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Major crisis that India is facing in Short & medium Term

Major crisis that India is facing in Short & medium Term

“Global risk” is defined as the possibility of the occurrence of an event or condition which, if it occurs, would negatively impact a significant proportion of global GDP, population or natural resources.

As per Global Risks Report 2023 of World Economic Forum following major risks are identified by their annual Global Risks Perception Survey, which brings together leading insights from over 1,200 experts across the WEF’s diverse network. It draws on the collective intelligence of the world’s foremost risk experts, including the Global Risks Advisory Board and the Chief Risk Officers Community, as well as thematic experts from academia, business, government, the international community and civil society.

As 2023 begins, the world is facing a set of risks that feel both wholly new and eerily familiar. We have seen a return of “older” risks – inflation, cost-of-living crises, trade wars, capital outflows from emerging markets, widespread social unrest, geopolitical confrontation and the spectre of nuclear warfare – which few of this generation’s business leaders and public policy-makers have experienced. These are being amplified by comparatively new developments in the global risks landscape, including unsustainable levels of debt, a new era of low growth, low global investment and de-globalization, a decline in human development after decades of progress, rapid and unconstrained development of dual-use (civilian and military) technologies, and the growing pressure of climate change impacts and ambitions in an ever-shrinking window for transition to a 1.5°C world. Together, these are converging to shape a unique, uncertain and turbulent decade to come.

India top 5 Risks

1. Digital inequality

2. Geopolitical contestation of resources

3. Cost-of-living crisis

4. Debt crises

5. Natural disasters and extreme weather events

1. Digital inequality and lack of access to digital services

Digital inequality: Fractured or unequal access to digital networks and technologies stemming from underinvestment, low digital skills, insufficient purchasing power, or government restrictions on technologies Factors such as low literacy and income levels, geographical restrictions, lack of motivation to use technology, lack of physical access to technology, and digital illiteracy contribute to the digital divide. These include lack of resources to pay for hardware, technology, and Internet access; lack of electricity; lack of education and knowledge about the use of technology; and physical limitations that limit access.

The digital divide as the “gap between individuals, households, businesses, and geographic areas at different socio-economic levels about both their opportunities to access information & communication technologies (ICTs) and to their use of the Internet for a wide variety of activities.” The digital divide can be explained as the inequalities between the digital haves and the have-nots in terms of their access to the internet and the ICTs. Due to the ever-increasing importance of the internet and the rapid digital transformation on account of the COVID-19 pandemic, digital divide has increased.

Whilst different parameters such as availability, affordability, and digital literacy can be used to measure the digital divide, this piece takes a simpler approach and explores the usage dimension and the physical access dimension, i.e., “use of internet” and “access to mobile phones” respectively. Using these parameters, the piece highlights the prevailing digital divide across India.

2. Geopolitical contestation of resources

Geopolitics is the study of political phenomena (a) in their spatial relationship and (b) in their relationship with, dependence upon, and influence on earth as well as on all cultural factors which constitute the subject matter of a broadly defined human geography.

Geopolitical incidents are increasingly shaping economic interactions at both local and global levels. A number of geopolitical events like terrorist incidence, local/regional instability, political copes, energy crisis, political violence, terrestrial disputes, and other geopolitical events across the globe are increasing geopolitical risks. Geopolitical risk captures both the risk that these events materialize and the new risks associated with an escalation of existing events

Natural resources such as coal, oil, gas, and minerals are widely regarded as the potential drivers of economic growth and development. Demand for natural resources is growing swiftly worldwide. The two important drivers behind the increase in resource extraction include population and economic growth. Natural resources are extracted, traded, and transformed to fulfill human and social development needs. The increasing demand for natural resources originated from infrastructural needs and higher living standards. The exploitable and/or profitable deposits of natural resources may be found only in certain geographical areas. The political and social conditions characterizing these areas may not always be in favor of natural resources operations. A geographical world map was published showing candidate/probable global contested areas for conflicts related to natural resources: oil pipelines, natural gas pipelines, water systems, and gems/mineral and timber. The map was used as an indicator for potential violence in the contested areas where ownership of natural resources would be a subject of severe dispute. It was argued that the map would be a predictor of conflicts and would provide policy makers with a powerful lens through which to examine the larger array of world security problems.

3. Cost of living to become major crisis in India within two years

India on verge of major cost of living crisis due to unrelenting prices and lopsided govt policies India needs a comprehensive social protection programme not only to save people in great distress due to deepening cost of living crisis, but also pre-empt consequences such as social unrest

India is entering into a major cost of living crisis due to multiple domestic and international crises, which included soaring food and energy prices, rising poverty, joblessness, endangered food security, disincentives to farmers growing food articles, and lopsided policy interventions. The way the current government is responding to the issues lacks a holistic approach, and problems are being responded to on an ad hoc basis which further contributes to exacerbation of the cost of living crisis.

