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Thursday, October 22, 2020

Explained Ideas: Why Atmanirbhar Bharat will not work for India

Arvind Subramanian and Shoumitro Chatterjee write: The delusion of size is making policymakers set their sights on the domestic market when it should be on the world market.

By: Explained Desk | New Delhi | Updated: October 19, 2020 12:39:36 pm
India’s export opportunities in general and in specific sectors could be significant even in a post-COVID world. (Bloomberg Photo: SeongJoon Cho, File)

In their joint opinion piece, Shoumitro Chatterjee and Arvind Subramanian, professors at Pennsylvania State University and Ashoka University, respectively, argue that India’s intellectual and policy community has embraced atmanirbharta and “this inward turn — actually return — amounts to abandoning two core principles of the post- 1991 consensus: Export-orientation on the macro-economic side, and slow but steady liberalisation on the trade side”.

So, will atmanirbharta work for India?

“Not really,” state the two economists, one of whom (Subramanian) was the chief economic adviser to the Government of India in the recent past.

Why? Isn’t India’s GDP big enough to sustain its future growth all by itself?

The authors state that at $2.9 trillion, and as the fifth-largest in the world, India’s GDP “seems alluringly big”. But if the domestic market is to sustain growth, we need to look at the size of the market (say the “middle class”) with some amount of purchasing power over manufacturing goods and services.

“Based on some assumptions, our rough estimate is that this middle-class market size is between 15 and 40 per cent of GDP,” they write.

This is smaller than commonly believed and substantially smaller than any potential world market that Indian firms and producers can and should compete for.

(Source: BACI dataset. CEPII; Illustration: C R Sasikumar)

The reason is twofold.

There are a lot of poor people with limited purchasing power and a few people with a lot of purchasing power who, however, save a lot. Both of these reduce the market for consumption.

“The delusion of size is making policymakers set their sights on the domestic market when it should be on the world market,” they caution.

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“Normally, it is failure that is an intellectual orphan. In contrast, India’s inward turn seems to be a case of making an orphan of spectacular success,” they state.

That is why they argue that India’s growth model has been an export-led one and should not be abandoned. Moreover, India’s export opportunities in general and in specific sectors could be significant even in a post-COVID world.

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