2 min read.Updated: 03 Mar 2021, 09:20 PM ISTLivemint
India isn’t turning inward again, avers our government, even as recent tweaks of policy echo past dreams of self-sufficiency. This could be a slippery slope, as shown by our pre-1991 story
During last year’s lockdown, when Prime Minister Narendra Modi first declared the country’s adoption of Atmanirbhar Bharat—or ‘self-reliant India’—as a national theme, few expected it to go beyond our home self-sufficiency of covid times. But when the Centre launched a pandemic-relief package under that name, what had seemed like just an evocative slogan began to take the shape of an economic policy. While import tariffs had crept up in previous years and manufacturing incentives had made a comeback, the state was now going all out to promote chosen sectors. Import substitution was not the idea, officials averred, and India was not turning inward, but a preference for domestic stuff grew pronounced. Last year, the government quit issuing global tenders for any procurement deal worth ₹200 crore or less. Recent media reports suggest that an informal nudge from Niti Aayog has led all ministries to refrain from awarding even big-ticket contracts to foreign suppliers. As an ideal, “Be Indian, buy Indian" has always held appeal. However, we should be wary of autarky. We have been there and done that. It led us to a dead-end. If that cautionary tale of how one distortion of our economy gave rise to another needed retelling, then former Niti Aayog vice-chairman and Columbia professor Arvind Panagariya did just that in an oped for The Times of India on Wednesday.
Panagariya traces the origin of our pre-1991 closed economy to India’s post-1947 fervour against all forms of foreign dependence. Freed of British rule, we yearned for self-sufficiency, a quest that meant keeping imports out and making all that we could ourselves. Almost everything needed to be made. Our savings, however, were too meagre, and so the state laid down investment priorities and rules. Starved of capital, India’s state-pushed resources went into capital-intensive sectors, where money got spread too thin, economies of scale proved hard to achieve, and production was very costly. Few firms could scale up or upgrade technology. As funds had to be rationed, licences were used to limit the number of large manufacturers, even as lots of items were reserved for small-scale units that were largely left to fend for themselves. Import barriers were kept high to shield them all; essentials were allowed in, but only through special permits. With demand for their products always assured (no matter how costly or shoddy) and levels of competition so low, domestic producers had no incentive to contain costs, but got to tighten their grip on markets anyway. To relieve consumers and control excessive profits, price caps were imposed, but this created shortages and so purchase permits came in. At the end, an elaborate maze of controls left us with an inefficient economy—till we adopted market reforms and opened it up.
The big lesson, as free-market advocates had long said, was that state planners cannot allocate resources better than the ‘invisible hand’ of market mechanisms. This is a task best left to dynamic price signals generated by the free interaction of demand and supply (with safeguards in place for failure). Today, though, our government is back to shunning imports, hand-picking specific sectors to promote, and intervening in other areas. It is axiomatic that a state which exercises greater discretionary authority over commerce will expand the space available for cronyism and corruption, as the profit motive of private enterprise—in itself a worthy force—extends to lobbying for favours and patronage. It’s a path we’ve gone down before, a slippery slope best avoided.