There’s no such thing as self-reliance
For sustained growth India needs to use foreign capital and foreign know-how to produce goods that it sells in foreign markets. What’s self-reliant in that?
If there is one phrase that has confused and confounded both domestic and foreign investors over the past year, it is “Aatmanirbhar Bharat”. What does “self-reliance” mean in practice? Ever since the prime minister introduced the new tagline for the country’s economy in a major speech sometime into the lockdown last year, the government has sent out mixed messages. Some officials and ministers have said this is simply an attempt to strengthen India’s productive capacity or increase domestic demand. Others have claimed that it is an effort to stay independent of the vast gravitational pull of China’s manufacturing sector and capital resources. Yet others have indicated that amounts to little more than import substitution. The prime minister himself is not helping. In his radio address on Sunday, he declared that “aatmanirbhar Bharat” is not an economic programme but “national spirit” which has percolated down to the villages of the republic. Most of us will have been left even more puzzled once we heard that explanation.
Is a slogan that can lend itself to so many multiple and perhaps contradictory explanations really worthwhile? Or does it lead to misjudgments by both administrators and investors? Everything — from a new toy sector policy, to recycling, to textiles exports, even to liberalisation of the geo-spatial sector — is being tagged with the same slogan, leaving it effectively meaningless. Some even claim that “self-reliance” is the exact opposite of isolation or protectionism. This mangling of simple language is Orwellian newspeak.
The fact is that given the fuzzy nature of the slogan, bureaucrats in particular have defaulted to what they best understand: Control. We now have the unfortunate situation of various sectors being singled out for production-linked incentive schemes. Some of these will no doubt be the “right” ones, in that they will be engines of growth and employment; some will not. The problem is that only a fool would expect the Indian government to be any good at picking sectoral and corporate winners. That has, after all, been tried before and failed. It is a recipe for stagnation, for corruption and lobbying, and for oppressing consumers with low quality and high prices. Tariff policy is also being seen as an arm of this agenda of control. A while ago India tried to protect steel producers by raising tariffs; now it has lowered tariffs on some steel products to help out companies that use steel as an intermediate input. A tariff policy that responds to whoever lobbied last and loudest is the worst way to run trade. Even if such changes are completely above board and transparent, they will also inevitably run well behind the actual market trends. They will also encourage producers to focus on complaining to bureaucrats rather than on increasing competitiveness, leading to a rentseeking equilibrium that will harm both growth and consumers.
And it will certainly doom any effort to incorporate India into global value chains. Bureaucrats and policymakers seem to be living in some distant past where countries were not interdependent and goods were produced using simple, textbook production functions. The simple fact is that very few highvalue-added goods will be produced using inputs that are entirely made in one country. Trying to increase productive capacity for those goods while targeting tariffs on those inputs is obviously counter-productive. This is not a complex idea, but it appears policymakers have failed to grasp it.
The size of India’s market is a confounding factor here. “Self-reliance” surely does not mean turning one’s back on global markets. The country will not grow unless it taps global markets and global demand.
But any individual company does not care about that macro picture. They will be happy to try and make money by expanding their share of the domestic market alone. As Harsha Vardhana Singh has pointed out: “Within a large economy like India, the primary focus of producers operating under a protectionist regime is not on exports, but on the domestic market which is easier to access. Import protection results in a rise in costs, with cost-inefficient inputs being produced domestically, while those which cannot be domestically produced trigger higher tariff costs. [Global value chains] and exports require cost-efficient products, and import protection works against that.” Raising the cost of imports hurts exports, it hurts consumers, it hurts competitiveness, and it hurts growth. And yet we have embraced protectionism for five years now — with nothing to show for it in terms of either growth or private investment.
That is the other conundrum of “aatmanirbhar Bharat”. We can claim we desire self-sufficiency all day long. But the fact is that we do not have sufficient financial savings to drive up private investment to the level that we need for sustained high growth — particularly when the government has decided to abandon fiscal restraint for years in the wake of the pandemic. Already we are seeing turbulence when it comes to yields in the bond markets. CRISIL has estimated that, even for highly rated companies, there will be at least a ~5-trillion gap in bond financing in the coming years, which will have to be filled by foreign capital. More generally, when it comes to greenfield investment and project finance, domestic private capital remains subdued. No country, whether East Asia in the 1970s/1980s, China in the past decades, or post-war Europe, has achieved sustained growth without a financial push from foreign capital. Yet the government continues to treat foreign capital as an unloved stepchild. If anything, the positions should be reversed: Domestic capital is more likely to invest here, while foreign capital has the entire world to choose from. It’s common to hear the complaint that “China welcomes foreign capital with the red carpet, India with red tape”. That complaint has only intensified in recent years, as the government changes the rules of the game — for example, in the digital e-commerce space — to the detriment of foreign companies after they have already invested. But by far the worst signal is the government’s continual effort to pester companies for old retrospective tax claims even after they win arbitration awards, as is happening with Cairn India and Vodafone. It is almost as if those in charge of making those decisions want to scare off the foreign investment that is crucial for India’s return to high growth.
No amount of smooth-talking about exports and new projects (Tesla, anyone?) will change the fact that for sustained growth India needs to use foreign capital and foreign know-how to produce goods that it sells in foreign markets. And simply nothing about “aatmanirbhar Bharat” so far has made that possible. In fact, it has made that ever more unlikely. I cannot speak to its political effectiveness. But from the point of view of policy and future welfare, this slogan needs to be quietly retired — just like “Make in India”, “Digital India”, “doubling farmers’ income”, and all the others that we don’t hear quite as often these days.