Make in India should not rely on swadesh through the back door

It looks like the apprehensions that Prime Minister Narendra Modi’s call, in his Independence Day speech, that Make in India could lead to import substitution policies may not be too far-fetched or alarmist.

According to this report in the Indian Express , Prime Minister Narendra Modi has asked ministries to discourage inessential imports, in order to give local manufacturing a boost. So, a few ministries have to track imports in their sectors and give quarterly status reports on these.

Some of the ministries told to monitor imports, according to the Indian Express report, are steel, coal, petroleum, telecom, IT and agriculture. Coal imports are a fallout of our messed up coal policies and India is not self-sufficient in petroleum, so why these are on the list of watched industries is puzzling. Do we have a choice in not importing them?

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The move appears to be driven by two reasons. One is to ensure that the trade deficit does not increase irrationally and the other is to boost the Make in India programme.

A widening trade deficit is a problem, and one that can have a destabilising effect on the economy. But is this the right way of keeping a lid on it? The approach is flawed for several reasons, the common thread being government interference in a market economy. The Modi government is not supposed to be ideologically inclined; it is supposed to be pragmatic. But such a measure fails the pragmatism test as well.

What constitutes non-essential imports? Gold, yes. What else? Consumer goods, perhaps. Some intermediates, maybe, like steel? Gold imports can - and did - throw the current account balance off kilter, but the share of consumer goods in the import basket is not significant enough to do the same. More to the point, clamping down on imports is being unfair to the consumer. Why should ordinary people (or industries using imported intermediates) be deprived of choice, which the opening up of the economy in 1991 and the end of quantitative restrictions on imports (in line with World Trade Organization commitments) in 2000 provided? This really amounts to influencing consumer behaviour, which is definitely not the business of any government.

In his August 15 speech, Modi asked why India is forced to import even the smallest of things. But is India being forced to import? First, there is nothing wrong if we import the smallest of things if that frees up our industry to move up the value chain. It’s another matter that this is not happening and Make in India is supposed to address this. Second, what is wrong if consumers prefer something made abroad, if they find it more cost-effective or of better quality? The cheap Chinese goods flooding the markets may not be high on quality, but they sell because there is a market for these. Besides, raising tariffs to discourage imports (which can only be to the extent that bound tariff commitments to the WTO allow) cannot be done in a country-specific manner.

Restricting consumer choice has another fallout. It will, willy-nilly, shield domestic industry from competition. That means there will be no incentive for domestic manufacturers to improve their efficiencies or the quality of their products. India pursued an import substitution approach for decades - neither consumers nor the economy benefited. Top Indian industrialists cried foul when the economy was opened up, but later rose to the challenge and shaped up. Competition did not kill them, it made them more efficient. An attempt to go back to the Be Indian Buy Indian days only raises the question asked by Milan Vaishnav and Suyash Rai in this article - is the Modi government pro-business or pro-consumer?

In any case, discouraging imports does not always help. The previous government hiked duty on gold several times to dampen gold imports which were putting the current account under tremendous strain. That did help bring down imports through the official channels. But as a State Bank of India EcoWatch report in February noted, smuggling increased. The report noted a steep rise in seizures of gold by the Directorate of Revenue Intelligence - from nil in 2011 to 3 per cent in 2012 and 8 per cent in 2013. The report noted, `a close look at this trend tells that sudden solace on CAD figures attributed to drop in gold imports is ill-founded’. The inadequate returns on financial savings instruments made it worth the risk for people to even invest in smuggled gold. So clearly the root cause needs to be addressed first.

That’s the approach that needs to be taken for other non-essential imports as well. The Chinese threat is a real one and needs to be countered. Foreign goods, especially Chinese goods, score over Indian goods because the latter are just not competitive. The reasons are well known and so are the solutions. The Modi government has, to its credit, started to tackle some of these issues - the easing of procedures for complying with various labour laws, reducing red tape for businesses, especially small businesses. It needs to go full throttle on these instead of throttling demand for foreign goods.

Making Indian industry competitive will also boost Indian exports and address the trade balance problem, which is driving the import substitution approach. Sluggish exports are as much a cause for a rising trade deficit as so-called non-essential imports.

Make in India is a goal that absolutely needs to be pursued, in order to boost the manufacturing sector and generate employment. But a swadeshi through the back door approach is not the way to go about it. Perhaps the government intends import curbs as a temporary approach, to shield Indian industry till such time as the measures to increase its competitiveness bear fruit. But the problem is protected industries never want the protective shield to be removed. What will result is the lobbying and cronyism that India needs to put firmly behind it. The fallout of such an approach will not be good for India in the long run.