If the emphasis is going to be on reverting back to the Nehruvian-Indira Gandhi era of high import duties and restricted trade, the task will be arduous, expensive and often frustrating.
No matter their political leanings, people in power in India are prone to coming up with catchy phrases to popularise their programmes and priorities. Be it the “Jai Jawan Jai Kisan” of Lal Bahadur Shastri, Indira Gandhi’s “Garibi Hatao” or “Make in India” launched by the current Prime Minister, Narendra Modi, these creative phrases have been fixtures in Indian policy making. Coinciding with the India-China border-standoff in May this year, the present Government came up with the jingoistic acronym “Atmanirbhar Bharat” to set in motion a mission to make India economically self-sufficient.
Prima facie, the objective of this initiative cannot be faulted. Containing the expansionist Chinese dragon by restricting inter alia, trade, investment and other economic relations (especially the burgeoning trade deficit) is a logical objective. This is all the more contextual for a country struggling to find gainful employment for its huge working population of almost 800 mn, especially the 200 mn still living in abject poverty and deprivation. Add to this reality, India’s lagging manufacturing base, and the persistent mismatch in external trade, and it’s evident that changes need to be made.
However, the confounding matter at hand is that the contours of the specific goals to be attained, and the means of implementation and timelines have yet to be spelt out with any degree of clarity. Insight has so far been drawn from the comments of government representatives in different fora. For instance, in the context of India recently not joining the 15-nation Regional Comprehensive Economic Partnership (RCEP), the erudite External Affairs Minister S. Jaishankar stated on 16 November: “the mantra of an open and globalised economy was used to justify unfair trade and production practices against India” and that “the effect of past trade agreements has been to de-industrialise some sectors. The consequences of future ones would lock us into global commitments, many of them not to our advantage.” Furthermore, he mentioned that instead of joining the RCEP, where a special window has been left open for India to re-join, we should have “the courage to think through the problem for ourselves”. A slightly different take has been offered by the Prime Minister, as well as the Finance Minister, who before Jaishankar’s elucidation, had taken pains to explain that an Atmanirbhar India does not imply import substitution, and that the nation would continue to seek to be part of global supply chains with the requisite flexibility and resilience.
Without much doubt, if the emphasis is going to be on reverting back to the Nehruvian-Indira Gandhi era of high import duties and restricted trade, the task will be arduous, expensive and often frustrating. While China, “the world’s factory” for consumer goods like garments, toys, shoes, electrical lighting and several other low value items can be substituted with some worthwhile and concentrated efforts, it would be difficult in the foreseeable future to domestically replace most other products, especially those in the technology and skill intensive sectors.
The dominance of China in several essential raw materials, intermediates and end products, and its ability to deliver these at prices which most countries find hard to match, cannot be overlooked. Over the years, China has come to enjoy a distinct advantage in the production of thousands of critical intermediates such as APIs for drug manufacture, engine components for automobiles, and lithium batteries for EVs and solar power—all areas of key interest to India. It has succeeded in turning itself into a high-tech producer of electronic hardware, power and telecommunication equipment, complex chemicals for new material, etc. Using more industrial robots than anyone else, China now stands at the forefront of Artificial Intelligence, blockchain technology, life sciences and several new technologies that are expected to be the catalysts for ushering the Fourth Industrial Revolution.
Restricting Chinese imports through higher duties and other trade restricting measures, and subjecting investment flows from China to greater scrutiny, as has been done in the half year since May 2020, surely has broad justifications. However, for most tech and skill based products, the options available to us are limited and replacing such Chinese goods would entail significant sacrifices, both in terms of quality and prices, on the part of Indian consumers and the processers dependent on such essentials. A case in point is the recent fiat of the Union Government to its telecommunications-undertaking (BSNL) to cancel the 4G tender and instead buy from local vendors. This has led to BSNL management protesting that the use of unproven technology and inferior equipment, in addition to paying higher than global prices, will severely impact its ability to compete with private players in the market.
