#292 Breathless

Indian Economy in the Trump2.0 Era, A Timeless PolicyWTF is Back, The Old Poles of the World Order, and Questioning the Criticality of 'Critical Minerals'

India Policy Watch: New Deals

Insights on global issues relevant to India

— RSJ

It is difficult to write on other topics when you have Trump flooding the zone every day with content ripe for this newsletter. But everyone needs a break from the daily MAGA madness. So, let’s get back to India for this edition. Three topics up for discussion.

Indian Economy in the Trump2.0 Era

First, it is safe to assume multilateralism in global political and economic order has been dealt a coup de grâce by the nascent Trump 2.0 administration, with vice president Vance leading the charge. The U.S. no longer wants to shoulder the burden of leading the ‘free’ world, and there will be little surprise if it lets go of all its commitments to multilateral institutions. UN, IMF, WTO, NATO, NAFTA - there will be an active withdrawal of the US participation from the frameworks and global rulebooks that have been put in place through these institutions over the years. After successfully using these institutions for more than half a century to establish its global political and economic hegemony, it now feels it gives more than it gets from them. Of course, this is myopic, and it will hurt US interests more than others, but Trump has won this narrative for good. This won’t change even in a post-Trump scenario, even if a future Democrat or a Republican president works to restore the strength of these institutions. Because other nations have woken up to the reality that American polity is going rogue. The JD Vance speech in Berlin last month aimed at the US allies in Europe was a moment of clarity for everyone. There’s no US guarantee any more. Once that factor enters political and economic security calculus, you can’t ever take it out.

There will be essays and books written on why multilateralism died in the past decade and a half while it survived the worst partisanship and paranoia of the Cold War. Did the global financial crisis, which revealed the badly skewed benefits of multilateralism in western society, engineer the loss of faith? Or, was it the blind eye WTO turned on China’s repeated abuse of the global trading system through currency manipulation, skewed industrial policy, directed credit and export of surplus capacity that led to the hollowing out of the manufacturing sector and loss of jobs in these countries? Or, was it the rise of political nationalism and populism, possibly due to everything that happened in the past two decades, that engendered a backlash against a shared liberal world order? Whatever it may be, this unwinding that started from the collapse of Doha round back in 2011, gathered steam with Brexit and met its peak expression in Trump, it is safe to say we are in the endgame of it.

How should India play its cards in this scenario? Possibly, that’s a subject for more books and essays but there are a few no-regret moves available. An important point to remember here - multilateralism might be fading, but global trade is as strong as ever, with trade volumes hitting an all-time high in Dec ‘24. Countries are trading bilaterally or through regional cooperation on a tactical basis more than ever before. India will do well to focus on a couple of no-regret moves that stem from the same imperative of prioritising economic growth.

One, India needs to get going on bilateral trade agreements with clear priorities on where to focus its efforts. The more comprehensive bilateral trade treaties like the Comprehensive Economic Cooperation Agreement (CECA) that it signed with UAE or the Economic Cooperation and Trade Agreement (ECTA) are the kind of arrangements India must focus on that cover goods and services and investments, sharing of IPR and cooperation on R&D, instead of signing up preferential trade agreements that are narrower in scope and have low complementarity in goods traded (i.e. low comparative advantage). Such comprehensive arrangements today account for about 30 per cent of India’s exports. India should target to double this share by selectively targeting countries with complementary needs and relatively large markets. Clearly, the work underway on bilateral trade agreements with the UK, SACU and Israel is a step in the right direction. Instead of focusing on the EU as a bloc, it might make sense to explore similar arrangements with the likes of Italy, Spain and France that offer greater scope for comparative advantage.

Two, given all the volatility from Trump, AI, and Chinese overcapacity, it will make sense for India to focus on boosting domestic demand. This has been weak for the past couple of years. Private gross fixed capital formation (GFCF) has remained weak despite all the promises and panes sung by corporate India for this government. Policy uncertainty, especially at the state level, labour market reforms that have been pending for long and the farm laws that were withdrawn are some of the structural reasons that underlie this reluctance from the private sector to raise the capex spending despite having the strongest balance sheets in ages. The other area is to give a boost to housing, which has the highest multiplier effect on the economy. For a country with a still burgeoning middle class, low home ownership and a low credit-to-GDP ratio (people are still credit-starved), it makes sense to give tax breaks and credit support for home buyers. Domestic demand pick-up should be a high policy priority for the next few years.

