2024-07-28 - #265 Self-correction - Omnivore

# #265 Self-correction #Omnivore ## Colophon title:: #265 Self-correction type:: [[clipped-note]] tags:: [[&omnivore]] Newsletter url:: https://publicpolicy.substack.com/p/265-self-correction archive:: https://omnivore.app/me/265-self-correction-190f707530a date:: [[2024-07-28]] ## Highlights tags:: > ## India Policy Watch #1: China, _Padharo Mhare Des_ ##### _Insights on current policy issues in India_ ##### _— RSJ_ [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#4ac3b87e-1e7a-425f-9d42-474fa61ca9c7) ^4ac3b87e tags:: > Listen, the chasm between what’s suggested in the Economic Survey and the real world of policymaking is quite wide. We know that. But to have cleared ‘god knows how many reviews’ and to have got this sort of plain speak into the Survey deserves appreciation. It has got people talking. A good attempt, if there was ever one, at shifting the Overton window. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#cbcb1c14-e895-458f-afb6-da33245219c9) ^cbcb1c14 tags:: > Then, like it is today, we had three core arguments favouring our stand. Over the last three years, data from both India and China have only made these arguments stronger. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#e7aaba34-8b52-47e6-a066-c501366d6f50) ^e7aaba34 tags:: > **Firstly**, the dominance of China across multiple global manufacturing value chains makes it impossible for domestic manufacturers in India to decouple from them. Either they will reroute Chinese components from other countries or have to find alternatives from the developed world. Either way, it will make the domestic producers uncompetitive in terms of prices. And there’s no way, given the low maturity of our manufacturing sector, will we be able to make these intermediates ourselves any time soon. We have seen the impact of import substitution in the past. You get inferior products at higher costs. So, the die was already cast on this decision to distance ourselves from China economically. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#17fd39e4-1b1b-4a0c-8f33-075a557467c7) ^17fd39e4 tags:: > **Secondly**, China is sitting on an economic crisis of its own and as much as it might enjoy needling India on its borders, it also needs us. To cut a long story short, China is unwinding its massive over-investment in real estate and infrastructure sectors that drove its growth in the past decade or more. Much of it was speculative, and there’s real pain from the high level of indebtedness resulting from this. The obvious lesson from this experience was to put a lid on investment-led growth and then balance their economy by focusing on greater domestic consumption. But that’s hard work for many reasons. The most important one is how to do this rebalancing without inflicting huge pain on its people in an economy that’s still on the ground floor of being a middle-income one. The absence of democracy and a quasi-dictatorial regime doesn’t help either in having real debates about the economy and the kind of bitter pill it needs to swallow. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#c99274d3-064d-4050-9b02-e717ab2e20da) ^c99274d3 tags:: > These have led China to revert to its old playbook. Go big on manufacturing again. It has built humongous overcapacity in the green energy sector and is now looking to export it worldwide to fuel its growth in the same model that worked for it in the first decade of this millennium. The problem is that the developed economies have learnt their lesson this time. China is struggling and will continue to find it difficult to export this overcapacity so easily this time around. The second-best option for it is to set up production facilities in the markets it wants to access. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#5854942c-bb3f-45a6-8136-c23890f19f64) ^5854942c tags:: > **Lastly**, having more Chinese companies setting up factories and making mega investments in India shifts the risk to them. Once they are in with their investments, they are on the hook and vulnerable to our policy regime. This is a point that Swaminathan Aiyar made back in 2020\. It is risky for others to put money in India and they will have to weigh it with the advantages of cheaper labour and a large market in India. We don’t have to do anything except ensure we keep a few strategic sectors out of it and ensure these companies follow our data privacy and safety laws. This option works more in our favour than the ever-spiraling trade deficit with China. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#ece1b677-e513-4964-b869-17e9a5a25910) ^ece1b677 tags:: > Regarding Budget 2024 itself, I don’t have a lot to write about. It was mostly _meh_. A fair degree of continuity in keeping fiscal discipline, some special packages for the states run by the coalition partners, an apprenticeship programme that might take care of skilling issues in the long run but won’t address the more fundamental challenge of creating jobs, a bit of TDS reform and random tinkering on taxation on capital gains that make no sense except to signal that we like to tax the rich. Nothing to see here. Move on. The Finance Secretary reiterated the last bit about taxing the rich in his interactions with the media. If that’s something to go by, this is a strong early signal that one of the lessons learnt by the BJP from the elections is to go down the good old socialist, redistributive ‘_garibi hatao_’ plank. It is a bad idea, both economically and politically, for a party in power. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#18946c58-f256-40d6-bce1-92a8dc61dbad) ^18946c58 Another overton window shift? tags:: > Even firms such as Apple have a large supplier base in China. Of the 188 companies in its **[supplier list](https://substack.com/redirect/d2e87cf4-da47-4994-9fce-8d139c636dc5?j=eyJ1IjoiZHI5OW4ifQ.TkB5aaK3urcRAoIqMo7i4RAYnb5GuIc-u8FFruB7GjU)**, 151 are Chinese or have a substantial manufacturing presence in China. There is absolutely no way for India to build an electronics ecosystem quickly without accessing Chinese investment, talent, and commodity chips. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#d5601bf0-5428-4eb6-97cc-4b39ab3a8725) ^d5601bf0 tags:: > ## **Global Policy Watch: Bye-Bye Biden** ##### Global policy issues relevant to India ##### _— RSJ_ [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#8b4c365a-66e6-4673-b987-b68a152b7a02) ^8b4c365a tags:: > Back in January, in my annual prediction post, I had this as my first prediction: > “**President Biden will decide sometime in early February that he cannot lead the Democratic Party to power in the 2024 elections.