For India, economic entropy presents both an opportunity and big challenge

Context: Entropy, or the disorder in a system, is a concept not usually used to understand economic trends, but it best describes the disorder and randomness at work today.

What are some negative economic trends since the start of 2022?

Energy costs rising, the trade balance turns more negative, the fiscal balance deteriorating, portfolio capital flowing out, the rupee drops, companies getting more cautious, markets turning nervous, and consumers feeling the inflation pinch.

What are the elements of the increased economic entropy today?

Several elements go into the complex molecules of increased economic entropy.

First comes the disproportionate weight of globalisation on weak shoulders, in both rich and poor countries, simultaneously with the rise of national and global elites commanding previously unimaginable wealth.

Second, the more dramatic manifestations of sudden wealth have grown out of the ideological triumph of financial capitalism (one of the causes of the 2008 financial crisis), followed now by the rise to prominence of venture capitalism, and in a third but parallel development the rise to power and influence of Big Tech.

Third, the rise of winner-take-all (or platform) businesses and their start-up wannabes, the replacement of secure jobs with the uncertainties of the gig economy, and disruptive disintermediation.

Fourth, The forced entry into the rich countries (with under a sixth of the world’s population) of large numbers of immigrants from poorer ones.

Fifth, there is the power shift caused by the rise of China (and some smaller economies, like India’s), shaking up old power balances but the churn not settling into new ones.

Sixth, biology-driven havoc of a succession of epidemics/pandemics — the mad cow disease, SARS, bird flu, Covid-19, and for all one knows monkeypox — caused by, among others, dangerous research work in secret labs and the industrial farming of animals and birds.

Finally, add the technological changes being force-fed by global warming, making not just specific industries but entire sectors (energy, transportation, manufacturing) confront sudden discontinuity.

The economic consequences of these multiple, random elements of disorder have been disorienting, like the financial crisis of 2008.

Political-economy responses mirror the disorientation, from the rise of political nativism and economic nationalism to the spread of alternative truths, pace Brexit and Donald Trump.

Way forward

The cycle of events could even end the Chinese super-growth story. While India could benefit from that, it must recognise that entropy is the larger reality to be reckoned with.

Source: This post is based on the article “For India, economic entropy presents both an opportunity and big challenge” published in Business Standard on 27th May 22.