Dear Readers,
In his book, Economics: A user’s guide, Ha-Joon Chang starts the chapter on international trade by narrating the story of Qianlong, the Chinese emperor, who, in 1792, rejected the request of George III, the British king, to allow more open trade between the two countries.
Britain had run up a huge trade deficit, thanks largely to its new-found taste of tea. The British monarch had hoped that if China allowed trade at more ports — instead of just one (Canton or Guangzhou) — British goods could be sold all across China and thus plug some of the trade deficit.
The point of the story wasn’t that Qianlong rejected but the reason he gave for his summary dismissal of the British proposal.
“He reminded the British king that China had allowed the European nations to trade in Canton only as a ‘signal mark of favour’, as tea, silk and porcelain, which the Celestial Empire produces, are absolute necessities to European nations. Qianlong declared that ‘our Celestial Empire possesses all things in prolific abundance and lacks no producthin its own borders. There was therefore no need to import the manufactures of outside barbarians in exchange for our own produce’.”
Call it self-sufficiency or self-reliance, few statements capture the notion better.
Chang points out that given the development of international trade as an academic discipline at that time, it made sense for Qianlong to turn away from trade because China seemed to enjoy “absolute advantage” over other countries.
But later refinements in the discipline — Theory of Comparative Advantage — showed even such a country, which enjoys self-sufficiency, should trade as it would be beneficial.
Why? Because there are certain things a country can do much better than others. If it focusses on doing more of what it does better — by taking away resources from doing what it does less efficiently — it improves its wellbeing.
This episode underscores the importance of trade even for those countries that think they have achieved self-sufficiency.
For those who are not self-sufficient, trade is an absolute must.
Again, look at China. Till about 1990, India and China had roughly the same annual Gross Domestic Product (GDP). In fact, India’s per capita GDP was higher because its population was much smaller than China’s.
But in the last three decades (see chart), China’s economy has grown rapidly and leapfrogged over most other countries like the United Kingdom. In the process, today, it is roughly 4 to 5 times India’s size. In another few years, it is set to topple the US to become the world’s largest economy.
What has all this got to do with India, you may ask.
There were several reasons for China’s rise but the central factor was its intent and ability to use international trade to boost domestic growth, raise incomes and reduce poverty. Its share in global exports and imports rose from barely over 1% in the early 1980s to over 13% and 11%, respectively, in 2018 — far in excess of any European country, and equalling the US.
By contrast, India’s trade performance has been a non-starter. For instance, India’s share of global merchandise exports was higher a year after Independence (2.2% in 1948) than 70 years later (1.7% in 2018).
Why did India turn away from trade after Independence when many other Asian cousins were doing the exact opposite?
The answer was economic nationalism, which, in turn, was a reaction to the colonial regime’s free trade policy. “Self-reliance under economic nationalism was narrowly interpreted as self-sufficiency and founded in a deep-rooted suspicion of international trade…,” state Suresh Tendulkar and T A Bhavani in their book Understanding Reforms.
Coupled with socialism — also rooted in the colonial era leadership’s misgivings about private enterprise — economic nationalism held back India’s growth potential for several decades.
Since his address to the nation on May 12, Prime Minister Narendra Modi has repeatedly talked about his “new” vision for India: Atmanirbhar Bharat Abhiyan or Self-reliant India Mission.
However, the absence of any concrete policy steps on how the government intends to achieve this goal has given rise to several apprehensions.
Is this a definite move towards Swadeshi — the long-standing demand of the Rashtriya Swayamsevak Sangh, the ruling party’s ideological parent?
Over the past few years, India has been taking an increasingly protectionist stance as evidenced by higher tariffs.
The most alarming episode was when it decided to opt-out of the Regional Comprehensive Economic Partnership (RCEP) in November last year fearing Indian markets will be flooded with all manners of imported goods — from Chinese steel to New Zealand’s milk.
There are other worries. Last week many Indians “celebrated” our forex reserves crossing the $500 million mark, thanks in part to higher foreign inflows — both, portfolio and direct. Over the past six years, PM Modi has assiduously worked towards convincing international brands to come to India and invest. But openly suggesting that Indians choose the Indian alternative does not sit well with that invitation.
Moreover, at least in the short term, any move towards self-reliance will come at the cost of consumers, who will have to either pay more for an Indian alternative or make do with a less efficient Indian alternative instead of enjoying the best product at the cheapest prices possible.
In that sense, as things stand, this policy, like many in India’s long past, simply robs the consumers to pay the producers, who tend to be better at lobbying for their interests.
Further, in trying to assuage apprehensions, the government has stated that this move is not intended to take India back to “command and control” economy but to go towards “plug and play”. Regardless of what exactly a “plug and play” economy is, the “command and control” bit should not be conflated with the desire to participate in international trade. China is a great example of a command and control economy that uses trade as a springboard for growth.
Coming back to the notion of self-sufficiency and self-reliance. As much as these are desirable goals, in the modern economy, they are often either not achievable or achievable in a counter-productive manner.
Let me leave you with one provocative example. India is very proud of its self-sufficiency in food grains. But do you know that when it comes to fertilisers, which is arguably the most important input towards achieving self-sufficiency in food grains, India is not self-sufficient? This is true for all the main fertilisers — N (Nitrogen or Urea), P (Phosphorus) and K (Potassium). Worse, in all likelihood, India would never be.
Why? Feedstock, typically natural gas, accounts for around 75%-80% of fertiliser production cost. Like with all our energy needs, Indian firms import large quantities of natural gas — often at double or triple the domestic price. At present, India imports two-thirds of its requirement for fertilisers. But diverting all domestic natural gas to fertilisers would come at the cost of power generation, CNG etc.
In the weeks and months ahead, we hope to see concrete policy steps towards achieving the goal of Atmanirbhar Bharat because without them, it will repeat the tepid track record of the Make In India initiative.
And let’s hope future policy steps under this rubric do not set back India’s economic growth the way the first wave of economic nationalism did immediately after Independence.
Stay safe.
Udit
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