The first thaw in the Galwan Valley is a tentative one and no one’s guessing how it will play out. With the India-China face-off continuing along the border, can it be business as usual for a democratically elected government? In times like these, it may be instructive to refer to Adam Smith’s treatise, “An Inquiry into the Nature and Causes of the Wealth of Nations”. Defending England’s hugely discriminatory Navigation Act of 1651, which required cargo from British colonies to be carried only in British ships, Smith had said that defence is of much more importance than opulence. In simple words, national security takes precedence over welfare or prosperity of the people. This may sound antithetical to what the Scottish economist, philosopher and one of the earliest proponents of free trade stood for.
For India, defence and welfare have always complemented one another. Since 1990-91, when New Delhi, forced by an economic crisis at home, shunned its four-decade-heavy ideological burdens and walked the difficult path of reforms, growth through openness to trade has remained an unstated sine qua non of national security. The overhaul of industrial and trade policies, much to the chagrin of a section of domestic industry and many political parties, meant a gradual reduction in average customs tariffs, easing of foreign investment norms, and doing away with many licensing requirements. This, contrary to fears expressed then, helped the domestic industry achieve scale and become more competitive. It helped India grow. Higher growth rates meant more people being pulled out of poverty through the last three decades.
Globalisation stood the country in good stead. Buoyancy in world economic growth coupled with an upswing in global trade helped India clock a trend growth rate of 8-plus per cent a year in the mid 2000s. Take the five-year period 2003-04 to 2007-08, till the Lehman Brothers’ collapse froze global financial markets, and the crisis spilled over to the real economy: India’s GDP growth rate averaged at around 8.7 per cent a year on the back of robust exports which grew an average 25 per cent during the five years. India emerged as one of the fastest growing economies in the world.
It was this economic success that lent India weight in global geo-politics. As dark clouds gathered over the world economy in the second half of 2008, the then US President, George Bush, called for an emergency summit of the Group of 20 (G20) countries in Washington DC in November. To a correspondent who reported from three G20 summit venues in the first two years, it was clear that it was the spectacular growth over the previous five years that had catapulted India into the global league. India’s advice was sought, and incorporated, in the G20 final declaration.
The trade policy since the 1990s — through its openness — contributed enormously to economic prosperity which acted like the bone and sinew to national security. India’s merchandise exports quintupled from $63.84 billion in 2003-04 to $314.40 billion in 2013-14, recording a compounded annual growth rate (CAGR) of 17.28 per cent during the period. In the next five years, till 2018-19, however, the CAGR plunged, to just about 1 per cent. In fact, merchandise exports in 2019-20, at $314.31 billion, were exactly at the same level or a tad lower than in 2013-14, at $314.40 billion. In these six years, India avoided trade deals with other countries or blocs, and gradually raised tariffs across several segments, and the domestic industry continues to lobby for more.
There is telling evidence of New Delhi’s rising dependence on Beijing for imports across key sectors. Both the UPA and NDA did precious little to link trade policy with industrial policy to strategically counter this. The composition of the basket of imports from China over the last 10 years shows nothing has changed. Four of the top five categories of items that India imports from China have remained the same in the decade leading up to 2018-19: Electronics, mechanical machinery, organic chemicals, and iron and steel.
The industrial policy hardly picked any cues from trade data. Midway into the UPA’s second term, then National Security Advisor Shivshankar Menon and then Commerce Secretary Rahul Khullar did prepare a strategy to correct this imbalance. Among the biggest concerns then, and now — a disruption in supply chains, especially in sensitive sectors such as pharmaceuticals. A strategy document was prepared, only to gather dust.
Over the past few weeks, India’s coercive diplomacy has seen a turn that is hardly surprising given China’s belligerence and the national mood. A flurry of decisions such as banning Chinese apps, barring Chinese companies from bidding for road projects, stopping imports of power equipment, prohibiting Chinese investment in micro, small and medium enterprises, and blocking their consignments in ports, were taken. The intention is to send a message across that Beijing will have to incur an economic cost for such misadventure.
But such sanctions by India alone will hardly sting China, which has responded in good measure to punitive trade actions by the US. For India, it may work only when there is a broader coalition among big economic powers, including the US, Japan, UK and Australia. Promoting domestic industry for everything that is imported from China will carry the risk of prompting perverse policy responses and more protectionism, with industry lobbies making the most of it.
The ongoing crisis opens a window for New Delhi to reset relations with China. More than barriers to trade, what is vital for the government is to reduce what TeamLease’s Manish Sabharwal describes as “regulatory cholesterol”. Labour alone presents obstacles to India Inc in the form of 463 Acts, 32,542 compliances and 3,048 filings.
Today, neither can China’s role in the world economy be wished away, nor can its dominant position in the global supply chain be ignored. New Delhi’s trade policy needs to be alive to the imperative of higher growth, which can be achieved only through more, not less, globalisation. Perhaps one way forward in redefining the engagement with China could be in not viewing this relationship in the binary of friend or foe, particularly since India shares a 4,056-km long border with it.
Post Script: In his book “On Adam Smith’s Wealth of Nations: A Philosophical Companion”, professor at University of Illinois, Samuel Fleischacker has a brilliant take on Smith’s dialogic writing style. Yes, Smith concedes the Navigation Act as acceptable interventionism, but starts the discussion noting that the Act “is not favourable to foreign commerce, or the growth of that opulence which can arise from it.”
This article first appeared in the print edition on July 8, 2020 under the title “Line of actual decontrol”. email@example.com
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