Global challenges require constant vigilance

The biggest risk to India's economy and social stability comes from 'grey rhino' disasters that are highly probable but often ignored

India is witnessing robust gross domestic product growth at a rate of 6-7 per cent. We are likely to continue growing at this rate for the next few years, making us the world’s fastest-growing major economy. However, the Indian economy is constantly disrupted by major global crises. In the recent past, these crises have included the 2001 terrorist attacks and the invasion of Afghanistan, the 2009 global financial crisis, and the Covid pandemic. The term “grey rhino” is used to describe such probable, high-impact events that are often ignored until they evolve into immediate crises. Looking ahead, we can already anticipate three “grey rhino” crises: Climate disasters, geopolitical confrontations, and social strife linked to global events. We must be prepared to deal with them.

The British Prime Minister Harold Macmillan was once asked what he feared the most. Famously, he replied: “Events, my dear boy, events!” It is major external events and crises that disrupt projections. Few policymakers or business planners factor in grey rhino crises into their medium-term plans. However, as we have seen over and over again, it is these events that actually shape the future of companies and countries.

Consider the likelihood of natural disasters triggered by climate change. India is at imminent risk of massive flooding, cyclones, and intense heat waves. According to climate experts, these are likely to become commonplace in the next few years in South Asia. The sixth Intergovernmental Panel on Climate Change (IPCC) assessment report provides a sobering perspective on the impending planetary crisis. Land temperatures have already increased by 1.6 degrees since the pre-industrialisation era, with Indian cities having heated up by 2 to 3 degrees. Global warming is now likely to reach 2.8 degrees by 2100, with urban areas heating up much faster.

Rapid global warming can trigger extreme weather events. For instance, consider what just happened to Pakistan in 2022. Record heat waves in April and May led to unprecedented glacial melting in their Himalayan rivers. This was coupled with extreme monsoon rainfall in Sindh and Balochistan. Devastating floods inundated a third of Pakistan and forced over 30 million people to abandon their homes. Pakistan’s economy sustained enormous damage, triggering major macroeconomic stress and political upheaval. Such climate disasters will likely happen in India as well, though we do not know what shape they will take.

The second grey rhino crisis that we may have to deal with soon is geopolitical conflict. Over the years, we have had to contend with multiple geopolitical conflicts, ranging from the Cold War in Europe to the Taliban takeover in Afghanistan. Today, we are dealing with the Ukrainian crisis, which has led to food, fuel, and fertiliser shortages around the world. At the same time, the relationship between the world’s top two economies, the US and China, is deteriorating rapidly. Many experts believe that a major geopolitical confrontation between China and the West regarding Taiwan is possible in the next few years. Such a scenario could lead to a fracture in the global economy, dividing it between the West and a China-led alliance. If such a global fracture happens, then we are likely to see a major breakdown in the global world order, with significant consequences for global trade and investment flows.

India, with its open economy, is deeply impacted by global events. The US and China are our two major trading partners. We will have to carefully navigate our way through such a global fracture while trying to protect our growth prospects. India will also have to make sure that its supply chains are resilient and not overly dependent on any one trade bloc. Strategic supplies such as fuel, electronics, pharmaceutical ingredients, fertilisers, weaponry, and manufacturing equipment will have to be carefully monitored and appropriate reserves built up. Finally, if our exports and capital flows are severely constrained, then we will have to make sure that we have the currency reserves to get us through a major geopolitical slowdown.

Finally, we need to worry about social strife driven by global events, as exemplified by Sri Lanka. The pandemic devastated Sri Lanka’s tourism industry and damaged its ability to earn hard currency. As a result, Sri Lanka faced significant economic shortages and many lost their jobs. Social strife broke out in the country, leading to violence and the collapse of the government.

India is taking the necessary steps to deal with such grey rhino crises. We have strengthened our disaster management capabilities and set aside funds to deal with one-off disasters. The Ukrainian crisis has been handled skillfully, with India being able to secure fuel supplies at advantageous prices. Through the Production Linked Incentive scheme we are building up local manufacturing and strengthening our supply chains. Our macroeconomic situation and currency reserves are stable and robust, giving us the necessary buffers to get through difficult crises. The Mahatma Gandhi National Rural Employment Guarantee Act, the Garib Kalyan Yojana, and a host of other social programmes have provided economic and food security to our most vulnerable people.

Going forward, we must continue to be vigilant about these types of risks and fully factor them into our economic planning and projections. It is now quite predictable that India, and every other country, will be buffeted by such grey rhino crises. We have to build up truly resilient institutions to handle these events. Simultaneously, we must further strengthen our social security systems to assist vulnerable populations in coping with such economic downturns. Finally, we will have to continue to rapidly build domestic manufacturing capabilities for our strategic supplies.

The writer is the chairman of the Standing Committee on Finance and a Member of Parliament from Hazaribagh, Jharkhand. The views are personal