Opinion

India’s bane is its non-competitiveness

Ajay Shankar | Updated on December 11, 2019 Published on December 11, 2019

Nurturing capabilities Indian policymakers need to craft smarter and more creative policies   -  metamorworks

Imports from China have curbed capacity creation and utilisation. This malaise must be addressed for economic revival

Traders, throughout history, have sought new markets and been natural globalisers. Traders, producers and consumers, all parties gained from trade. Spices from India were so valuable in Europe that the voyage of Christopher Columbus to find a shorter sea route to India was financed. The East India Company, too, was formed for trade. Colonisation was a later consequence. The benefits of free trade and production based on comparative advantage became key tenets of economic theory.

A fundamental change, however, occurred with the advent of the Industrial Revolution. Competitive advantage in industrial production was created through technology and innovation, and thus gradually lost linkage with natural endowments. Now, first movers and leaders sought global markets and gained disproportionately through trade.

Advent of industrialisation

India’s impoverishment began in the 19th Century, with the beginning of the industrial revolution in England and the completion of the colonisation of India by the East India Company. As industrialisation matured in England, poverty in India became extreme, with the large-scale destruction of artisanal jobs, especially in textiles, with thriving cities like Dhaka experiencing depopulation. This was captured eloquently in the economic writings of Indians at the end of the 19th and the early 20th Century, and provided the intellectual underpinning of Swadeshi and Khadi in the freedom struggle.

The bloody Civil War in the US is now popularly understood as a battle led by the virtuous President Abraham Lincoln, in a bid to abolish slavery, against the southern states who seceded as they wanted to continue with the practice. But an underlying economic dimension is not so well known. The north-eastern states of the US had begun to industrialise. Import duties were imposed on manufactured goods coming in from Europe. The southern states, on the other hand, were exporters of agricultural produce and preferred free trade. With the imposition of duties on imports, the terms of trade shifted against them; they had to pay more for manufactured goods. There was, therefore, an economic rationale behind their decision to secede against the north.

In the 20th Century, as Japan industrialised, it followed the example of England and began to colonise its neighbouring areas — Korea and western China — creating a larger captive market for its industrial goods; similar to what England had done in India. Later, after World War-II, the US — as the leader of the West and the pre-eminent global industrial and intellectual power — promoted free trade. This culminated in the WTO agreement in 1994, thereby ending the era where countries, after decolonisation, were trying to industrialise with infant industry protection, which had been used successfully in the past.

China’s success

The extraordinary success story of industrialisation and the biggest beneficiary of globalisation of the last few decades has been China. In 1991 — the year of Indian economic reforms and opening up of the country to globalisation — the per capita incomes of India and China were the same. Technological capacities were at similar levels. China is today the factory of the world. It has eliminated poverty. Its GDP and per capita incomes are five times that of India. China chose to craft its own pragmatic path to success.

Western economic commentary throughout the 1990s tended to be critical of China which was not acting according to the prevailing economic paradigm, and foresaw dire consequences as a result. China became a member of the WTO only in 2000, and that too with difficulty. But being outside the WTO did not slow China’s phenomenal rise.

It is ironic that the US has now got the G20 to change the formulation in their joint statements from ‘free trade’ to ‘ fair trade’ . Trump’s unambiguous ‘America first’ policy and his trade hostilities with China have strong appeal with many Americans. Having conquered global markets, China is now the proponent of free trade and globalisation at Davos. The OBOR and the RCEP are being promoted by China, which is on its way to becoming a superpower.

Free trade agreements

It is useful to have a larger historical perspective, as India confronts a critical juncture. In the run-up to the RCEP negotiations, hardly any producer group in India saw benefits from joining the RCEP. They only saw adverse consequences and asked for carve-outs and protection. Mainstream commentators, however, argued that India should join; it just could not afford to stay out. The experience of India’s FTAs with Asian countries has shown that the Indian industry has not experienced the anticipated gains. It also may not have lost on balance, though sections of industry feel that they have lost.

The real loss in this period, however, has been through the growing trade with China. There is the widespread view that India did not gain from its FTAs as it did not undertake the reforms needed to improve competitiveness. By that implication, joining the RCEP would pose a problem. But it would then compel India to undertake requisite reforms and become competitive. The straightforward proposition would be to argue for first becoming competitive, and thereafter consider joining the RCEP.

Growing imports of consumer goods, thermal power plants — and now solar panels and exports of primary products like iron ore and cotton — constitute India’s trade with China. All that is imported was being made, and can be made in India. Globally, there is stagnant demand in the West, excess, competitive manufacturing capacity in China and a huge growing demand in India. The logic of free trade is for India’s growing demand to be met by China’s excess capacity and India’s inefficient, non-competitive capacities to close down without need for creation of new capacity. This has been happening. Joining the RCEP would only accelerate the process. This may be a major factor in the structural nature of the present severe economic downturn.

India needs to take a hard look at its choices. Creating global competitiveness and doing all that it takes to do so, including abandoning conventional ways of thinking, cannot be delayed. Better-functioning factor markets and reducing costs for businesses are overdue. Smarter, creative policies for developing and nurturing the nation’s industrial and technological capacities need to be crafted. Economic nationalism and greater ambition is the need of the hour.

The writer is Distinguished Fellow, TERI, and former Secretary, DIPP

Published on December 11, 2019
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