Secular Stagnation or Super Commodity Cycle – Will India Step Up To Help Save the World?

After a successful visit to the USA and on the world stage at the UN, Prime Minister Modi must now focus his energy to reversing the decline in the economy to achieve his goal of making India a $5 trillion economy. A bold corporate tax cut is a start – but must now be backed by even more difficult structural reforms. Whether India grows rapidly to $5 trillion by 2025 or thereabouts and possibly $10 trillion by 2035 will not only have a huge impact on the lives of 1.5 billion Indians - it will also have a huge impact on the roughly 9 billion citizens of the world. 

Slow-down in the world economy, since the 2008 Great Recession has resurrected the idea of secular stagnation – an idea first proposed by Alvin Hansen in the 1930’s and 1940’s during the Great Depression. The most well-known proponent of this idea today is former US Treasury Secretary and Harvard Professor Lawrence Summers. The basic tenet of this idea is that lack of aggregate demand – slows down investment even as savings pile up. He thinks the world entered secular stagnation around the time of the Great Recession of 2008, and since then recovery has been anemic globally and well below potential. But this thesis has been challenged by other competing theories of global growth. One compelling alternate is the idea that commodity markets go through cycles and when these cycles combine –they form commodity super-cycles.

Economists at the Bank of Canada, using commodity price indices have provided this picture of commodity super-cycles since 1900. The first super-cycle corresponds to the rise of the United States when in 1890 it surpassed Great Britain – the first American Express cheque was issued, coco-cola was patented and the first electronic telephone exchange was established. Then comes WWI and the Great Depression. The next super-cycle comes with industrialization and re-armament for WWII and the subsequent recovery of Europe through the Marshall Plan. The rise of Japan and East Asia forms the next super-cycle in the late 1970’s and 1980’s – aided by an OPEC led spike in oil prices – and the rise of China in the beginning of this century the next big super –cycle, which is now ending.

Clearly demographics has a lot to do with these super-cycles – but turning demography into a dividend is not inevitable. Latin America went through a demographic transition in the 1980’s without a dividend – and instead it experienced joblessness, inequality, ethnic conflict and massive social and political instability. The Middle East too saw huge demographic transition from 1990-2010. Education spread, urbanization occurred but without adequate growth and job creation and stifling political and social systems – the region exploded into the Arab Spring.

Rising global savings with no good options for investment are already sending alarm bells uncomfortably similar to what was seen in the 1920’s. Ruchir Sharma at Morgan Stanley has shown that in 2019, the US stock market as a share of GDP is above 160% - roughly where it was at the start of the Great Depression in 1929. Inequality has also risen to levels last seen during the Great Gatsby period of the roaring 1920’s. Central Banks, often under huge political pressure are injecting massive doses of money into the global economy – with limited economic impact while increasing risk and volatility. And trade wars are breaking out just as they did in the Inter– war period of the 1920’s and 1930’s creating greater uncertainty across the world.  Rising natural disasters and the looming threat from climate change add to the uncertainty. If no one steps up to lead the global economy, the world could be headed for another Great Depression or at least another deep recession.

China’s growth saved the world in 2001 and post 2008. Based on demography, it is now India’s turn to begin the next uptick in the super-cycle over the next decade followed by Africa from 2030 onwards. Africa is now seeing a huge demographic explosion – but will eventually see a transition. By 2040 the African continent will have a larger working age population than China or even India and by 2050 one-quarter of the world’s working age population will be in Africa. Inadequate growth, lack of jobs will create huge problems for the African continent and massive migration into Europe, intensifying populism. Climate change will further increase this pressure.

While India’s labour surplus has already peaked and will now begin a decline – it will, nevertheless, remain in surplus until 2047 – at its 100th year of independence. There still remains the opportunity for India to generate very rapid double –digit growth of the kind China witnessed – but will require huge policy and institutional reforms – in freeing factor markets, upgrading social and physical infrastructure and modernizing administration. The stakes are massive for India and the world. 

Over the last decade India has contributed to 15% of global economic growth. Were it to take –off it could easily more than double that contribution in the next decade. By no means do I mean to suggest that India will solve all the world’s problems – but if India grows rapidly – over 9% - and sustainably over the next two decades it could become the next engine for the global economy – like Japan and East Asia and then China. If not it will become mired in social conflict and political instability like we saw in Latin America and the Middle East. And it will remain a prisoner of a low middle income trap or worse.

Will India make its “world premiere” and become an indispensable nation to the world – not just the most populous country.