Solar Energy for the Future
The FDI illusion

The article talks about the three big challenges in front of India hampering India’s growth and productivity.

  • The financial disruption due to the Brexit has been less than feared.
  • Fears of a sharp rise in global risk aversion haven’t materialised and it would appear that for now the adverse impact on near-term growth is likely to be limited to the UK and, to a lesser extent, the EU and Central European emerging markets.
  • There are two main reasons why this has likely happened:
    • The direct trade and financial linkages between the UK and the non-EU world are small, despite London being a major financial centre.
    • The actual impact will not only take time to take effect but at present it is also unclear what these are.
  • Brexit hasn’t happened yet. The brexit process hasn’t even begun as UK is still to invoke clause 50 of the Lisbon Treaty.
  • Once this clause is invoked, the negotiations will start, which are likely to be long drawn and complicated, as these will have to cover a large number of issues that took the EU several decades to agree.
  • The Lisbon Treaty specifies a maximum of two years for these negotiations to end. Once the negotiations with the EU are over, the UK will then need to negotiate new cross-border treaties with non-EU countries on trade, financial transactions, and many other areas.
  • This includes the UK’s membership of the WTO, which has also been on the basis of its membership of the EU. The non-EU countries are unlikely to negotiate ahead of knowing the terms of the EU separation and will likely be in a stronger bargaining position after that.
  • Only when these negotiations are over, can one, with any degree of certainty, start assessing the impact of Brexit on the UK economy and its implications for other countries.
  • In the meantime uncertainty will rule over number of issues:
    • There is the economic uncertainty of not knowing what the regulatory and trading landscape will look like in two years, which will delay individuals’ and firms’ spending and hiring decisions.
    • There is the political uncertainty. While the UK as a whole voted to leave the EU, Scotland voted to remain. Reports already suggest that Scotland could hold its own referendum on independence and separate membership to the EU.
    • The rest of the EU appears torn between fear and fantasy — fear that a UK exit will lead the region to unravel, and fantasy that without the UK the Euro area can take a leap forward in terms of integration.
  • Brexit and India:
    • The UK imports about 3.5 per cent of India’s total exports and the EU about 13.5 per cent.
    • In terms of financial linkages, capital inflows from banks headquartered in the EU make up 20 per cent and that from the UK 13 per cent of total bank-related foreign inflows into India.
    • As the rise in uncertainty shaves off growth in both the UK and the EU, cross-border traffic in trade and financial flows could well slow down. However, this is likely to affect only specific sectors and companies. But barring China, no other emerging market economy has started to rebalance its growth drivers.
    • In India, we are still chasing the export dream. This time dressed up as a strategy to gain market share.
    • With global export growth languishing at 2 per cent, India needs to keep gaining market share every year almost inexorably to sustain GDP growth anywhere close to its 2003-08 pace.
    • If Brexit lowers global trade further, this task becomes all that more difficult.
    • Rather than using up the limited policy and reform space pursuing this uncertain strategy, India needs to introspect and explore new engines of growth. Unfortunately, the conversation hasn’t even begun.

The export-led growth model, which all emerging market economies adopted in varying degrees in the 2000s, now lies broken and new sustainable engines of growth need to be found. Discuss.

Suggested approach:

  • Why export led growth model is not useful today.
  • New ways to be find out to push growth such as consumption based economic model of India.


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