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Have we forgotten all about 1970s socialism?

There have been reverses in trade policy, and the principal opposition today to 1990s-styled liberalization is spearheaded by ministers within the government rather than industry. Art: Tape Recorder by Anjaneyulu G, 2019, oil on linen  (courtesy: Anjaneyulu G/Art Ali)Premium
There have been reverses in trade policy, and the principal opposition today to 1990s-styled liberalization is spearheaded by ministers within the government rather than industry. Art: Tape Recorder by Anjaneyulu G, 2019, oil on linen (courtesy: Anjaneyulu G/Art Ali)

The pushback against liberalization and new protectionist policies and language indicate a dangerous nostalgia for control over industry

The big new idea of 2020 was an old one. The Modi government brought back industrial policy, usually associated with the licence-permit raj of the 1960s and 70s. Its production-linked incentive scheme for mobile phone manufacturers offered a wide range of subsidies to Indian and Taiwanese companies to boost mobile phone exports from India.

In mid-December, Ravi Shankar Prasad, minister for electronics and information technology, went so far as to set a goal for the industry in India to “surpass" China in manufacturing mobile phones. Even as dreams go, this was wildly implausible: India’s mobile phones production is just a fraction of China’s. Just a week or two later, ominous signs loomed over that sunny horizon. An industry body representing mobile manufacturers said manufacturers would likely miss the targets set for this fiscal, but pleaded that they should not be penalized for this.

Meanwhile, in an indictment of industrialization led by the Indian state in earlier decades, the market cap of public sector companies declined by double-digits in market capitalization last year, despite a handsome rise in the stock market index over the same period.

2020 marked an unabashed return to the import substitution and industrial policy led economic policymaking of the licence raj. Last year, the decision not to join the Regional Comprehensive Economic Partnership (RCEP) despite Japan and Australia’s efforts to persuade India amounted to turning its back on the trade liberalization since 1991.

On the surface, these moves appeared a reprise of ideas associated with the Bombay Club, the moniker ascribed to those industrialists such as Rahul Bajaj who sought more protection for domestic industry in response to the energetic delicensing and reduction of tariffs that followed 1991. While it attracted headlines then, the Bombay Club’s influence and importance now seems exaggerated.

Shankar Acharya, chief economic adviser between 1993 and 2001, said: “It was not well documented; it was more an idea that referred to the pushback against liberalization. They may have met a few times. I don’t think the ‘Bombay Club’ was able to influence different governments to change industrial policy." The Confederation of Indian Industry (CII), for instance, was always pro-reform.

Most observers believe the principal opposition today to 1990s-styled liberalization is spearheaded by ministers within the Modi government rather than industry, which in many ways makes this reversal much more potent—and permanent. The steady rise in tariffs, for example, marches along even as government ministers voice their scepticism and distrust of free trade agreements.

The Modi government’s chief economic adviser between 2014 and 2018, Arvind Subramanian, said, “There is no question that these are government-led initiatives. You have these subsidies for investment and the decision not to join RCEP. I don’t see any signs of it being reversed."

Earlier this month, CII called on the government to create a roadmap to reduce tariffs especially on raw materials and intermediate inputs, warning that India’s duties regime was making its products uncompetitive.

Last year, Subramanian, who is now with Ashoka University, co-authored research that showed that India’s manufacturing sector grew the third-fastest in the world in the decades since 1991 when tariffs were reduced and industrial licensing done away with. “Why not build on that rather than abandon it," he said.

Instead, the successive increases in tariffs over the past couple of years, and the more easily understandable use of non-tariff barrier interventions last year on imports from China in the wake of Beijing’s aggression at the Ladakh border, has made business more difficult for mid-sized Indian exporters in industries ranging from garments to furniture.

Longer term, annual export figures have been flat for the past few years, suggesting a loss of competitiveness made worse by such misguided policy interventions and a perennially overly strong rupee.

“The volatility (through tariff increases on inputs after lobbying by large corporate producers) the smaller companies are put through is huge," said Sebastian Morris, a professor of economics and public policy at the Indian Institute of Management in Ahmedabad. By contrast, through the 1990s and beyond, successive governments ranging from P.V. Narasimha Rao’s minority Congress government to the United Progressive Alliance and the Vajpayee government, showed a commitment to reducing India’s tariffs with the goal of bringing them down to East Asian levels, said Acharya.

From ‘be vocal for local’ to atmanirbhar to voicing the need for Indian multinationals, there is no shortage of headline-grabbing pronouncements from the government. Meanwhile, GDP growth has been slower every successive quarter even before the pandemic. A family health survey released last year but completed before the onslaught of covid-19 showed that the improvement in nutritional standards over the past five years had reversed course. Stock indices have surged around the world ensuring that those with savings and equity investments have enjoyed an increase in wealth.

Meanwhile, what has been termed a K-shaped recovery with the poorest across the world getting poorer while the rich get richer looks even more skewed in India as the amount of food consumed by sections of the population looks set to decline further.

The Centre for Monitoring Indian Economy reports that almost three-quarters of the 4,234 companies in its sample cut their wage bill, kept it flat or did not increase it beyond the rate of inflation in the quarter ended September 2020, primarily through slashing contractual labour. Many doubled their profits as they did so.

Every other month last year seemed to bring news of a foreign strategic investor buying into companies that are part of Reliance Industries Ltd (RIL). The most ironic were large investments by Google and Facebook that came about a year after Mukesh Ambani had warned against the dangers of data “colonization" by foreign companies. The country’s e-commerce rules are continually tweaked to make business more difficult for both Walmart-owned Flipkart and Jeff Bezos’ Amazon.

Meanwhile, changes in the regulatory structure that made it possible for one company to own several airports helped the march of Adani Group. As Arvind Singhal, chairman of Technopak Advisors, the market research consultancy, points out, there exists neither the pressure of politics nor public opinion for the Competition Commission of India to police emerging monopolies and duopolies.

That may change. As 2020 drew to a close, farmers protesting at Delhi’s border pledged not to use services provided by either company. In early January, RIL petitioned the courts to protect its communications infrastructure against vandalism from protesters. The company clarified that Reliance Retail had never used “contract" farming and said that the conglomerate had no plans to do so.

What might be called India’s pseudo-socialism took another bizarre turn in 2020: the drumbeat of interventionist industrial policy from New Delhi grew louder even as ground realities showed large companies and oligopolies becoming more dominant than ever.

Rahul Jacob is former Hong Kong bureau chief for the Financial Times

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