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The wave of globalism, finance and unfettered markets that defined the last four decades may be subsiding, ushering in a new era of national sovereignty and state-led industrial policy, Nuvama said in a research note. The brokerage firm argues that the world is facing a "crisis OF the system" rather than a cyclical downturn, with the US-led USD-system showing signs of strain and a new synthesis of sovereignty and democracy likely to replace hyper-globalisation.
According to Nuvama, Dani Rodrik's political trilemma explains the last 150 years of world order. Under the Gold Standard, hyper-globalisation and national sovereignty prevailed while democracy was limited. The Bretton Woods era saw democracy and sovereignty take precedence as globalisation receded. Since the 1980s, the USD-system has turbocharged globalisation but weakened national sovereignty, with the US acting as a surrogate world government. Nuvama notes that each phase has produced "miracle economies" that used Hamilton's state-directed competitive advantage to industrialise rapidly and challenge the hegemon -- from the US in the Gold Standard era to Japan and Germany under Bretton Woods, and China under the USD-system. Today, Nuvama says the USD-system has hit a bad equilibrium, with the U.S. over-extended, constrained by a bloated balance sheet and limited industrial base, while record inequality and populism are pressuring domestic policy space globally. The transition to a sovereignty-democracy synthesis, Nuvama outlines, will have far-reaching consequences. Financialisation may have peaked, with governments likely to impose capital flow restrictions and guided lending, which could weigh on returns on equity and valuations. Supply chains may face recurrent disruption as US naval hegemony weakens and states increasingly use material sanctions as a geopolitical tool. AI's impact on income distribution could also push societies toward redistributive policies like universal basic income, similar to the New Deal response to 1930s inequality. Nuvama also expects the global monetary system to shift from a single reserve currency to a multi-currency competitive framework, better suited to a multipolar world but likely to deliver slower growth. A fiscal-monetary compact may replace the strict separation of the two that defined the age of global finance. For India, Nuvama says the changing order presents both a challenge and an opportunity. While China's 1994 balance-of-payments crisis pushed it toward a Hamiltonian model, India's 1991 and 2013 crises nudged it toward Smithonian free-market reforms. That has helped India excel in services but limited its manufacturing scale. With geopolitics and AI reshaping trade, Nuvama argues India must now build an industrial base and secure critical supply chains, calling reshoring a "national security necessity." To do so, Nuvama suggests India should incentivise scale over RoE, production over consumption and fixed assets over financial assets, with public sector enterprises taking the lead. A scaled-up PLI scheme and a rethink of currency and inflation-targeting policy may be required to counter China's regional ambitions as US hegemony recedes. In Nuvama's view, the coming age will move away from the abstractions of Adam Smith, Hayek and Friedman toward the realism of Alexander Hamilton, Keynes and Polanyi -- a shift from economics to political economy. (ANI)
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