point. Rapid digitalisation, strong tax buoyancy (growth in tax collections nearly double that of Nominal GDP growth for FY22), Services exports at record high (FY22), healthy balance sheets of corporates and banking sector, policy reforms, formalisation of economy and push for privatization and capex hold India in good stead.