The central thrust of Prime Minister Narendra Modi’s economic package to tackle the Covid-induced economic downturn is “self-reliance”. To this end, his government has announced measures such as reserving government tenders up to Rs 200 crores to only Indian bidders and vigorously promoting indigenisation of defence manufacturing. All these policies are underpinned by an aggressive liquidity push within the debt markets for small- and medium-scale businesses.
Such moves are in line with the steadily protectionist instinct of the Modi government that has been evident over the past few years. There has been the periodic raising of tariffs in critical sectors to promote domestic manufacturing, and the foregoing of free trade deals such as the Regional Comprehensive Economic Partnership.
Yet after every such announcement, the nation’s financial media is predictably dismayed at this “protectionist turn”, claiming that the country’s willingness to stand by its manufacturers will cost India.
This outlook is severely mistaken. Considering the nature of the world order today, the Modi government’s instinct to look out for India’s industrial base and supply chains hits the right notes. In fact, Modi’s fault lies in not pursuing this path comprehensively enough.
A world order coming apart
We live in a world of momentous change. China, by some metrics, is already the biggest economy in the world. Its chief rival, the West – more specifically the United States and Western Europe – are too internally divided, too indebted and, by the looks of their coronavirus response, too incompetent to be able to block or temper its rise.
Covid-19, by inducing the steepest decline in the West’s output since the Great Depression of the 1930s, has accelerated the advent of the new world order that has been at least two decades in the making. This portends to the drastic reshuffle of power dynamics – whereby the West’s relative power viz. the world, and especially East Asia, will dramatically decline.
But, China, the challenger, is no democracy or lover of constitutional freedoms. The Chinese Communist Party, which rules China, considers its writ to be subject to no higher laws. It has ruthlessly cheated on international trade. It routinely kidnaps billionaires who dare to defy it, viciously censors news and social media, eradicates ethnic identity hood through mass incarceration and is now doing away with Hong Kong’s freedom.
Every man to himself
In such a multipolar world where there is no arbiter, the playbook for any major power necessarily is every man to himself. Far-flung supply chains or excessive foreign ownership become potential liabilities for any major economy.
In the Indian context, this is doubly troubling if the dependency extends itself to countries that are politically and socially incompatible with Indian values and could use economic power as leverage for political gain.
For instance, China today exports to India five times as much as it imports from India. China also owns tremendous portions of India’s tech ecosystem. If China tomorrow needs political leverage over India, does one really think it would not use its presence in India’s electronics market or its vast ownership of Indian tech as leverage?
Such lessons are being learnt in two other major powers of the world today – the United States and Russia. Last fortnight, the United States Senate passed a bill banning Chinese companies from listing on American stock exchange. This follows at least two years of relentless trade war and corporate skirmishes between China and the US. With bipartisan support for humbling China in Washington, this likely marks the beginning of America and China decoupling their economies. China will attempt to rely less on the US market, and US will attempt to re-orient many supply chains back home.
Similarly, Russia, through import-substitution over the past six years, has become the top wheat exporter in the world. Russia’s import-substitution strategy was a direct response to the Western sanctions following the Ukrainian crisis. And it is a perfect illustration of how a strategy that prioritises building a industrial base can succeed.
Don’t be dogmatic
Free trade cannot be a dogma. It increases prosperity between countries where industrial bases are at par with one another (such as China and Japan), but exacerbates inequalities where there are fundamental economic and political differences – such as China and India.
The amount of evidence against unfettered free trade – especially between countries that are different stages of industrial development – is so large and now well documented that it is surprising that our leading editorial pages still have slavish attachment to the idea.
The central fear of free trade proponents is that any industry support through tariffs or subsidies will leave our industrialists too coddled. That fear is correct but relevant only in instances where the industrial development is mature – for instance the Indian pharmaceutical industry. When it comes to fledgling industries such as the Indian solar-panel manufacturing, free trade – especially with industrial giants in East Asia – is likely to kill the goose before it starts laying any eggs.
Modi, therefore, is fundamentally right in his attempts to prioritise domestic industry. Through trade protection and government support, his intention to ensure at least substantial presence of Indian manufacturers in critical home markets is clear. This support is necessary both for India’s manufacturers to stand on their feet and for India’s national security in a world which increasingly recognises economics as a tool of politics.
A sound foundation
It will also provide an industrial foundation for export promotion – something that has sorely been lacking in India’s economic history.
India’s biggest imports – apart from oil and gold – are electronics, solar equipment and high-end capital and defence machinery. Here, there have been vigorous steps taken by Modi to at least begin the assembly of some of these categories through judicious use of tariffs on end-products, and reduction of tariffs of key inputs.
Such initiatives should, however, be considered as the first step to a steadily increasing backward integration whereby manufacturers are compelled to shift more and more of the supply chain to India. Today the smartphones are being assembled in India; tomorrow some of its components must also be domestically manufactured.
Beyond this, the Modi government should learn from the best. Look at how the Chinese, German or Korean industrial planning mechanisms work. Understand the sophisticated industrial policies that nurture complex ecosystems. And adjust such methods to Indian context.
That is not too much to ask for.
Akshat Khandelwal is a writer and entrepreneur based out of New Delhi. His Twitter handle is @akshat_khan.