This is how we can build a truly self-reliant India.
You can also read this in Hindi- आत्मनिर्भर भारत का क्या अर्थ होना चाहिए, वैश्विक प्रतिस्पर्धा के लिए क्या करें-न करें
There is a danger of reading too much, or too little, into Narendra Modi’s clarion call for an “atmanirbhar” Bharat, or a self-reliant India. Those who have experienced the horrors of the licence-permit raj, import substitution policies, suboptimal production scales and poor-quality fear that we are walking down that same ruinous path again.
Those of the swadeshi bent of mind believe that we are kowtowing to global interests at the cost of our own producers even now. They want more atmanirbharta, more swadeshi, not less.
The problem is that the word atmanirbhar conjures up many images and thoughts. It has also been inadequately fleshed out as yet, though Modi government ministers have been at pains to tell us that it is not a return to the pre-1991 mindset of inward-looking import substitution policy, which was a Himalayan blunder.
The best way to interpret the word is to reduce it to two essentials. It should mean an ability to cater to both domestic and export markets using the scale economies that India’s large consuming class provides. It should not mean becoming atmanirbhar in each and every product or service we can produce, for that works against the basic idea of comparative advantage.
Taking three broad sectors, agriculture, manufacturing and services, we are actually “atmanirbhar” in agriculture and services, but a washout in manufacturing.
In agriculture and services, we need to be less atmanirbhar and must look for even more global scales and competitiveness, while in manufacturing we need to be more self-reliant without losing global competitiveness.
We cannot become the next China, ie, factory to the world, for the global trade climate has become more protectionist, but we can become cost-competitive globally in many products even while focusing substantially on meeting domestic demand.
We should be aiming to expand the share of manufacturing to at least 25 per cent of gross domestic product (GDP) from around 15-18 per cent now. There is no point doing this if the only idea is import substitution.
Stripped to the core, 'atmanirbhar' Bharat is the latest version of our industrial policy, which has repeatedly failed. We started with the licence-permit raj and import substitution and gave commanding heights to the public sector. We failed.
After 1991, the licence-permit raj mutated into the regulator-crony raj, where regulatory and policy capture by vested interests essentially played the same role as the licence-permit raj. We failed again.
We eased capital controls without freeing our other factor markets, land and labour, thus making our manufacturing successful in some areas with huge automation and capital costs. In the process, we shifted to looting our banks and enriching our crony capitalists.
What we did not achieve was any kind of global scale or competitiveness in any manufacturing sector. The few exceptions may include gems and jewellery and pharmaceuticals. But both these sectors are heavily import-dependent for inputs. We are atmanirbhar in these sectors by abandoning the idea of complete atmanirbharta.
We have tried several versions of industrial policy, from Indira Gandhi’s 'broadbanding' policies of the 1980s (which essentially eased licence-quota limitations to some extent), to the creation of export processing zones to special economic zones (with underwhelming success rates), to the United Progressive Alliance’s (UPA’s) New Manufacturing Policy (a non-starter) to Modi’s own Make in India (with meagre results to show as yet).
None of these policies really moved the needle on manufacturing competitiveness. Atmanirbhar Bharat is thus the latest iteration of manufacturing policy, or Make in India Version 2.0.
Will this work any better than Make in India 1.0?
It can work, but only if all the moving parts are made to work seamlessly. It means making huge changes in the following areas.
One, we have to move towards port-based manufacturing clusters, so that true economies of scale and the benefits of lower logistical costs can be reaped. Right now, the average time to move goods from Indian ports to the east coast of the US, according to data provided by the 2016-17 Economic Survey, is 21-28 days (versus 14 from China).
Our road transport costs are $7 per km, versus $2.4-2.5 for China. $3 for Sri Lanka, and $3.9 for Bangladesh). Trying to move supply chains out of China won’t happen without fixing our logistics costs. This calls for huge improvements in road and railway infrastructure and also port infrastructure.
Two, the states have to more than do their bit. Since 1991, most of the reforms have been Delhi-led, but most states have been in a state of stupor. This makes no sense when land, power, labour and infrastructure are all in need of huge reforms, mostly at the state level.
City infrastructure sucks, and property taxes (especially stamp duty and additional costs incurred due to building permission delays) make real estate unaffordable. You can’t get the big boys to Make in India, if they can’t even rent office spaces at reasonable rates in cities. Reform has to be the focus of both state and city-governments in India for India to become atmanirbhar.
Three, our dispute resolution mechanisms suck even more. Contract enforcement is almost impossible without years of litigation, and the police, legal and judicial system is built for delays and feeding a corrupt chain, not resolution. India ranked No 163 in the last World Bank Doing Business survey, and 154th in registering property.
