IN 2004, AFTER MORE than 50 years spent on arguing free trade and free enterprise, the economics Nobel laureate Paul Samuelson did a table-turning of sorts. In a paper that year, he showed in textbook fashion how free trade could, under certain circumstances, have negative consequences for a rich country that had benefited from a much poorer exporter. His hypothetical example involved the US importing a good produced cheaply in China. 2004 was a presidential election year and Samuelson’s arguments got traction. It was not until after the political heat dissipated that the three champions of free trade—Jagdish Bhagwati, Arvind Panagariya and TN Srinivasan—gently rebutted his claim.
Another decade elapsed before these debates were to finally see some political action. By 2015, when Donald Trump was on the rise, the reality could no longer be ignored: the widespread feeling that the US had been ‘cheated’ by countries like China became unshakeable. In the years ahead, there were trade wars and world trade entered a very uncertain phase. It is another matter that economists knew all along that free trade had distributional consequences; that there were winners and losers and some form of compensation for the latter was essential if a political backlash was to be stopped. In the US that did not happen. The top 1 per cent garnered all the gains; the bottom 50 per cent exacted its revenge.
If in the US it was distributional issues that put free trade in a fix, in India the culprit is a big and aggressive neighbour that has enjoyed overwhelming trade advantage with India. China hardly buys anything while it sells everything to India. In normal times, this did not matter. But then a pandemic and a border skirmish intervened. No Prime Minister, least of all Narendra Modi, could ignore the consequences of this skewed trade pattern. When coronavirus cases hit India, the country was left scrambling for vital medical supplies, from something as basic as personal protective equipment (PPE) to specialised items like ventilators. It was also worth noting that a huge part of India’s pharmaceutical supplies, especially the active pharmaceutical ingredients for drug formulations, were manufactured in China. Suddenly, it seemed that the adage ‘trade is good but imports are bad’ had some truth to it.
In a widely discussed speech delivered on May 12th, Modi said: “The state of the world today teaches us that an Atmanirbhar Bharat (‘Self-reliant India’) is the only path. It is said in our scriptures—EshahPanthah—that is self-sufficient India.” One could discern concerns about China—that became manifest a month later in mid-June when 20 Indian soldiers died in a clash in the Galwan Valley—but also the protectionist tendencies that had emerged in the global economy. A protectionist world has economic and political pathologies built into it. For example, in such a world, importers tend to lose as exports are discouraged and that makes countries turn inward. The last time that happened, after the crash of 1929, it took a war and nearly five decades to end protectionism. The domestic mismanagement of an open world in the advanced economies where laissez faire attitudes percolated in domestic politics as well—leave the losers to their own fate—unhinged the system in just a quarter century.
Is India staring at such a world? It is unlikely that India will turn into a protectionist haven. The key concern for policymakers after China’s wayward behaviour is to keep vital supply chains within India. There is some strategic logic to it. The fear that the huge disparity in trade will feed China’s war machine cannot be dismissed in a country that lost territory with a catastrophic war with its overbearing neighbour. What is interesting about Atmanirbhar Bharat is that it revives some old debates, such as the one about the ‘home market’, at a time when most people had forgotten them. The issue of escaping a middle income trap—where demand saturates and, in turn, growth stagnates—is now an important one after India has seen multiple years of tepid growth. Should the objective of high growth be attained by promoting trade vigorously or should India’s potentially huge domestic market be tapped? It is also a question of relative buying power among different segments of Indian consumers, one that is exceptionally skewed towards the uppermost decile of consumers. It is fascinating to note that in this emerging debate, leftists of a certain persuasion are in favour of an open India while it is a conservative Government that seeks to develop the ‘home market’.
In the two months since the Prime Minister’s speech, plenty of concerns—some bordering on panic—have been raised on the idea of Atmanirbhar Bharat. These should not be dismissed out of hand even as one should be clear that a return to the command and control economic system that prevailed between 1952 and 1991 is unlikely.
At Independence, India had undergone 190 years of unbroken rule by the British. The experience of this time cast a huge shadow on the economic system that India chose after 1947. Some of the salient features were: One: a resolve against free trade, a system that nationalists since Dadabhai Naoroji had held to be exploitative and responsible for the alleged de-industrialisation of India. Two: the belief that foreign investment was a bad idea, based on the—wrong—experience of British capital investments in railways and other sectors. Three: a general suspicion of the private sector, especially after 1952, as profit was considered a ‘dirty word’. Four: ‘Planning was in the air.’ It was believed without planning and ‘marshalling of national resources,’ India could not be developed and its mass poverty could not be eradicated.
Fast forward to the time of Atmanirbhar Bharat and virtually all these factors are observed in reverse. The last item—suspicion of the private sector—illustrates this best. India, it seems, has taken Deng Xiaoping’s adage “It doesn’t matter if a cat is black or white so long as it catches mice” to heart. This is a politically incorrect example for these times, but it is unlikely that the private sector will be discriminated against if India makes a full-hearted attempt at self-reliance in the years ahead. There is simply too much of accumulated economic and administrative experience to show that what the private sector can achieve, the public sector cannot. In certain sectors, it is the public sector that can deliver and the private sector is unlikely to be given a free run. In any case, the Thatcher-Reagan ideological positions never found favour in India except in the hearts of some ideologues. For good or for bad, India always had a mixed economy.
There is evidence that, willy-nilly, some of the economic irrationalities that go back to the socialist era are being undone during the pandemic, nearly 73 years on. In her announcements on the Atmanirbhar Bharat programme, Finance Minister Nirmala Sitharaman spelled out a number of changes that redefined the scope of Medium Small and Micro Enterprises (MSMEs). The original proving ground of Gandhian economics, the MSME sector had not only become stunted due to perverse incentives. The moment an enterprise grew beyond a certain scale, the help it received from government vanished. This was by design: India needed its ‘village-scale industrial enterprises’ and economic levers in the government’s hands were going to ensure that. It does not take too much thinking to understand why India never got its mittelstand, the backbone of Germany’s industrial wonder. Indian MSMEs had to adhere to an ideological nostrum; output and productivity were not there in the equation at all. In the times ahead, this is likely to change.
Where India needs to be cautious on Atmanirbhar Bharat is in not going overboard. It ought to be a pragmatic ideal to cope with the world’s changing economic landscape. Ideological formulations, ones that have been so damaging to India’s economic fortunes, need to be avoided. It should not be forgotten that India achieved high growth rates at that time when it engaged openly and confidently with the world. Three issues in particular need to be kept in mind. First, self-reliance should not be confounded with self-sufficiency. The latter is a product of an imagination that will take India into an economic rabbit hole. At no point should India close its doors to foreign capital, ideas and technology. Second, government should never get into the game of picking losers and winners among business enterprises. That path leads to inefficiency and cronyism. Third, there is little doubt that global trade is weakening. Trade wars, protectionism and all the pathologies that were once thought to have been banished have returned with a bang. Yet, in spite of all these problems, India and Indian firms need to keep exploring and finding new export markets. That is the only way to ensure that foreign investment continues to flow into India without causing macroeconomic problems down the road. India has always displayed export pessimism for a long time and the idea keeps on appearing in different forms. This ought to be banished.