IIndia’s economic reforms in 1991 and onwards, domestic as well as global, were investments in free markets. The reforms were influenced by Reagan–Thatcher era ideas on a reduced government role in the economy. The domestic initiation for this was LPG: Liberalisation, Privatisation, Globalisation.
Although it was implemented in stages and only partially, the belief was that greater market orientation would work to India’s advantage. And it provided faster economic growth, lower inflation, better trade balance and external economic viability.
But the failure to boost manufacturing, the lack of quality jobs and the rise in inequality have fueled frustration. Furthermore, in parallel with the need for green (solar energy, electric vehicles), vulnerability to China has developed on systemically important products and materials and others,
The response has been a more restrictive approach to trade (tariff hikes, new non-tariff barriers, restrictions on Chinese products) and a rebirth of government-directed industrial investment.
This includes the full range of policy tools: investment subsidies, production incentives, tariff protection, and preferred business houses. This is not a 180-degree reversal of 1991 (especially since those reforms were never completed), but a change in direction. The government gets a bigger role, not a smaller one.
Importantly, it is related to the new wind coming from the west. The collapse of manufacturing in the US and elsewhere has led to similar results: loss of quality jobs, rising inequality and vulnerability to China. So politics has become populist, and economics nationalistic.
Former champions of free trade have spearheaded new-age policies under Presidents Trump (“America First”) and Biden, who have rewritten trade agreements, offered massive investment incentives, and sought to localize strategic industries. has demanded.
Simultaneously, import barriers against Chinese goods have also increased, along with restrictions on the transfer of strategic technologies to China.
In response, major companies from Europe and East Asia turned to the US, where investment in manufacturing has doubled in two years. Countries in those regions protested – and have now copied the US with investment subsidies and sanctions on China.
Beijing has responded with a warning: export restrictions on gallium and germanium, used in the electronics, electric vehicle and telecommunications products sectors. (Did you know that India is the third largest importer of these materials?) But the Chinese, too, have disguised themselves as free-traders, demanding open market access because they have nearly half of the world’s exports in critical sectors. There is an export surplus in all needs, including electric vehicles.
TeaHe says that governments are making massive efforts to avoid buying from China. Subsidies per electric vehicle in the US and Europe are around $7,500. Intel has received a $10 billion incentive from Germany to set up a chip plant. Companies like General Electric, which didn’t emphasize manufacturing, are getting back in the game. Investments in new manufacturing facilities in key regions are expected to reach hundreds of billions of dollars.
Will such policies end well? For one thing, overcapacity is looming on the horizon, and so is a possible trade war. How would it work in fragmented, subsidized, protected markets? Or will the tariff hike make products costlier and lead to inflation?
Although the folly of disengagement from China has given way to reducing risk and reintroducing purpose as diversification, the risks are still of tit-for-tat action and seeking subsidies from its neighbor – and therefore still There is more government debt. Therefore the west wind cannot dominate the east wind (to use Mao’s imagery); Instead, it can predict storms.
India has been wading into policy territory like other countries, but is struggling to move beyond the shallows. One could argue that this may be just as well, as the diversification of supply and mitigation of risk (that too to a greater degree) can be provided by other countries.
Such a conclusion could free New Delhi to pursue employment rather than import substitution as the primary goal of the manufacturing push – and possibly achieve both (along with mobile phone assembly). But India is really suffering from the disease of big countries and is once again committed to import substitution on crutches.
By special arrangement with Business Standard.