On to the second point - India macros

The good news is that there’s a belated recognition of how tight liquidity conditions and somewhat premature countercyclical measures to prevent the banking system from lending have hurt growth in the economy. The balance between supporting credit growth and preventing asset bubble build-up is always tricky. However, the data from the past four quarters clearly showed that the central bank had erred on the side of caution at the expense of growth. Through a combination of open market operations and multiple forex swap interventions that have been announced in the past two months, there’s been a clear intent displayed to inject more durable liquidity in the system to support growth. This supply of liquidity (almost ₹3 trillion) will help though the continued defence of the Rupee will offset this soon. So, the liquidity normalisation effort has to be continued for most of the year, preferably through a rise in non-borrowed reserves (OM operations). In any case, with the budget showing a path to a 4.4 per cent fiscal deficit ratio, any possibility of sovereign credit risk compressing because of OMOs seems low. We should avoid a systemic liquidity deficit to support domestic consumption.

Lastly, one of our timeless Policy WTFs springs up again

Here’s the Hindustan Times reporting:

The Karnataka government has introduced a price cap on movie tickets across the state, ensuring that the cost does not exceed ₹200 under any circumstances. This regulation applies to films of all languages screened in Karnataka, including in multiplexes. The move has come as a surprise to film producers, who frequently request ticket price hikes ahead of major movie releases.

During his budget speech, CM Siddaramaiah emphasized that ticket prices across all theatres would be capped at ₹200. While a similar price ceiling had been imposed earlier, it was not strictly enforced. Over the years, Bengaluru has seen a steep rise in ticket prices, with some movie tickets selling for over ₹600 during initial release days. To make cinema more affordable for audiences, the government has now decided to standardize ticket prices across the state. The new rule will be implemented soon across the state.

And some additional context here from a Business Today report:

In 2024, during a discussion, directors Karan Johar and Zoya Akhtar highlighted the deterrent effect of the high expenses associated with watching films on audiences' decisions to visit theaters. Johar noted that surveys suggest that the typical consumer now limits their visits to the cinema to just twice a year. Johar claimed that the average spending of a family of four can come out to be Rs 10,000 if they decide to go for a movie outing.

To this, the Multiplex Association of India (MAI) slammed Johar and the average cost for a family of four at multiplexes is slightly over one-tenth of what Johar suggested.

MAI's statement clarified that: “In 2023, the Average Ticket Price (ATP) across all cinemas in India was Rs 130 per ticket. The country's largest cinema chain, PVRINOX, reported an ATP of Rs 258 for the fiscal year 2023-24. Additionally, the Average Spend Per Head (SPH) on F&B at PVRINOX during this period stood at Rs 132. This brings the total average expenditure for a family of four to Rs 1,560-significantly different from the Rs 10,000 figure carried in the media reports.”

Earlier, PVR-INOX chief Ajay Bijli addressed the issue of high ticket and F&B prices at his cinemas. He said, “I’m a business, I also need to get a return on investment. If you put a Rs 8 crore projector, then you need to get your revenues in line to get that ROI, which will satisfy any investment decision you make.”

This brings me to one of our favourite expressions: we have seen this movie before—and written quite extensively about it.

Read it here: Price caps on film tickets

Lousy policy ideas don’t ever die. They are the immortals.

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Global Policy Watch #1: Churning of the Land and the Oceans

Insights on global issues relevant to India

— Pranay Kotasthane

It seems like the world is a Priyadarshan movie nearing its climax. There is just way too much craziness happening. I’m sure you are bewildered, too. So, let us think beyond the current pandemonium and ask what the likely general equilibrium for the world order looks like.

Taking the long view, we are witnessing a significant power transition, but not in the ways most people think. While it is commonly believed that China is out-competing an insecure US, the real story is that all the incumbent powers are losing strength in the ongoing churn.