It takes 58 days and 7.8 per cent (on average average) of property value to register a property in India. Commercial disputes take an average of 1,445 days – almost four years – to resolve at the court of first call, and this excludes appeals processes in higher courts. Competitiveness is not only about the physical price of producing and moving goods, but also the hidden costs of operating in India.
Four, we have to rethink the kind of incentivisation we offer specific industries. Atmanirbharta is not about being self-sufficient in all industries, but only in industries where we can be globally competitive.
For example, India has the world’s largest bauxite reserves, which led our policy-makers to conclude that we must produce alumina and aluminium too. But 50 per cent of the cost of aluminium is power, and India’s power costs are the highest in the world.
Clearly, Indian companies must produce aluminium in cheap power countries like Canada or Australia, not in India. We do not need to be atmanirbhar in aluminium. But this can happen in steel, for we have both the coal and ore required for the same. We should be exporting steel, not ore.
Defence, given that it is less about cost and more about security, is something in which we need to be completely atmanirbhar. Given our strengths in chemistry, we can be self-reliant and also an export powerhouse in pharmaceuticals, including active pharmaceutical ingredients (APIs), which we import largely from China. But we should be buying R&D hubs in the west, which has the right atmosphere for discovering new molecules and intellectual property.
India, with its low-cost scientific manpower, can do the grunt work in pharma R&D in the short-term – just as we did in software services.
Given our need for public transport, we should be world leaders in buses, trucks and railway wagons and coaches, but one wonders if we need to be champions in cars. Two-wheelers, though, are right up our street. It is our primary mode of personalised transport.
We can try to up our game in leather and garments, but the game in leather is changing as footwear is decisively moving towards non-leather products. And non-leather products can easily be made in factories using 3-D printing and other capital-intensive technologies in Europe and America.
Our leather products will thus have to be niche and focus on design and higher-value added products. In garments, we have a better chance as long as we can get our logistics and labour cost down and automate more.
The same logic should apply in non-manufacturing areas – especially agriculture and services.
In agriculture, it is good that we are amending the APMC (Agricultural Produce Marketing Committee) and Essential Commodities Acts to, first, create a truly national market for agri-produce and then build export markets without the fear of arbitrary curbs on trade.
However, it is far from clear that we should be producing all the crops we now are. We should be producing less rice and sugarcane, both water-guzzlers, and more of wheat, coarse grains, cash and horticulture crops. By exporting rice, we are essentially exporting water from a water-scarce sub-continent.
We should be making rice only in rainfed or water-surplus areas of the Gangetic plains and the Narmada Valley, and not much in the south. Exports make no sense, unless it is of the value-added branded type, like Basmati rice. We can additionally create brands using geographical indications (Surti Kolam, Sehore Wheat, etc), but raw rice exports should be tapered down and reduced to zero.
We should even consider importing sugar and instead focus on export of value-added sugar products (candies, unguents, or sugar-substitute products). India should be an exporter of value-added and branded food products, and not basic foodgrain, fruits and veggies.
In services, again we need to become more international than national. We are already the world’s largest offshoring destination, but increasingly value will come from developing IP (intellectual property) and not through labour arbitrage services.
This means India must invest abroad in buying consulting and IP companies, and depend less on exporting low-value IT labour services. We have to become less atmanirbhar in IT services, and more dependent on global skills and IP because we currently have no particular strengths in these growth areas.
The way to go is something like what HCL Tech did when it bought some of the IP products of IBM, including Lotus Notes. Lenovo bought out IBM’s personal computer and laptops business 15 years ago, and dominates this space in many price-sensitive markets like India.
Five, in areas where India has skills but no natural resources – example gems and jewellery – we are doing more or less the right things, but clearly, we need to move into the larger spaces of higher value diamonds dominated by Israel and Belgium. We need the labour-intensive smaller gems and jewellery market, but we need to automate more and buy global brands to pull ourselves up the value chain. We are now getting only the small crumbs in the global gems and jewellery market. Here the slogan cannot be atmanirbhar, but “vishwanirbhar”.
Six, we must have a group of industry and bureaucratic experts who will examine, on a continuing basis, every product group where the duty structures, both internally (through GST) and externally (customs and other duties), are inverted. An inverted duty structure means that duties are highest on raw materials and inputs, and lower on the final products, thus making manufacturing in India unviable.
We need to decisively end inverted duty structures in order to become not only atmanirbhar, but also globally competitive in areas of our comparative advantage.
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