Covid-19 pandemic to trigger deglobalisation. Can India be the next China?

According to Nomura, unconventional monetary policies will be the new normal, reducing the urgency for fiscal austerity

The Covid-19 pandemic that brought the world to its knees and triggered nation-wide lockdowns across countries since the past few months can lead to deglobalisation alleviate some woes, such as worsening inequality, but it could come at the cost of impairing productivity, raising prices, slowing the growth of emerging markets (EMs) and triggering even worse regional conflicts, argues a July 13 report from Nomura titled 'The world after Covid-19'.

“We expect the vacuum in global leadership, tense US-China relations and deglobalisation to continue, and EMs to face a more challenging medium-term outlook. We see the US dollar following a path of reduced global dominance,” analysts at Nomura led by Rob Subbaraman, their head of global macro research and co-head of markets research wrote in the co-authored report.

In this backdrop, Nomura expects inflation to remain low and sees the possibility of an even lower real rate of interest. Unconventional monetary policies, they say, will be the new normal, reducing the urgency for fiscal austerity.

US – China stand-off

Going ahead, Nomura expects US – China relations to remain strained given the trade-related issues, national security / technology-related matters, human rights and China's initial response to the Covid-19 pandemic. A second Trump term, Nomura believes, would broadly resemble the previous four years, where Trump would likely maintain a unilateral approach towards China while pursuing trade negotiations with other regions and countries.

“Both President Trump and former Vice President Biden are likely to maintain a hawkish stance towards China over the next four months, especially considering US public opinion that has turned increasingly negative,” the Nomura report says.

After Covid-19, the world, Nomura believes, may face a period without strong global leadership. The international system that was based on a common understanding about the 'rules of the game', according to Nomura, may devolve into self-interested and unregulated competition among nations.

“Global institutions, such as the WTO, IMF and WHO may suffer from a lack of support. Global problems – such as responding to broad financial crises, global health risks and climate change – will be harder to address without a center of gravity for a global response,” the report said.

Advantage India?

The post-Covid-19 deglobalisation, analysts believe, may give reshoring a further boost, but the scale may be quite limited as China still have a significant advantage. That said, to chase higher returns, investors could deploy more capital to EMs, with some capital in the form of financial flows and other capital in the form of foreign direct investment (FDI).

“Current US-China tensions will more likely compel some multinational companies (MNCs) to diversify part of their production to EMs such as Vietnam, India and Cambodia because of their much cheaper labour forces. We believe the small-scale reshuffle of global manufacturing after COVID-19 will mainly take the form of diversification out of China towards other EM countries rather than reshoring to DM economies,” the Nomura report says.

Analysts at UBS echo a similar view and suggest India to be the only country that can match China in terms of abundance of labour, with the country set to overtake China as the world’s most populous by 2027. However, they argue that it will be a long road ahead to achieving this feat.

“The Covid-19 pandemic and US-China tensions have opened a window for India, whereby foreign firms are considering their options beyond China. What really sets India apart from other non-China competitors as a manufacturing base is its large and fast-growing domestic market, which can absorb a large share of a company’s output. By 2030, close to one-fifth of the world’s working-age population (aged 15 – 64 years) will be Indian,” wrote Hartmut Issel, head of APAC equities at UBS in a recent report.

Despite having essential resources like land, low cost labour and coal, UBS says, India has missed out on developing a strong manufacturing setup. That apart, it has largely skipped to cultivating a robust services sector (around 56 per cent of GDP), but the lack of a strong manufacturing base has limited India’s growth potential — services have a smaller multiplier effect on capital expenditures and employment.