Growing protectionism will also dent our ability to join both the global supply chains, and the fast emerging regional value chains that are all based on the relative competitiveness and free movement of goods and services. In fact, the hiking up of duties on a large number of Indian imports (3,200 tariff lines constituting 70% of Indian imports) had already begun in 2018. Compared with the historical figure of 13% between 1991 and 2004, the average import duty now stands at 19%. Undoubtedly, this increase is also a primary cause of the prevailing stagnation been seen in Indian exports. As several economists and India-watchers have observed, it is worth recalling that the high GDP growth years in India with big leaps in investment coincided with high export growth rates.
An implicit belief many ideological proponents of Swadeshi Bharat (a self-sufficient India) have is that the size of the Indian market is large enough to lead to efficient production, and there is little need for global markets. Evidence on the ground, however, belies such make-belief. Advantages of two-way trade have been realised for centuries, and vast empires came to be built on its premise. Apart from the obvious cost-advantages, global trade brings with it knowledge and awareness; this know-how coupled with modern technology, and capital flows, are imperative for rapid growth. From beginner economics textbooks to a plethora of real-world examples, evidence of this abounds. An isolated North Korea languishes, while its neighbours South Korea and Japan, pursuing free and open trade, thrive. Even the story of our large northern neighbour China is fairly similar; it was mired in lacklustre growth till it opened itself up in the early 1980s. Since then, on almost all economic and socio-economic parameters, it has flourished and not looked back,. Cognizant of this reality, it’s no surprise that China today actively espouses and seeks greater international trade.
Such arguments for not blindly lurching towards an insular trade policy, however, in no way undermine the call for a renewed emphasis on domestic assembly or the production of strategically important goods. Given the contemporary geo-political situation, the growing tensions at the border between India and China, and the persisting poor relations with Pakistan, all defence related industries and their support-activities have to be ramped up. So must health and pharmaceutical production, as well as the food industry. Several more can be added to such a list. However, to plug these areas, and in fact most of our manufacturing into global and regional supply chains on a sustainable basis, requires making these products price and quality competitive, effecting drastic improvement in logistics arrangements and affordability, and creation of a vibrant network of thousands of nimble and sure footed innovation based small and medium enterprises. It is not a coincidence that these initiatives are also the hallmarks of modern day manufacturing in China.
In the context of India not joining the RCEP, and even prior to that in advocating more broadly against open trade, an argument advanced centers on the premise that Free Trade Agreements (FTAs) have not helped India much. It is cited that the three subsisting FTAs with South Korea, Japan and the ASEAN countries have benefitted them more by way of boosting their exports to us more than ours to them; correspondingly the Indian trade deficit between 2011 and 2019 with ASEAN countries rose from US $5 bn to $22 bn, with South Korea from $8 bn to $12 bn and with Japan from $4 bn to $8 bn. With China, a country with which we don’t have a trade agreement, our trade deficit has soared from $5 bn in 2007 to approximately $50 bn in 2017. While these numbers may be correct, it is also true that the pace of growth of Indian exports to these countries, post the signing of these accords, has been higher than in the periods before. In fact, in a 2019 study by Prof Pravin Krishna of Johns Hopkins University, he found that the deficits with countries with whom we have FTAs or PTAs (Preferential Trade Agreements) had declined in aggregate from 12.6% to 7.5% of the overall trade deficit during the period 2007 to 2017.
The truth is that the underlying reason why India’s export growth rates have not matched its trading partners’, with or without trade agreements, is the lack of global competitiveness of its exports to them. FTAs or PTAs, by themselves, cannot assure higher trade. Boosting the Indian trade balance requires concerted domestic action to produce export worthy goods and services at globally competitive prices; an area where much internal work remains.
Dr Ajay Dua, a public policy specialist and a developmental economist by training, is a former Secretary in Ministry of Commerce and Industry.
Part 2 of this article spelling out the sectors and policies where Atmanirbhar Bharat can succeed will appear next week.