Import substitution strategy not against free and fair trade

November 18, 2020 10:07 AM

The call for ‘make in India’ and ‘vocal for local’ is an attempt to rebuild and restructure Indian manufacturing predominated by MSME sector to achieve higher standards of performance.

India’s manufacturing sector has not been able to match its global counterparts in terms of productivity, capacity building and cost effectiveness.

By Sushim Banerjee

The impact of Globalisation in raising the per capita income of the developing countries during 1990 and 2008 was an undisputed testimony to silence the critics who were lamenting the invasion of sovereignty of the low-income countries by rising trend of global trade that increased its share in GDP by more than 56%. The concept of free and fair trade was formalised under the GATT regulations and the role of WTO in promoting the case of Special and Differential treatment for the developing countries alongwith protracted regulations against cheap flow of goods in terms of dumping, subsidising, sudden surge of imports etc. assured all the countries of the independent and transparent nature of global trade.

The events in the post Lehman crisis, however, took shape on a different note. The emergence of China as a low cost producer and aggressive capacity augmentation enabled China to send a whole range of commodities and services as a major exporter replacing some of the advanced countries.

The global trade in the subsequent period witnessed protective policies in the form of a series of tariff and non-tariff barriers adopted majorly by the rich countries culminating in USA proclaiming unilateral imposition of duties under section 232 (threatening security) for steel and aluminium against all trading partners. The Covid-19 pandemic brought down global trade by 13 to 32% according to official assessment.

India’s manufacturing sector has not been able to match its global counterparts in terms of productivity, capacity building and cost effectiveness. The call for ‘make in India’ and ‘vocal for local’ is an attempt to rebuild and restructure Indian manufacturing predominated by MSME sector to achieve higher standards of performance. To describe such an attempt of import substituting industrialisation (ISI) as a “strategy that seeks to develop industrial capacity by shielding domestic producers from foreign competition” as commented by Economist (Nov 7, 2020 edition) appears uncharitable.

The arguments offered against ISI relate to irrational economic calculation in favouring domestic industries based on political self-interest, sheltering of local inefficient and complacent industries behind high tariffs. It is mentioned that India with its poorer and less integrated domestic market would deprive the consumers to derive the fruits of competition and technology and restrict the benefits of growth in the emerging economies like China and India from spreading to other countries of the world.

The purpose of a self-reliant India is to encourage domestic firms to produce goods that would cater primarily to the domestic market and also to explore export markets for higher capacity utilisation. The GOI has in the last few months issued notifications to restructure the outstanding loans, facilitate liquidity for working capital and capacity expansion drives, liberalise bankruptcy rules and introduce export incentives.

The call for minimising imports of defence goods in a phased manner, to develop indigenous capability of producing engineering goods by promoting Indian capital goods industry and urging domestic steel sector to produce various speciality steel so as to facilitate production of a variety of engineering goods by being a part of the global value chain is a laudable strategic focus that any emerging country adopts and this is not against rational economic calculation.

Rationing of foreign exchange by replacing imports by the poor countries, the argument put forward by noble laureate Gunnar Myrdal, is still applicable and India as an emerging economy which has brought down high tariff wall substantially in the past few years is definitely not against the benefits of specialisation and global trade. There is a renewed thrust to become export oriented and, in this respect, the Indian industry is facing stiff challenges by various trade restrictive measures adopted by countries.

The ISI pursued by India is not against free and fair trade for which WTO compliant trade measures are available. India wants its manufacturing sector to reach global standard of excellence by creating an enabling environment. Wealth creation would only be possible to share with others by being a dominant player in both indigenous and external market. Atmanirbhar Bharat is a prudent step in that direction.

(The author is Former DG, Institute of Steel Development and Growth. Views expressed are personal.)

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