Is this government pushing India back to the Indira era? Idea of economic nationalism will work only if backed by structural reform

Narendra Modi, who had positioned himself over the years as a trade liberalist and a free-trade champion on global platforms such as Davos, has been taking an increasingly and distinctly protectionist turn.

Sreemoy Talukdar May 18, 2020 09:52:38 IST
Is this government pushing India back to the Indira era? Idea of economic nationalism will work only if backed by structural reform

It has been a few days since Narendra Modi delivered his address to the nation, exhorting people to buy local and promote local for an Atmanirbhar (self-reliant) India. There has since been some confusion over the meaning of his words. Not only over the definition of “local”, but also regarding the way his slogan fits within the paradigm of a more globally connected India — a target that he also set during his 12 May speech.

It would seem that the prime minister wants to strike a balance between making India an integral part of the global supply chain (like China) while promoting local industries and empowering small businesses so that they can compete with the world’s best.

And how does Modi hope to strike this delicate balance?

It seems the government wants to incentivise shifting of global supply chains from China to India, make India attractive for investment through a slew of reforms in labour, land, liquidity and law and at the same time, stress on economic nationalism that — along with policy tweaks — may offer some sort of protection from cheap (read Chinese) imports and fast-track the time it takes for Indian businesses to be strong and globally competitive. In his latest address, where the word ‘self-reliance’ was uttered 17 times, Modi asked consumers to use and promote local products almost as a moral duty.

Is this government pushing India back to the Indira era Idea of economic nationalism will work only if backed by structural reform

Prime Minister Narendra Modi interacts with Chief Ministers of all States on COVID-19 situation through video conference. ANI

“Local is not just the need, it is our responsibility also. Time has taught us that we must make the local as a mantra of our life. The global brands you feel today were sometimes also very local like this. But when people started using them, started promoting them, branding them, proud of them, they became global from local products. Therefore, from today every Indian has to become vocal for their local, not only to buy local products but also to promote them proudly.”

When economic nationalism becomes a moral duty, the economy suffers the consequences. India has travelled this road before. The prime minister’s rhetoric takes us to the Indira Gandhi days when license-permit raj ruled the roost, and under the umbrella of protectionism and import substitution domestic businesses and small producers remained uncompetitive and inefficient. The economy suffered a distortion that led to eventual bankruptcy and brought India to the brink of defaulting on international debt obligations in 1991.

Is Modi bent on repeating the past folly? Worth noting that Modi, who had positioned himself over the years as a trade liberalist and a free-trade champion on global platforms such as Davos, has been taking an increasingly and distinctly protectionist turn. This trend was reinforced during the 2020 budget when Union finance minister Nirmala Sitharaman tweaked the Customs Act, 1962.

This trend has been noted and commented upon by economists, including Columbia University professor Aravind Panagariya who has been a former vice-chairman of Niti Aayog and is by no means ideologically antagonistic towards the NDA government.

In his column for Economic Times criticising the tweaking of Customs Act that allows the government to now prohibit imports and exports of any item, not just gold, Panagariya wrote: “These measures come on top of numerous tariff increases on virtually all labour-intensive light manufactures of which we ought to be large exporters. Instead, we have chosen to punish our consumers to protect our inefficient small producers, which will never become globally competitive. Our approach, instead, ought to be to create an ecosystem in which small enterprises become medium, medium become large, and large turn larger still. That is what will place us on the path to double-digit growth and gainful employment for the masses.”

The turn towards economic nationalism, therefore, is not just a reflex reaction to accommodate the new realities of post-pandemic era. It is rather a calibrated invoking of the ‘swadeshi’ era of economic policies. There are clear indications that we may return to the ‘import-substitution’ framework that had been junked during the post-1991 liberalisation and globalisation policies.

A few days ago, Union minister Nitin Gadkari, a heavyweight in the Modi cabinet who handles the MSME and road transport and highways portfolios, urged captains of Indian industry to make technological upgradations and come up with “cost-effective substitutes to reduce the country’s inward shipment” because the government “is considering introducing a policy on import substitution.”

In a separate reportEconomic Times notes that government has identified pharmaceuticals, furniture and leather as the three sectors where the states will be asked to restructure their procurement process and prefer local manufacturing. The Modi government may offer “tax sops, procurement preference in contracts for domestically produced goods while imposing stringent non-tariff barriers to discourage imports,” reports the newspaper.

