Tariff Zeitgeist and the Way Forward for India

One way to capture the spirit of what is happening today is to look at the cyclic nature of the world-economy, in terms of Kondratieff cycles. The earlier Kondratieff cycle began in 1945 and, like all Kondratieff cycles, had two components - the A-phase or the period of economic expansion that went from 1945 to 1967-73. followed by the B-phase or the downward swing. The A-phase led to the revival of Germany and Japan after WWII.

Starting during the 1980s, the A-phase or the period of economic expansion of the present Kondratieff cycle ended somewhere around 2008. This period led to the emergence of China and India as serious actors on the world stage.

Modernization of production technology permitted production processes to be located in different parts of the world, benefitting China. On the other hand, outsourcing of services due to advances in information technology was advantageous to India in the following ways.

During the late 1990s the West made large investments in information technology to overcome the Y2K scare, and a collateral benefit of this intense research effort was increased services outsourcing. Furthermore, India was fortuitously placed 12 hours away from the West - while the West slept, India worked - leading to unimaginable increases in firm productivity. Finally, during this time Indian higher technical education opened to the private sector, and many engineering colleges were established which resulted in the generation of “foot soldiers” to work in the software industry.

Thus, an external demand for services has led to positive effects for India. If, there is an order for R. 5 million, then the information technology (IT) sector will increase their production Rs. 5 million. To meet this additional output the IT sector buys additional inputs from other industries, pays additional salaries to households, recruits more workers, increases salaries of existing workers, or imports additional goods. In turn, the increased employment and incomes will lead to more spending and rev-up the economy. These are the multiplier effects.

This A-phase has produced positive outcomes for India. The emerging “tariff war” is a response to the structural changes in the World induced by the modernization and relocation of production technology across the world and the dismemberment of services from production processes.

A useful talisman for Indian negotiators during these uncertain times is to ask if, and how, the policy measure locates and services an external demand or adds to multiplier effects. This will enable India to come out unscathed from the present turmoil.