India and a possible retreat from globalisation

June 19, 2017

By Peter Enderwick

Flag of India

Image credit: Flag of India. (c) Yann Forget / Wikimedia Commons / CC-BY-SA-3.0

The past 30 years have brought strong economic growth due, at least in part, to increasing trade liberalization and globalisation. One of the distinctive features of this period has been the higher rates of growth enjoyed by so-called emerging markets, in particular China and India. Between 1990 and 2010 more than one billion people were lifted out of extreme poverty (living on $1.25 per day), with almost 140 million of those within India. The growth spurt experienced in emerging markets resulted from their increased integration within the global economy and augmented opportunities in trade, investment, capital movements, and migration.

But in 2017 it appears there may be a slowing down or even a reversal of the processes of global integration with Brexit, and the Trump administration putting into place new restrictions on immigration, overseas investment, and outsourcing. An interesting feature of the US attempts to curb globalization is the selective nature of the approach. While there are plans to restrict outsourcing and overseas investment by US firms, to reject (TPP) or renegotiate (NAFTA) trade agreements, and limit immigrant flows, there is no mention of restrictions on cross-border capital flows or inward investment into the United States. The policy seems to be founded on a simplistic view of the global economy: a view that a government can somehow restrict what are seen as the less desirable elements of globalization and that the impacts of such restrictions can be predicted and managed. Such a view seems naive in a globally integrated economy characterized by complex cross-border supply chains supported by liberal trade in components, ideas, people, and knowledge.

For India the threats of growing protectionism cast doubt on the model that has underpinned its strong growth over the past 20 years. That model was based on services outsourcing and the transfer of project workers to overseas clients. India is now the world's largest source of outsourced IT services accounting for around 70 percent of a US$130 billion market. The United States accounts for about half of India's IT exports and Indian companies work with the majority of Fortune 500 companies, contributing strongly to the competitiveness of US business. In essence, these outsourced services are complementary to US employment, not a substitute. Indian sourced IT services provide skilled labour and capacity to American firms seeking to develop new markets, products, and processes.

Proposals to restrict the H-1B skilled worker visa programme would limit the ability of Indian IT companies to provide tailored solutions to their customers in the United States. Indian IT firms have also invested heavily within the United States and a combination of restrictions on work visas and inward investment would threaten the viability of India's outsourcing strategy. Any restrictions on the ability of U.S. firms to move operations to countries such as India would also threaten the Indian government's attempts to strengthen its manufacturing sector through the Make in India initiative.

Longer term there have been recent proposals (the RAISE Act) to limit the number of legal migrants allowed into the United States and this would negatively impact on India, restricting numbers and lengthening the already substantial period required to obtain a green card. Indirectly, changes in migration levels and temporary work visas would adversely affect remittance flows to India: the United States is the second-largest source of such flows.

Opposition to these proposed moves have been swift. U.S. based technology firms are rightly concerned about the availability of foreign talent. Immigrants to the United States, and their offspring, are linked to the founding of 40 percent of Fortune 500 companies. In addition to the uncertainty that businesses face, they may find themselves forced to re-site operations to those places where highly skilled workers will be willing to locate to. It is hard to see how the United States will gain from this.

Is there any upside for Indian business? It may be that tax cuts and other reforms push up U.S. growth rates that could stimulate Indian exports of pharmaceuticals, gems, and textile products. Strategically, India could benefit, as a counterbalance in the Asian region, from U.S. concern with China's growing power. China's international competitiveness could be harmed by countervailing duties imposed because of a belief that China is a trade and currency manipulator. India is also an effective check on Pakistan. India might benefit from a strengthening of U.S.-Russian relations as India enjoys a positive association with Russia. It is likely that U.S.-Indian technological, financial, and defence cooperation will continue. Any move away from globalization might prompt a rise in regionalism and India could benefit from its links to other parts of Asia, the Middle East, and Latin America.

It is worth noting that any reversal of current trade agreements and global value chains will take time. U.S firms will likely focus initially on Mexico, where for example, General Motors has a fifth of its North American production. Building new supply bases is a time consuming process that may delay the introduction of new tariffs. However, while the immediate effects of a U.S. retreat from globalisation will be greater for countries such as Mexico, India also faces a higher level of uncertainty with selective impacts on its IT sector and labour movements. These changes may encourage Indian policy makers to also look increasingly inwards and to focus on developing its domestic economy.

A Dictionary of Business and Management in India

Peter Enderwick is a specialist in the field of international business and Professor of International Business at Auckland University of Technology, Auckland, New Zealand. He has also been a Visiting Professor at the Centre for International Business, University of Leeds, UK. He is the author of a number of books, book chapters, and articles in professional journals and has published on Indian business in journals including the International Business Review. He is a member of the Academy of International Business and a founding member of ANZIBA (Australia and New Zealand International Business Academy).

Peter is author of A Dictionary of Business and Management in India, which was recently published online.


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