13 July 2020 09:13 PM

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ANWESHA BASU & ANUSHKA MITRA | 28 JUNE, 2020

India Can Benefit from Imports: Swadesi Thought Needs Confronting

Will mercantilism win over free trade?


In Satyajit Ray’s adaptation of Tagore’s Home and the World there is a scene where a protagonist argues that Swadesi is a movement of the privileged, and imposing it on the poor is unfair. He says that the swadesi products cost much more than their imported counterparts, which have benefited from the industrial revolution in the West.

In recent years too India has often witnessed support for a more protectionist stance, which aligns well with the idea of embracing Swadesi. This call for inward-looking economic growth coincides with the rise of majoritarianism and communal “nationalistic” sentiments.

The Prime Minister in a tweet on June 18 spoke of implementing atmanirbharta or self-reliance by reducing imports. The argument being put forward is that if Indians consume goods produced in India, domestic businesses will benefit in addition to the savings on foreign exchange, adding to economic growth.

While such mercantilist sentiments that focus on reducing imports may be well-intentioned, they are, from a pragmatic point of view, completely misplaced.

We import goods and services from abroad because no nation can produce all that it needs on its own. If we produce those goods and services in which we have a competitive advantage over other countries, and import those we can obtain more cheaply from abroad, it is an act of exchange in which both countries stand to gain.

The exporting country earns foreign exchange which it can use to import other commodities. Exports can generate employment as well. As for the importing country, its consumers can now consume better and more varied goods, and its producers are able to import cheaper or superior intermediate inputs for production.

A section of the population in the importing country may lose out, however. These are the domestic producers of goods or services which are now being imported, and who are unable to compete with the imported product. This is a major reason trade barriers exist: to offer protection to domestic industries from foreign competition.

The “infant industry” argument, that in the initial stages of a country’s development it is necessary to protect its industries, akin to an infant in its growing years, has merit in theory, but it has been observed that the infant tends never to grow up. The giant public subsidies provided to US agribusinesses are a case in point.

The central government’s recent emphasis on a Self-Reliant India, especially in imports, are reminiscent of the import-substitution industrialisation strategy followed by India till the 1980s, which compromised heavily on quality and efficiency. Indian products were unable to compete in international markets, creating foreign exchange deficits and further import restrictions, plummeting into a vicious circle. GDP per capita contracted by 7.4% in 1979. From 1951 to 1981 our GDP grew at a paltry 1.5% per year.

Today, Indian industries are dependent on imported inputs for production. Using data from the latest available global input-output table (for 2014) we find that more than 20% of the inputs used in the following manufacturing industries are imported from other countries: chemicals and chemical products, non-metallic mineral products, basic metals, fabricated metal products, transport equipment.

And when we take into account the agriculture and service sectors, the dependence of certain industries (fishing and aquaculture, telecommunications, architectural and engineering activities) on imported inputs remains significant.

As a point of comparison we find that most major economies of the world are also dependent on imported inputs for production. While the share of imports in total inputs used by India’s manufacturing sector is on an average 16%, it is 17% for the USA, 19% for South Korea, 31% for the UK and 35% for Germany.

Several studies (Topalova and Khandelwal 2011, Goldberg et al 2009, 2010) have also argued that trade liberalisation led to the availability of a greater variety of inputs for Indian firms, improving their productivity significantly. Restricting imports would nullify these benefits for Indian industry.

Indeed, any blanket policy to reduce our import dependence will do more harm than good. What then should be the way forward?

India needs a more nuanced policy that addresses the concerns of individual industries with a narrower lens. International trade today is dominated by Global Value Chains (GVCs). Few products are manufactured from start to finish in a single country. Instead production is broken up into different stages, and each can be in a different country. Thus, to produce a particular commodity, different countries add value to it in this fragmented production process.

Given that India’s comparative advantage lies in “unskilled” labour, a wise policy decision would be to participate in the labour-intensive segments of GVCs (like assembly activities), much like the path followed by China and more recently Vietnam.

In the wake of the recent coronavirus pandemic and the US-China trade war prior to that, many companies have been reportedly moving out of China. Most have been relocating to Vietnam. This is an opportune moment for India, with its large pool of unskilled workers, to attract multinational corporations in setting up production facilities here.

As outlined in Chapter 5 of the Economic Survey 2019-20, we can particularly benefit in the category of goods known as “network products” (electronics and electrical equipment, machinery and equipment, transport and communication equipment). These can not only provide employment to the large pool of unskilled labour but also create linkage effects.

However, for India to emerge as an important assembly centre and to export finished products, tariffs and other import restrictions, especially on parts and components, will need to be negligible. Governments should therefore strengthen the industries where our advantages lie, and continue to import where there is no immediate advantage - the South Korea story.

Tagore wrote Ghare Baire in 1916. It is unfortunate that the sentiments being propagated in recent times still follow a century-old narrative that disregards the benefits of trade. What we forget is that in 1916 the Swadesi Andolan was a response to an oppressive colonial government and not a means for economic growth. The time has come for India to benefit from trade, and not espouse myopic strategies that revert to protectionism.


Anwesha Basu is a doctoral candidate in economics at the Indira Gandhi Institute of Research and Development, Mumbai. Anushka Mitra is a doctoral candidate in economics at the University of Texas, Austin

 

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