Make versus buy

Finance Minister P. Chidambaram’s announcement that the Government is preparing a list of ‘non-essential’ items with a view to curbing imports is a retrograde move. It is true that in recent times, the economy has become increasingly import-intensive. One indicator is the ratio of overall merchandise imports to GDP, which has grown from under 13 per cent to over 28 per cent between 2002-03 and 2012-13. Equally true is the emergence of imports as a default option, with most firms preferring to source inputs and even final products from abroad rather than trying to manufacture them locally. This tendency has been prevalent not just among those selling mobile phones, computer hardware and consumer electronics, but even makers of power equipment, steel and other products where the country ostensibly has a fair degree of manufacturing self-reliance. Nothing symbolises this trend better than imported Chinese Ganeshas or Diwali lights!

Disturbing though the above phenomenon is, the answer does not lie in going back to the days of artificial import restrictions. Chidambaram has specifically referred to electronic hardware, which was India’s third largest import item worth $31.5 billion in 2012-13 after oil ($169 billion) and gold ($54 billion). The Finance Minister may not be wrong in saying that these goods “can be manufactured in states like Rajasthan and Kerala”. But the question is whether such manufacturing should be encouraged through clamping down on imports. Doing so is at odds with the Information Technology Agreement, which binds India to a duty-free import regime for these products; moreover, it will open the door for other industries to seek similar indirect protection against ‘non-essential’ imports. In the process, the babus in North Block and Udyog Bhawan will regain their old powers of determining which goods to allow and which to label non-essential.

The Government would do better by focussing its attention on improving the country’s creaky roads, rail and power infrastructure as well as its counterproductive labour, land acquisition and environment laws that contribute to making manufacturing the least preferred option. There is no better time to fix this than now, with a weakening rupee forcing companies to rethink their strategy of getting things made in China and selling them in India. Import as default option may, in fact, not be the smartest approach in the days ahead. What the Government needs to do is seize the initiative by convincing firms about this and making it easier for them to manufacture and source increasingly from home. It can, if necessary, also provide encouragement through proactive tax breaks and other incentives. But blocking imports is something it should not even consider. That job can be left to the forex markets, which have already imposed sufficient punishment on importers.

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