Navigating a world on fire: What the Kautilya conclave had to say

The first is inclusive development: Homi Kharas provided evidence-based projections to argue that extreme poverty could be eliminated globally at a relatively low cost by providing unconditional one-time grants to those in extreme poverty as a core growth strategy. Indermit Singh Gill argued that from a growth strategy perspective, expenditure on infrastructure, education and health should be prioritized over income support grants. The floor discussion highlighted that political economy considerations are key for policy making. Income support and other grants are important for political leaders to nurse their constituencies today while benefits of expenditure on infrastructure, education and health will be realized only in the future. Hence, politically realistic spending patterns must balance allocations for short-term poverty alleviation measures like income support with investments in infrastructure, education, health, etc, for longer term benefits in a fiscally sustainable manner.

The second subject is dealing with climate change: Different aspects of it were discussed in several sessions. One key takeaway, which I have often mentioned in my Mint columns (eg: 26 April 2023) and elsewhere, is that technology is not the binding constraint in dealing with climate change. Global warming is already happening. But there has also been enormous progress in mitigation technologies. Commercially viable technologies for solar and wind power, green hydrogen, green steel, green mobility, carbon capture and sequestration, etc, are already being deployed. These will profoundly transform economies across the world from fossil-fuel based production systems to those based on renewable energy. However, this transformation will require investments on a massive scale. The resources required to finance this huge investment push, especially in emerging market and developing economies (EMDEs) in tropical geographies, is the binding constraint.

An estimated $5 trillion per year will have to be invested, including a transfer of about $1 trillion per year to EMDEs excluding China to supplement their domestic climate finance investments. Much of this can be privately financed, but private investments will not flow to EMDEs without adequate risk guarantees and insurance. The Independent Experts Group (IEG) on Multilateral Development Bank (MDB) reform, commissioned by the G20 at the instance of India, has recommended that MDBs should be repurposed to address global public goods, including climate change mitigation and adaptation. Tripling MDB operations to $390 billion by 2030 will enable them to provide the necessary risk guarantees and insurance. This will require far reaching reforms in MDB systems and procedures that the IEG has recommended.

The conclave discussions made clear that there is no conflict between climate finance and growth, since the huge investments required to contain and reverse global warming will also give growth a massive boost.

The third subject is lessons for India on industrial policy: Differing views notwithstanding, the discussions pointed to a core set of issues on which there appeared to be consensus. First, industrial policy should not be equated with trade policy and protectionist tariffs. Maintaining competitive exchange rates is a neutral means of switching expenditure from import substitution to export promotion. But border interventions like competitive exchange rates and membership of regional free trade arrangements by themselves may not help grow exports unless a supportive ecosystem is in place behind borders to raise productivity and lower costs domestically. This would include, inter alia, a world-class infrastructure and communications system in which India has taken great strides in recent years. But it also includes ease of doing business, in which India is lagging behind.

Industrial financing is another important part of the required ecosystem. Winding up term lending institutions has left a gap in long-term industrial financing which has to be filled. Skilling is also an important gap. Despite numerous schemes, the outcomes are disappointing. A large number of graduates, including technical graduates, remain unemployable because of the poor quality of their education. A related issue is investment in R&D. India’s expenditure on R&D remains abysmal compared to advanced countries and EMDE competitors. Finally, the Productivity Linked Incentive scheme is a good initiative if its sunset clause can actually be enforced once enterprises reach the required scale. But picking winners can lead to regulatory distortions in Indian conditions. Small and medium size enterprises, which account for the bulk of industrial employment in India, have not been able to take much advantage of the scheme.

The conclave covered many subjects in addition to the three cited above. But the likely transformative impact of artificial intelligence (AI) was hardly discussed, barring a brief discussion by a co-panellist and me in our session. This was a disappointing omission, since in the next few decades AI is likely to have a profound impact on the way the world lives and works.

These are the author’s personal views.