For January-March 2023, the average retail inflation is seen at 4.7 %. According to the latest data released by the ministry of statistics, the retail inflation during the month of December was at 5.72 %, this is much higher than RBI’s comfort level.

4. Debt crises in India

Corporate or public finances struggle to service debt accumulation, resulting in mass bankruptcies or insolvencies, liquidity crises or defaults and sovereign debt crises. A higher debt to GDP ratio indicates a higher risk of default for any country. In the past 5 years, India's external debt increased by $91 billion to $621 billion, which is 19.5% of the GDP.

Even as the size of external debt of $621 billion has increased since FY17 by around $150 billion, most of the increase was led by non-resident deposits, commercial borrowings, and the short-term trade credit. Of this total outstanding external debt, 43.1% is short-term debt. This includes short-term debt by residual maturity and by original maturity.

A depreciating rupee and contracting foreign exchange reserves raised concerns about India's external debt position. As neighbours Sri Lanka and Pakistan grapple with an unprecedented economic crisis, speculations were rife that India may also face the same situation soon amid rising foreign debt, owing to persisting geopolitical pressures. However, data released by the Reserve Bank of India (RBI) showed that India's external debt situation is reasonably comfortable and it does not have economic problems like Sri Lanka and Pakistan. According to CMIE, most of the indicators determining the sustainability of external debt appear to be in line with the past trend. However, there are concerns regarding short term debt in view of the pressure it can exert on the sharply depreciated rupee.

A higher debt to GDP ratio indicates a higher risk of default for any country. . Even though India's external debt to GDP ratio has remained in the comfortable zone, the overall debt-to-GDP ratio stood at 69.92% in 2022. Ideally, economies with low debt-to-GDP ratio are more likely to be able to repay their debts with ease. In comparison, India's debt level is much lower than many economies. The US has an overall debt-to-GDP ratio of 107%, while for China it is 50.50%. For UK, the ratio stands at 80.7%, Germany 59.8%, France 98.10%, and Canada is at 89.7%. Venezuela and Japan have the highest debt-to-GDP ratio at 350% and 266%, respectively.

Soaring debt levels as a result of high inflation and tightening financial conditions across all major economies has become a cause of concern. Economies were trying to recover from their Covid-induced slump when Russia's invasion of Russia made matters worse. However, India is much better placed in comparison to its peers.

Global Sovereign Debt Trap

At $300 trillion of global debt, a 1% hike in interest rates could translate into $3 trillion additional interest outgo, equivalent to India’s nominal GDP. It is the central banks that are entrusted with the task of maintaining price stability in a nation. They did that with the classic tool of interest rates — raising them to curtail inflation when it was high, and cutting them when economic growth and inflation were low. But over years, central banks around the world over-stimulated prices and inflation by printing money and lowering interest rates.

India’s total general government debt (Centre plus states) to GDP ratio increased from 48.8% in the 1980s to 89.6% in FY21.

5. Natural disasters and extreme weather events

Natural disasters and extreme weather events, geo-economic confrontations, failure to mitigate climate change and large-scale environmental damage incidents, are some of the other short term risks for India, the report noted. At the same time, on a long term basis, i.e. 10 years down the line, some major risks for India include failure to mitigate climate change and climate change adaptation, biodiversity loss, large-scale involuntary migration, and natural resources crises. ‘Failure to mitigate climate change’ as well as ‘failure of climate change adaptation’ are the two most severe risks facing the world in the next decade, followed by ‘natural disasters and extreme weather events’ and ‘Biodiversity loss and ecosystem collapse’. ‘Natural disasters and extreme weather events’ is also the second-most severe risk that the world needs to be prepared for in the next two years. Over the next 10 years or by 2033, the interconnections between biodiversity loss, pollution, natural resource consumption, climate change and socioeconomic drivers will make for a dangerous mix. In 10 countries, natural disasters and extreme weather events were perceived to be the top most severe risk in the short term or in the next two years. India recorded extreme weather events on 291 of the 334 days between January 1 and November 30, 2022 according to India’s Atlas On Weather Disasters prepared by the Centre for Science and Environment and Down To Earth. This means that the country witnessed an extreme weather event of some sort in one or more of its regions for more than 87 % of the time over these 11 months.

Extreme or monster waves occur randomly. They are generated by extra-tropical and tropical storms and reach over 20 meters, equivalent to four double-decker buses stacked on top of each other. Climate change could drive ocean waves to reach monstrous heights, growing by 5-8 % by 2100, a new study has warned. This could lead to widespread coastal flooding and erosion.

The impact is likely to take a higher toll on India and a handful of countries affected by tropical cyclones, the study published in the journal Science Advances stressed.

CA Harshad Shah, Mumbai

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