This is also where the confusion around the messaging lies. On one hand, the government clamps down on imports and seeks to promote local manufacturing, on the other hand BJP leaders claim that the concept of ‘local’ includes even the MNCs if they make in India and the government won’t make a distinction or give any directive. The Centre has no “isolationist approach, no protectionism,” as BJP’s Rajya Sabha MP GVL Narasimha Rao was recently quoted as saying.

The government evidently wants to strengthen local businesses and make them globally competitive so that India can become the next manufacturing hub, like China. The prime minister has perhaps taken the disruption caused by the pandemic as an opportunity to push India towards developing its manufacturing prowess and emulate China’s export-driven rise.

Yet it is not clear at this stage that businesses will leave China en masse or shift their supply chains from China to India. The very impulse that is driving India to focus towards “local manufacturing, local market and local supply chain” is also driving developed economies like the US or Europe to hedge against reckless globalism and bring a large chunk of the production chain back home.

The Donald Trump administration has already threatened economic decoupling and “rip all global supply chains from China” but more importantly, it wants to end offshoring of US jobs and bring manufacturing back home.

As Robert E. Lighthizer, US trade representative in the Trump administration, recently wrote in the New York Times, "After we have defeated this disease and reopened our economy, we cannot forget the hard lessons learned from this misguided experiment. Over the long run, the path to certainty and prosperity is the same for our companies as it is for our workers: Bring the jobs back to America.”

Not just the US, Europe, too is taking a turn towards economic nationalism. London-based newspaper Financial Times quoted Bruno Le Maire, France’s finance minister, as saying that “in the long term we cannot depend on Asia, on China for goods that are strategic for us, whether in the aerospace or medical sectors or in other supply chains.”

Notably, US president Trump has reacted irritably to a statement that tech giant Apple may shift its manufacturing base from China to India and has threatened the California-based company with tariffs if it doesn’t move all production lines “100 percent” to the US.

If localisation is an increasingly popular global policy response to the lessons taught by the pandemic, it is not clear how India may suddenly become the next manufacturing powerhouse when it doesn’t already dominate global supply chains, lacks the manufacturing prowess of China and is faced with a world where countries are busy ring-fencing risks and pulling up the drawbridge.

The danger is that in its push towards becoming more self-reliant and promote domestic manufacturing, India may end up taking an even more unequivocally protectionist turn. “When I requested you and the nation to buy Khadi and said it will be a great support to our handloom workers. Today, the demand and sales of both Khadi and handloom have reached record levels in a very short time,” Modi had said in his address.

The ideational push may slip very easily towards a policy position, if not already and the protestations, that a “self-reliant India will automatically be a more internationalist India” do ring a little hollow.

The government insists that a compromise between going local and staying global is possible. As former Union minister and chairman of the parliamentary standing committee on finance Jayant Sinha was recently quoted as saying in an interview, “We want to first make India a very competitive nation so that our local companies, products and services are purchased by the domestic consumers as well as enthusiastically by consumers around the world. One aspect of being resilient is that our local companies are as competitive as possible.”

But it is difficult to make companies competitive by shielding them from the competition. And that’s exactly where the policy seems to be heading.

Media reports indicate the government is apparently looking at medical textiles, electronics, plastics and toys as focus areas for local manufacturing in the first phase, while gems and jewellery, pharma and steel could be in focus in the second phase. A report in Economic Times quotes an official promising that Modi government’s “swadeshi focus was not just an ideological concept presented. It is a serious thought that would be followed up with concrete steps.”

India’s competitiveness will be unshackled not by clamping down on imports and asking consumers to go local, buy local and promote local. Rather, small businesses and local producers will become more efficient and even globally recognised in a competitive environment aided by a government that makes land procurement easier, reforms labour policies, ushers in changes in the legal framework and makes liquidity available. But that will require implementation first of structural reforms.

Happily, the government has moved in that direction and announced a slew of deep, sectoral reforms that will bear fruit and make it progressively easier to do business.

When that happens, ironically there won’t be any need for the prime minister to request citizens to buy and promote local. Until that transformation happens, “the argument that we can suddenly become world-beaters by turning self-sufficient is not convincing,” as professor Makarand Paranjape writes in The Print.

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