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Monday, May 23, 2022

It’s not trade dependence that makes India vulnerable but inadequacy of its human capital

For India to be truly self-reliant and self-confident, public investment in education, human capability and research and development has to increase.

Written by Sanjaya Baru |
Updated: May 14, 2020 9:44:52 am
PM Modi relief packages, Prime Minister Narendra Modi, Modi speech, Relief packages fund GDP, math behind 10 per cent GDP, 10% GDP meaning, indian GDP math, indian express The Modi government has made a habit of making economic policy statements into political speeches.

In his televised address on Tuesday, Prime Minister Narendra Modi presented a big picture vision statement on making India a more self-reliant and self-confident nation in a changing and challenging post-COVID world. In a series of televised statements through the week, Finance Minister Nirmala Sitharaman is to spell out the roadmap.

The central government owes it to the economy and the markets that a macro policy statement be made that shows how the FM’s “micro” trees fit into the PM’s “macro” woods. The Modi government has made a habit of making economic policy statements into political speeches. Why a political party that has an absolute majority in Parliament should do that is puzzling. The government must present a macro policy statement on the way forward for the post-lockdown economy.

Some have compared the PM’s speech to the dramatic policy statements of July 1991. Consider the fact that in 1991, only four policy statements were made — the end of licence-permit Raj, steep cuts in fiscal deficit and tariffs, and devaluation of the Rupee. With four policy measures, the economy was pulled out of a crisis and placed on a new growth path. The key to 1991 was political articulation of a vision that went beyond platitudes. The economy needs such a macro policy articulation, stitching together the numerous micro policy steps to restore confidence in the government’s ability to pull the economy out of its pre and post-COVID morass.

The PM’s vision statement had four elements. First, a step up in public spending and investment, aimed at promoting welfare and raising the investment rate; second, policy reforms aimed at making the domestic economy more globally competitive; third, a long-term structural shift making the economy more “self-reliant” and less dependent on the world economy. The fourth wheel of this new growth engine will be Lockdown Model 4 that is to be announced in a few days. The success on the first three fronts will, in the short term, depend on the strategy for the fourth.

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Increased public spending will certainly boost demand and generate employment in the short term and add to infrastructure capacity in the medium term. Policy reform, including changes in land, labour and other policies, could yield results in the medium term. But for now, investors will wait and watch to test the sincerity and efficiency of governments at the Centre and in the states. They will wait to see how the various policy steps being announced by the FM get implemented — how quickly and how efficiently. The government can meet with success if investors, consumers and other economic agents believe in the commitment of the political leadership and the capability of the administration to deliver.

In 2014, Modi began his tenure promising development and lost his way. The second term began with the pursuit of a divisive social and political agenda, despite the fact that the economy was already in trouble. If, after six years in office, Modi is now truly serious about pursuing development as a primary objective and will set aside his party’s divisive agendas, he may still make India a truly self-reliant and self-confident nation. Every political party, from the communists to the BJP, has always sworn by self-reliance. In practice, it has meant different things to different people at different times. Modi has said that his version of self-reliance does not imply isolationism and inward-orientation, but will inject greater self-confidence in the people by reducing the country’s dependence on other nations.

Theotonio Dos Santos, a principal guru of the Latin American “dependency school” that advocated greater self-reliance for developing economies, defined dependence as a situation in which a country’s economy is “conditioned by the development and expansion of another economy”. Writing in the 1970s, Dos Santos said that to be self-reliant the growth process of an economy “should not become dominated or dependent on another economy”. So what is the kind of dependence that India ought to be now reducing to become more self-reliant? On which economies is ours excessively dependent?

First on the list would be the oil-exporting economies. Oil and gas account for a bulk of India’s imports. Whatever new sources of energy India may tap in the foreseeable future, it will remain import-dependent for energy. Fortunately, for India, the global crude oil and gas markets are likely to remain buyers’ markets for some time to come. Second is the dependence on foreign exchange inflows both in the form of remittances, mainly from the Gulf and the US, and financial flows into capital markets. It is not clear how the new Modi strategy of self-reliance proposes to deal with this dependence. If anything, India is seeking more FDI and external debt. The third dependence is on imported defence equipment, mainly from Russia, the US, Israel and France.

Fourth, import dependence in electronic goods and pharmaceuticals, mainly from China. Thus far, government policy does not address these dependencies. The immediate focus of Modi’s self-reliance seems to be China.

Post-Deng Xiaoping China established long ago that for a large economy, it is possible to be both self-reliant and globalised at the same time. Trade in itself does not create dependence if a country is able to grow both exports and imports. China has demonstrated the geo-economic power of both exports and imports by making trade partners dependent on it on both counts. When China refuses to buy wine and beef from Australia, it is using its import power, not demonstrating its import dependence. If an economy is willing to live without those imports or can substitute them with domestic production, then it is not badly hurt.

It is export dependence that can make even a large economy vulnerable and it China’s dependence on US markets that President Donald Trump has aimed to reduce by waging a trade war. India has never had such export dependence on any one country. The Modi government’s hope that multinational companies exiting China will relocate to India can only make India more export dependent since these MNCs aim to sell globally. Making India less dependent on China cannot be the only measure of self-reliance. For India to be truly self-reliant and self-confident, public investment in education, human capability and research and development has to increase. It is not trade dependence that makes India vulnerable but the inadequacy of its human capital.

This article appeared in the print edition of May 14, 2020, under the title ‘PM’s woods, FM’s trees’. The writer is a policy analyst and former media advisor to Prime Minister of India

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