Handholding domestic industries to develop domestic capacities should be a part of India’s economic strategy, not the entirety of it.
By Smriti Verma
The coronavirus-induced lockdown in India created significant difficulties for the migrant, informal, and daily wage workers who became desperate to return home. MSMEs also suffered a setback from the lockdown—the over 63 million unincorporated non-agricultural enterprises engage over 111 million workers. Against this backdrop came the clarion call for an “aatmanirbhar Bharat” or a self-reliant India, encouraging people to be ‘vocal for local’ and striving for ‘global outreach’.
The blinkered focus of India’s economic policy on self-reliance is worrying. International trade brings gains to both the trading countries even when one country cannot produce anything more efficiently than its trading partner—this is the theory of comparative advantage which has provided the theoretical underpinnings for economies to open up during the 1980s and 1990s. The great lockdowns in all major countries around the world have destabilised global value chains; this crisis offers opportunities for improving international cooperation rather than an excuse for turning inward. In a well-timed book “COVID-19 and Trade Policy: Why Turning Inward Won’t Work”, Richard Baldwin and Simon Evenett explain how writing off the open global trading system may not be the best way forward. Protectionism has ripple-effects—protectionist policies cannot be pursued in isolation; they will evoke retaliatory measures from trading partners ultimately making everyone worse-off.
In the economic package announced for agriculture and allied activities, the finance minister proposed that efforts be directed at giving an export push to some niche commodities based on the cluster approach such as mango in Uttar Pradesh, kesar in Jammu and Kashmir, makhana in Bihar, and chilli in Andhra Pradesh. Gradually, the politico-economic narrative meandered toward being ‘vocal for local’ that is buying locally produced goods and producing as much as possible domestically, on the consumption and production sides, respectively. This idea is inherently flawed. Being open as an importer is a prerequisite for becoming a successful exporter, ie, it takes orthodox opening (open on both imports as well as exports) and not what trade economists call heterodox opening (open on exports but sealed on imports).
India’s merchandise exports shrank to $19.05 bn in May 2020, a y-o-y decline of 36.5% whereas imports contracted to $22.2 bn, experiencing a 51.1% y-o-y decline. In terms of overall trade (merchandise and services), India’s exports plummeted to $61.6 billion in April-May 2021—a 33.7% fall over the same period last year, while imports plunged to $57.19 billion registering a 48.3% decline.
Ongoing border tensions with China are compounding India’s economic problems further. Apart from syphoning scare and valuable resources toward bolstering defence and securing borders, it has steered the intrinsically flawed state rhetoric for “aatmanirbharta” or self-reliance further in the wrong direction. The clamour for restricting trade with China by imposing higher import duties on Chinese products is entirely misplaced, even as it stokes popular sentiment in its favour and even industries begin to take cognisance to reorient existing contracts and deals with Chinese companies. China alone accounts for 13-16% of India’s aggregate imports from around the world. In value terms, it is India’s second-largest trading partner next only to the US with a total trade valuation of $87 billion in 2018-19.
A sizeable portion of top imports are sourced from China, particularly those of intermediate goods and raw materials. India imports about 50-60% of electrical machinery and equipment, 35-40% of organic chemicals, over 30% of fertilisers, 30-35% of nuclear reactors, boilers, machinery, and mechanical appliances, over 20% of iron and steel and 35% of iron and steel articles, 25% of vehicles and accessories, 20-25% of miscellaneous chemical products, 17-20% of optical and photographic instruments and apparatus, 14-17% of plastic and articles thereof, and almost 14% of inorganic chemicals from China. Additionally, 60% of consumer durables such as furniture, bedding, mattresses, and over 25% of ships, boats, and floating structures are imported.
Indian manufacturers use many of these items for producing finished products for domestic and export markets. Unless comparable alternate sources of import are ascertained for these critical goods and raw materials, any unthinking offensive against Chinese imports will hamper manufacturing by Indian industries and dent India’s domestic and export markets. Producers may not be willing or able to absorb the higher costs of production from dearer inputs (imported or produced domestically) shifting the burden onto consumers who will face much higher prices for regular commodities such as mobile phones, automobiles, and electronic goods.
India is the third-largest producer of pharmaceuticals in the world by volume and accounts for 20% of global generics exports, catering to markets as diverse as the US and Sub-Saharan Africa. However, India imports over 70% of its requirement of active pharmaceutical ingredients (API) for the production of formulations sold domestically and abroad, from China. This critically integrates China into India’s production and supply chains. Any blanket ban on imports from China will leave the Indian pharmaceutical industry in acute shortage of raw materials posing a great danger not only to its export prospects but also to public health in India and in countries that depend on Indian drugs. Worse still, raising import tariffs and creating barriers for Chinese imports will attract retaliatory measures, which if imposed in any of the strategic sectors where India critically depends on Chinese imports, could throttle many an industry of material and strategic significance in India. China holds importance as an export destination too for India; exploration of markets in developing and advanced economies that are aligned with India’s stance toward China should precede any thought on imposing trade restrictions.
As Martin Wolf, in his recent column on the war on supply chains, aptly highlights from a chapter by Sébastien Miroudot in the aforementioned book, resilience is the ability to return to normal operations after a disruption whereas robustness is the ability to maintain operations during a crisis. Clearly, it is robustness that matters most during the ongoing Covid-19 pandemic. As Miroudot emphasises, it is “…a mistake to equate self-sufficiency with robustness – putting all the eggs in one basket…” even if it is the domestic one “…is still not a good idea.” A reasonable strategy in the context of Covid-19 and border escalations with China would be to have short- and long-term plans for diversifying import dependence and export markets. Handholding domestic industries to develop domestic capacities should be a part of India’s economic strategy, not the whole and sole of it.
Finally, to the question “should governments react to the health, economic, and trade crises by turning inward?” posed in their book, Baldwin and Evenett categorically and unequivocally answer: “No. Turning inward won’t help today’s fight against COVID-19…Trade is not the problem; it is part of the solution.” It is hoped that the policymakers are listening.
The author is Research analyst, International Food Policy Research Institute. Views are personal