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Is India headed back to the 1970s?

How did the story of India’s liberalization go from triumphant breakout to risky disengagement? The answer is complicated, but the China factor dominates it

A Thums Up ad from 1989. alamy
A Thums Up ad from 1989. alamy

Growing up during the peak of the licence-permit raj created within me an aversion to economic protectionism. Import substitution might have succeeded in other places and times but in the India of my childhood the best it did was produce Thums Up. Much as I admire the inventors of Thums Up, the fizzy drink was poor compensation for high inflation, lack of consumer choice, and a nightmarish bureaucracy that encouraged law breaking.

When the path of liberalization was first explored, hacking through a jungle of red tape, many commentators believed it would lead us off a cliff. India was bound to be swamped by Western products, the refrain went. There was even a call for a boycott of Hollywood films dubbed in Indian languages after Jurassic Park became a monster hit in 1994.

We know how the story played out: India proved equal to the challenge, a number of exceptional companies were born, the entertainment industry thrived, Indian pharmaceutical firms became the largest providers of generic medicines to the world, software service exports created millions of affluent professionals, and GDP growth trended significantly higher.

The rising tide, however, failed to lift all boats. If I was among the millions that the process left behind, I would have a less sanguine view of it. I can understand why many working-class Americans who have seen well-paid blue-collar jobs disappear in their lifetimes support President Donald Trump’s tariffs, or why Indian manufacturers faced with exorbitant overheads wish to be shielded from competition.

If protectionism guaranteed a better standard of living for a majority of Indians, I would welcome it even at personal cost. It is humiliating for India to depend for its self-defence on weaponry from Russia, the US, Western Europe and Israel. It was depressing when the Manmohan Singh administration ignored the large pool of coding talent in India and built its signature biometric identification programme, Aadhaar, on source code purchased from a private American firm (L-1 Identity Solutions, later bought by the French Safran Group). I am all for self-reliance, especially in matters of national security.

The present government’s six-year track record, sadly, does not inspire confidence in its ability to develop an Atmanirbhar Bharat, or self-reliant nation. Skill India did not measurably raise the quality of India’s workforce, nor did Make in India set a secure foundation on which Atmanirbhar Bharat could build. The government made significant improvements in certain welfare programmes and delivery mechanisms in its first term but failed to correct the structural deficiencies in India’s economy that it inherited.

That failure led to India’s withdrawal last year from the Regional Comprehensive Economic Partnership (RCEP), an enormous free trade agreement between nations in the Indo-Pacific region. On the first anniversary of the government’s second term, railways and commerce minister Piyush Goyal spun the RCEP withdrawal as a victory, saying, “PM Modi refused to compromise on India’s interests in the RCEP negotiations." Goyal had taken a different stand when India seemed committed to signing the agreement, saying at that time, “If India remains out of RCEP, we will be left isolated from this large trading bloc."

Goyal’s warning about India’s prospective isolation is undoubtedly valid. Why would investors interested in exports set up factories in India when they could gain tariff-free access to most Asian markets by locating their manufacturing in Thailand, Indonesia or another of the 15 nations that remain party to the agreement?

This is not to say that the prime minister ought to have signed the deal. It could well be that India is incapable at the present moment of withstanding the flood of imports that will follow a free trade agreement. If that is the case, our withdrawal from the RCEP casts a tragic light on the state of the economy.

How did the story of India’s liberalization go from triumphant breakout to risky disengagement? The answer is complicated, but the China factor dominates it. The government’s successive raising of tariffs since 2018, after they had dropped for the previous two-and-a-half decades, was driven by the yawning gap in the Sino-Indian balance of trade.

In recent days, incursions and skirmishes on the northern border, not to mention the origin of the novel coronavirus in Wuhan, have exacerbated anti-Chinese sentiment within India. Last week, the Ladakhi Magsaysay award winner Sonam Wangchuk made a video in which, sitting on the banks of the Indus, he gestured towards the snowy mountains beyond which Indian and Chinese troops had engaged in scuffles. He pledged to delete all Chinese software on his phone within a week and get rid of all the Chinese hardware he possessed within a year. His plea, which went viral, resonated with thousands of Indians, including celebrities like Milind Soman.

The dovetailing of national security considerations with economic protectionism in the assault on Chinese products echoes the years of the licence raj, when geopolitical adversaries represented a clear and present danger. It is unsurprising, then, to witness the resurrection of slogans from the 1970s like Be Indian, Buy Indian. Given the complexity of global manufacture and capital flows, however, it is no longer easy to define an Indian television, an Indian mobile phone, or even an Indian company. The components of a product marked “made in India" can come from many different nations, and foreign shareholders own majority stakes in a number of firms considered Indian.

The prime minister and his colleagues have been at pains to dissociate themselves from the discredited policies of the pre-liberalization days. Indians are to be “vocal about local", they tell us, but also to make the country a hub of the global supply chain. This sounds excellent in theory but evades the fact that raising tariffs on imports invariably begets barriers to our exports. The administration is yet to provide a sense of how it plans to square this circle.

The most important recent move made to enhance local manufacturing is the watering down of labour laws by state governments in Uttar Pradesh, Madhya Pradesh and Himachal Pradesh. Workers in these states can now be made to put in 72 hours a week without overtime. My understanding is that companies become world class through the efforts of skilled and committed workers who are adequately compensated for their efforts. India is unlikely to raise its global profile by marketing itself as the world’s sweatshop hub.

Although the reversal of liberalization over the past few years is real, I do not foresee it leading to the extreme import substitution policies of the licence raj. Absent a clearer road map, however, Atmanirbhar Bharat could turn into as empty a slogan as Indira Gandhi’s Garibi Hatao proved to be in the 1970s.

Girish Shahane writes on politics, history and art.

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