What India can learn from history amid the current economic crisis in the world?
In the 1970s crude oil prices rose 10 folds, and US 10 years bond yield kept on increasing, it was a tough decade for America. During the same decade in the 70s, US stock markets gave no return to all the investors. As the largest economy in the world, was reeling under severe recession, Japan the third-largest economy, which was a major oil-importing country until the 70s, was growing at a very high pace, their economy trebled in the 70s. Leading companies of Japan like Toyota, Casio, Sony, etc. compounded at 20 % plus, the economy grew by more than 5 % annually.
Why Japan did do so well when the US and the USSR the two largest economies were in a recession?
Japan did well because, in the 70s, their consumption of oil reduced significantly. The consumption went down, and their economy was much more immune to oil price changes. The reason this happened is that they had pivoted from the heavy industries (like Steel & Shipping etc.) to light industries like Electronics, Cars, etc.
What happened in the 1970s?
The First Oil shock came in 1973, The Arab and Israel went into a war, then in 1979 Shah of Iran was removed by a coup, which led to an increase in the oil prices. In the 70s, the oil prices increased 10X, which impacted the 10-year bond yield of US government securities, As a result, the American stock markets didn’t grow at all in the 10 years. While the West was “burning “Japan kept growing rapidly.
Before the 70s, Japan was the largest Steel Producer, but after that Korea was given the lead position, similarly Shipbuilding was also one of the major industries in Japan, which was later given less impetus. Japan started focusing on the Knowledge Industries, energy-efficient industries, and R&D-intensive industries, and gradually because of the efficient operations and effective management of resources Japan became a world leader in cars and electronics for example.
Japan changed its consumption patterns of crude oil, the Steel industry stopped growing and electronic production went up by 5X, the proportion of electricity production from oil was almost 65% which came down to almost 27% in the 70s.
The Japanese economy had a huge portion of their GDP tied up in bank savings, almost 28% of GDP was in savings, these massive savings were used for massive CAPEX for companies like Toyota, and Nissan, Interestingly even India’s GDP has a lot of Savings as proportion in that. Indian banks are flushed with funds of Indian saved money.
Toyota, for instance, was initially a textile company and then they pivoted to auto, in the 70s when the crude oil prices were rising. Japanese cars which were very fuel-efficient rushed into US markets. Similarly, companies like Kenwood, and Casio became world-famous.
India can DO a Japan too, the situation is somewhat similar to what we had in the 70s. The oil prices are rising and going what we have seen in the Russia and Ukraine war, it might take some time for the war to end. The Commodity prices are increasing subsequently because of the macroeconomic scenario.
India in the last 10 years has also changed just like Japan on the following fronts.
- Transportation – The quality of roads & highway networks have rapidly improved, railways and other modes of transport in the country have drastically expanded, The logistics cost for a country is also on the downturn.
- Alternate Energy sources: Solar and green Hydrogen expansion have been one the largest in the world, India is only behind China and US as far Capacity is a concerned, and it is rising.
- The rise of venture capital is giving the country a huge no of job creation in Soft Industries which are knowledge dependent and not oil-dependent, Fintech is a major growth sector in India, and with government initiatives like UPI ( Which is far better than in the US or any other payment system in the world ).
- In the US the interest rates are around 1% whereas the inflation rate is around 7%, the Gap is huge, in India this gap is not much, which means as an economy we are much more efficient and robust than the American and other western economies. In India, the CPI inflation is mostly ( 50% ) of food, the recent wheat and rice bans can help India in managing this rapid food inflation.
- Right now, the service industry in India is around .25 trillion USD, and in the next 10 years, it can grow to almost 1.5 trillion USD, as India is getting more Service-based jobs outsourced from the west, All the service-based jobs HR, Payroll, Finance &education related jobs are and will keep on coming to India( thanks to free trade deals ). Our IT service industry is already the best in the world. Elon Musk recently, wrote emails to all Tesla employees to report to work just NOT from home, there is news that even the workforce will reduce, all these points to one direction that services which don’t need a board-level decision making at US, Germany, and France could be outsourced back to countries like India because US economy has a lot of gaps to tackle inflation.
- The Chemical and API industry in China is slowly moving away from China, India, the US, and Japan with Australia having already formed a QUAD group, this helps more soft industries move to India, as these countries are the major Soft industries hubs.
If these trends continue, India can certainly reduce its dependence on the oil-based economy and can become a soft superpower like JAPAN once was.