** He will opt out of the race and give possibly the most well-backed Democrat, financially and otherwise, a really short window of four months to clinch the nomination. In a way, this will be the best option for his party. If he continued to run for the 2024 elections, it would have been apparent to many in the electorate that they are risking a President who won’t last the full term. If he had opted out earlier, the long-drawn primary process would have led to intense infighting among the many factions of the party, eventually leading to fratricide or a Trump-like populist to emerge perhaps. A narrow window will allow the Party to back an establishment figure and reduce the fraternal bloodletting.” Well, I had taken President Biden to be a better man than he turned out to be. Instead of doing this in February, he bowed out of the race only last week after a disastrous debate performance and a stubborn reluctance to read the writing on the wall. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#7eab27f4-8832-436d-9d28-c2d65f06fd14) ^7eab27f4 tags:: > Multiple theories are floating around about why he didn’t make this decision earlier. From a deep state running things behind the scenes to his inner circle led by his wife (Lady McBiden?) wanting to hold on to power, there’s an entire gamut of them. I have a simple theory about this. At the close of their careers, all politicians start to think about their legacy. This is pure hubris, of course. You don’t define or create your legacy. Eventually, history does. But hubris is natural to a politician. For Biden and his inner team, the legacy they had set store in their minds was this - the man who stopped Trump, not once, but twice. And took America back away from the brink. I’m almost certain everyone on his team knew it wasn’t about lasting a full second term with all his faculties working at levels that befitted the role of president. Their only focus was to hope he was fit enough to last this campaign, beat Trump, and then, a year or so down the line, step down, stating he was placing his country above himself. Everyone then stands up and applauds. And he cements his legacy. Unfortunately, Biden’s health deteriorated faster than they expected, although it was clear to everyone else. It was a gamble. It is what politicians do all the time. It is what Joe Biden has done most of his life with tremendous success. The key to this game is to not lose your last gamble. Because in this game _Joe Jeet Wohi Sikander_ (he he). Unfortunately, Joe lost his. And that will be his legacy. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#52ab280e-cbca-4a11-a412-24e0a6cb0a64) ^52ab280e tags:: > shrouded in secrecy, it faces little scrutiny. For instance, consider the fact that the government has stopped reporting the split-up of the expenditure on arms purchases across the three services. Until the intermediate FY25 budget, the government shared this data with the public, which allowed analysts to create charts of this nature: [![](https://proxy-prod.omnivore-image-cache.app/550x0,sNzsYcP44dArg-RuA50ioUJu1DcFHb_SFhD_d7gsQo9M/https://substackcdn.com/image/fetch/w_2912,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F4f1af7da-a23c-4495-aff4-4b3b22df55d4_2759x1705.png)](https://substack.com/redirect/577ace7e-0a43-4cce-b507-7cbc931511db?j=eyJ1IjoiZHI5OW4ifQ.TkB5aaK3urcRAoIqMo7i4RAYnb5GuIc-u8FFruB7GjU) source: my own, based on budget data **Starting this financial year, creating such a chart is no longer possible.** The budget only reports platform-wise lumpy numbers that combine the capital expenditure across the three services. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#32f6e937-96f5-45ca-8008-541fe65b67bb) ^32f6e937 tags:: > Some people have suggested that this indicates a move towards joint procurement and theaterisation. However, that is an incorrect inference. Even with theatre commands in place, the demands placed by the three services will determine the expenditure on arms procurement. Hence, they will continue to be budgeted as separate line items for the three services. A simpler explanation might be that the ministry didn’t particularly enjoy some reporting on the three forces' capital expenditures and decided to do away with the underlying data itself. I might be wrong about this, and I will happily revise my claims if there are better explanations. But for now, it seems like the MoD has done what the Education Ministry did with the Program for International Student Assessment (PISA) in 2012—if a number shows you in a poor light, make that number go away. ना रहेगा बांस ना बजेगी बांसुरी. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#00e905e6-5f2b-474c-adc3-37479e994a58) ^00e905e6 tags:: > That apart, the defence budget wasn't spectacular. Defence expenditure as a proportion of the union government spending and as a proportion of India’s economy continues to decline. It is now projected to be below 2 per cent of the GDP this year. That didn’t prevent the [MoD’s press release](https://substack.com/redirect/11d40521-9833-4767-a93c-06bc9e6bd7a0?j=eyJ1IjoiZHI5OW4ifQ.TkB5aaK3urcRAoIqMo7i4RAYnb5GuIc-u8FFruB7GjU) from claiming: > “In the Regular Union Budget of Financial Year (FY) 2024-25, Ministry of Defence (MoD) has been allocated Rs 6,21,940.85 crore (approx. US $75 Billion), the highest among the Ministries.” That’s putting a brave face on, but I’m old enough to remember that excluding interest payments, MoD expenditure has been the “highest among Ministries” for a really long time. After all, defence is the prime constitutional responsibility of the union government. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#348f2219-53c4-4578-87b3-6ab9942bede8) ^348f2219 tags:: > The budget's one positive aspect is its focus on improving the capabilities of maritime and land border protection forces. The capital outlay for arms procurement has also increased by 9 per cent over the revised estimates of the previous year, indicating a major platform deal might come through this year. [⤴️](https://omnivore.app/me/265-self-correction-190f707530a#4b0dd9d5-7765-493a-9a02-adab7113c3ca) ^4b0dd9d5 [Read on Omnivore](https://omnivore.app/me/265-self-correction-190f707530a) [Read Original](https://publicpolicy.substack.com/p/265-self-correction)