In the realist tradition, international relations is all about relative power. So, let’s try to project the power trajectories of some key countries, beginning with the US. There is domestic consensus that the US no longer wields the kind of influence it could in the decade following the collapse of the USSR. Trump, Biden, and Obama adopted different variations of defensive positions, keeping this reality in mind. Obama postponed challenging China, the Ukraine-Russia and Israel-Palestine wars drowned Biden's administration, and Trump is convinced that the US is not that great anymore (hence the MAGA call).

Things aren’t going well for China, too. While there’s a lot that China dazzles the world with each day, its current successes result from three decades of collaboration and learning from the West. China’s ability to stand up to technology denials in recent years shows that it has built base capabilities across several domains. A few export controls won’t blow it away or force it into submission. But a less open world will hurt China the most. Its companies, ideas, and investments won’t get the free pass it enjoyed over the last two decades. Without close linkages with the US and Europe, the Chinese ecosystem won’t have the same momentum it had all these years. China’s recent breakthroughs, then, are embers of a dying fire rather than markers of a new boom. Since authoritarian regimes must always put on a brave face even when they are in deep trouble, their weaknesses remain hidden longer.

The third weakening pole is Russia. The Ukraine invasion has exposed the limits of its defence prowess and will have a long-term impact on its economic fortunes. Sure, it has survived better than expected due to its gas and oil and a reasonably good defence-industrial complex. But it will be remembered as a regional power that couldn’t defeat a much smaller neighbour.

The fourth and final incumbent is Europe. Trump has woken it up from its slumber, but the sleep has lasted too long. It will be tough for Europe to change its free-riding behaviour and will settle back to being second fiddle to the US at the slightest softening of Trump’s stance. I don’t foresee any significant increases in Europe’s relative power over a five-year period.

This overview means that the power gap between these major powers and regional powers is declining fast. Power abhors a vacuum; hence, the current world order throws up many opportunities for middle powers to make their presence felt. The likes of Australia, Indonesia, Malaysia, Brazil, South Africa, India, and Saudi Arabia will all have more room for manoeuvre than before.

None of this means that India is in a pole position. Just like it lost the China+1 economic opportunity, India is capable of missing the geopolitical opportunity as well. It doesn’t seem that our polity has grasped the fundamental changes afoot. The current moment demands a national strategy involving all parties and state chief ministers. It requires a radical change in our defence, trade, and economic strategy. Instead, the union and state governments are bickering over the archaic three-language formula. The countries that rise to the moment will be the movers and shakers of the next world order.

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Global Policy Watch #2: How Critical are Critical Minerals?

Insights on global issues relevant to India

— Pranay Kotasthane

It fascinated me that critical minerals became a significant discussion point in the now comatose Ukraine-US ‘deal’. Judging by those conversations, you would have thought that Ukraine must be sitting on a, err, gold mine of critical minerals like rare earth elements. Well, you would be wrong.

A recent article in IEEE Spectrum says that ‘there are no deposits of rare-earth ore in Ukraine known to be minable in an economically viable way.’ Apparently, there is no recent assessment of rare earth reserves in Ukraine, and the current estimations were done when Ukraine was a part of the USSR using old exploration methods. Even if it did have substantial reserves, the current stock of minerals hasn’t been processed with rare earths in mind, while setting up a new mine takes fifteen to twenty years. Not to forget that the US would have to set up new facilities in a war-torn country.

This example illustrates that when “securitisation of everything” becomes the dominant narrative, policymakers bury the most fundamental questions. Anything and everything becomes strategic and critical. As of this date, more than twenty countries have recently created their critical minerals list. India, too, has declared a long list of 30 critical minerals spanning 51 elements, i.e. 43% of the periodic table.

So, let’s ask the much-needed dumb question: how critical are these critical minerals from the standpoint of a nation-state? Undoubtedly, these minerals are essential resources for our future economies. However, their importance as a geopolitical leverage is not as clear.

Much commentary around critical minerals likens them to new oil (sorry, data—you’ve been deposed). Just as countries with access to oil increased their power, the logic goes that access to the minerals crucial for the information age will also become a significant source of geopolitical influence.

At first glance, the comparison to oil makes sense. But here’s the thing: critical minerals aren’t burned up like oil (thanks to Aditya Ramanathan for this point). You don’t have to constantly refill your lithium battery the way you do a gas tank. The minerals in a phone, laptop, or electric vehicle stay there for years.

