How India can deal with ‘Black Swans’ : Daily Current Affairs

Relevance: GS-3: Indian Economy, mobilization of resources.

Relevance: GS-2: Effect of policies and politics of developed and developing countries on India’s interests.

Key Phrases: Ukraine-like crises, black swan event, global financial crisis, cross-border goods trade, current account deficit, Reduce dependency on crude, Diversifying defence sources, financial infrastructure, SWIFT.

Why in News?

India should diversify its sourcing for critical goods and ‘swiftly’ devise payment channels to deal with Ukraine-like crises i.e black swans.

Context:

As another black swan event engulfed the world with Russia and Ukraine at loggerheads, it is a clarion call for economies like India to draw lessons from it. The world in the first two decades of the 21st century has witnessed several manmade disasters, beginning with the global financial crisis in 2008, multiple disputes and instability across continents, apart from the ongoing Covid-19 which has consumed the whole world like never before.
Planning to deal with such concerns successfully is a major challenge for decision-makers, but one that needs to be addressed as a matter of urgency. Delineating here are certain aspects which India can increasingly focus on as a matter of its strategic interest, in the process of becoming more indigenous, and possibly a more indispensable force globally.

Black Swans are unpredicted, random events of huge impact. These events deviate from the normal expected course. They are thus, also called outliers as there is no reference data in the past which gives any clue to their occurrence in the future. No scientific model can predict them. Black Swan events can take place in business, politics, stock markets etc. These events are unforeseen and thus cannot be predicted.

Such events can be either positive or negative. E.g. the advent of the internet was such a positive watershed event which changed the way people look and live. Nobody had thought about the extent of its benefits.

How India can deal with ‘black swans’?

Utilising services sector

While India looks at enhancing its cross-border goods trade, it should provide significant emphasis on services which has done consistently well. India’s global share in services sector in 2005 stood at 2 per cent which increased to touch 3.1 per cent in 2011 and 4.1 per cent in 2020. The share of the services sector in India’s GDP increased from 45 per cent in 2001-02, to 49 per cent in 2011-12 and touched 54 per cent in 2020-21; and this amidst the pandemic.
In fact, the contribution of services exports in India’s total exports has been surpassing that of merchandise goods — it has increased from 59 per cent in FY17 to 64 per cent in FY21. A sustained stability in net earnings from services trade has propped up India’s current account by partly offsetting the merchandise trade deficit over the years. According to RBI, an upbeat services exports led by IT are likely to keep the current account deficit contained well below 2 per cent of GDP during FY22.
Since the pandemic the world has changed, offering opportunities for the services sector to create more income, employment, investment and trade. Given its proven strength in this segment, India has a huge headroom for growth. For example, globally, the new-normal is witness to remote onboarding of new employees, lectures from remote locations, tele-healthcare across geographies, and a big jump in e-commerce, amongst others.
With access to mobile connectivity, the services sector in India can do wonders across less developed, developing and developed economies at a fraction of the cost, allowing India to earn a much greater amount of foreign exchange. Mutual recognition agreements on legal services with countries could open a market for India by offering services at a rate which will be unmatched globally.

Reduce dependency on crude

India’s dependency on crude remains high and has increased by more than 165 times, and by annualised average growth rate of 5 per cent, between FY01 and FY21. Crude oil imports increased from $14.4 billion in FY01 to $62.2 billion in FY21 — an annualised average growth rate of 11 per cent. . With the ongoing crisis in Europe, the elevated oil prices will result in a domestic inflation and raw-material prices going up.
Exploring and using unconventional energy will not only help the country save billions on imported fuel but also protect it from energy price jolts. The government must step up its efforts in encouraging investors to take interest in alternative fuels like natural gas, solar, coal bed methane and fuel cells, amongst others.
The growth of electric vehicles (EVs) would require across the board availability of electricity, ideally generated from hydropower, and expansion of battery charging stations on thoroughfares and highways. India could save billions on crude oil imports if EVs were to garner a significant share of new vehicle sales by 2030.

Diversifying defence sources

India accounts for 3.7 per cent of the world military expenditure, making it the third highest military spender, with the share of defence in the FY23 Budget touching 9.7 per cent. Nearly 70 per cent of military hardware of India is of Russian origin. This exhibits high concentration risk, and India needs to diversify a lot more.
Government has launched two Defence Industrial Corridors and hopes to attract investments of ₹20,000 crore by 2024. All efforts should be made towards India based production of defence equipment and necessarily sharing of technology know-how.
India should use its strategic position in Asia to leverage and incentivise some of the largest defence companies to produce in India.

Financial infrastructure

After the onset of the Russia-Ukraine crisis, the SWIFT sanctions against Russia have caused payments being stuck, including from India. As of January 2022, 40 per cent of all SWIFT transactions by value were in dollars, followed by the euro at 37 per cent and the pound at 6 per cent. Given the extremely volatile situation and the uncertainty the world over, India should also consider building a similar mechanism, an alternative to SWIFT, which could facilitate trade with countries by offering incentives to cut the cost of operating beyond SWIFT. Both Russia and China had developed alternatives to SWIFT — System for Transfer of Financial Messages, and China’s Cross-Border International Payments System — a few years ago.
Besides the ongoing crisis in Europe has also shown the dependency and the impact of suspension of popular global platforms like MasterCard, Visa, and American Express. In lieu, Russian banks may possibly issue cards with China’s UnionPay. In 2012, the National Payments Corporation of India (NPCI) introduced RuPay as an Indian multinational financial services and payment service system. While RuPay has made significant inroads into the domestic market, it has still to compete with the global majors.India could work along with its counterparts in South Asia in promoting such financial instruments for the common good.

Strong domestic consumption

India should help boost household consumption, as this would drive the cycle of growth and to an extent keep India immune from global economic turmoils. Household consumption constitutes the largest part of aggregate demand. The level of consumption by every household is mainly contingent on their level of income.
Latest data show that private consumption as a share of nominal GDP slipped further to 57.5 per cent in FY22 from 58.6 per cent in FY21 and 60.5 per cent in FY20. Greater domestic investment would facilitate the growth of the consumer market, which would have a multiplier effect on the economy. This will entail companies to expand their businesses and, in the process, create jobs, leading to increase in income levels and a strong self-reliant domestic market.

Way Forward:

It is important to think about such black swans, consider ways of preventing them if they are negative ones and facilitating them if they are positive, and lay out ways of coping with them. Government agencies can do some of this thinking. Indeed, former president Abdul Kalam highlighted the need for the country’s intelligence apparatus to be prepared for black swans. Policy planning staffs can also undertake such exercises. Government agencies, however, are often burdened or overburdened with day-to-day priorities, with little time, inclination or resources to undertake such thinking. Therefore it is outside government — in think tanks, universities and the corporate sector — that such thinking about black swans, as well as forecasting, scenario planning and war gaming can and must take place. Such exercises do not necessarily require classified information. They do require time, resources, expertise and, most importantly, imagination.

Source: The Hindu BL

Mains Question:

Q. What do you understand by Black Swan events? How India can deal with ‘black swans’ rises due to Ukraine-like crises? Critically Examine.