Oil is a fuel; critical minerals are materials. Every second a car engine runs, it’s burning through petrol. You need more, constantly. If oil supplies get cut off, everything grinds to a halt—transportation, industry, heating. Oil-importing countries worry about inflation because an oil blockade or mere price rises impact every citizen immediately and visibly. But that’s hardly the case with critical minerals. We need lithium, cobalt, and rare earth elements to build EVs, batteries, and electronics, but they aren’t being used up daily. And compared to oil, the quantities we need are tiny. Countries don’t need millions of tons of lithium annually the way they need oil. That also means stockpiling is easier—a nation can hold reserves for years without worrying about them running out. Besides, oil is a fuel; hence, its value lies in it getting burnt, while critical minerals can be recycled, recovered, and reused from used products.

This is why weaponizing critical minerals isn’t as effective as an oil embargo. If supply is cut, it’s inconvenient, but companies and governments have time to adjust. They can look for new sources, develop alternatives, or recycle old materials.

Take the case of the poster child case for critical mineral securitisation: China’s 2010 rare earth export restrictions against Japan. These restrictions were meant to punish Japan for arresting the captain of a Chinese ship that approached the disputed Senkaku islands. The restrictions initially hit the production targets of Japanese semiconductor, automobile, and advanced material industries. However, there is no evidence of systemic job losses due to this move. This move, in fact, forced Japan to look for substitute sources, build stockpiles, invest in urban mining, and partner with other countries. The net result is that Japan is less dependent on China’s rare earths today than in 2010 (down to 60 per cent from 90 per cent) and consumes half the rare earths it did in 2010.

This brings us to the dragon in the room. The point is not that rare earths are rare or that these minerals are geographically concentrated in a few countries. The real issue is China’s grip on the midstream supply chain—processing and refining. Mining happens all over the world, but China is where raw minerals get turned into usable materials. Why does China dominate? Simple: Western countries let them have it. Processing and refining metals is messy, expensive, and environmentally damaging. The U.S. and Europe didn’t want to deal with it. China stepped in, offering state-backed investments, cheap labour, and fewer regulations. It’s the same reason semiconductor assembly in the 1980s moved to Taiwan and South Korea. These countries were willing to take on the work the West was happy to offload. Even today, the US still imports a lot of refined critical minerals from China, not because it has to, but because it’s cheaper than processing them at home.

Thankfully, China has made its intentions clear that it seeks to use its critical mineral processing technology as a geopolitical tool. The more China weaponises its control; the faster other countries work to break that control. Nations are already diversifying supply chains and investing in new sources of production. The US is reviving domestic mining and refining, though it’s still slow. Indonesia is forcing companies to refine nickel locally, while Australia and Canada are ramping up lithium, nickel, and rare earth mining.

As Hayek would predict, alternatives emerge as long as prices are allowed to work as a signal in this industry. There are already four ways countries are reducing their dependence on China’s supply chain:

1. Material-for-Material Substitution: for example, using iron or manganese (LFP) instead of cobalt in batteries.

2. System-for-System Substitution: Replacing lithium-ion batteries with hydrogen fuel cells.

3. Process-for-Process Substitution: Recycling critical minerals from old electronics instead of mining new ones.

4. Efficiency Improvements: Using less rare earths in magnets and wind turbines through better design.

States can help by building joint stockpiles of select critical minerals used in defence equipment, fast-tracking mining explorations and licensing, and co-investing in research on substitutes. China’s dominance in critical minerals is not the geopolitical masterstroke it is made out to be.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Paper] Critical Minerals and Great Power Competition: An Overview is a fantastic resource for anyone interested in understanding the strengths and weaknesses of important geopolitical actors in the critical minerals domain.

2. [Book] Written by a former US sanctions official, Chokepoints: American Power in the Age of Economic Warfare looks promising.

3. [Article] Suhas Palshikar bats for the delimitation proposal to expand the size of Lok Sabha such that no state loses its current strength in his Indian Express column.

4. [Article] Shekhar Gupta has a sharp commentary on India’s defence procurement troubles in ThePrint.

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