The idea of ‘aatmanirbharta’ (self-reliance) was envisioned in India’s core economic planning mission at its independence. Jawaharlal Nehru, along with PC Mahalanobis, who was instrumental in formulating India’s strategy for industrialisation in the Second Five Year Plan (1956-61), was keen on building an India that, from its infrastructural needs to consumer goods, would be self-reliant and self-sufficient to meet the needs of the society, particularly the poor.
Nehru-Mahalabonis’ vision, though, had limited success, if one looks at the nature of trade relationships India had during the 1950s or 1960s, or even by assessing the flow of foreign capital in and out of India.
The high degree of economic pessimism largely stemmed from a colonial hangover in the economic thinking of the ruling establishment – it sought policy consensus from both the political left and the right, leaving India’s trade and industrial policy only in principle pro-aatmanirbhar, while being pro-protectionist. The ‘License Raj’ made things worse over the next few decades.
'Amrit Kaal' for Whom?
More than seven decades after independence, as India wishes to enter ‘Amrit Kaal’ under a new regime – now in power for eight years – India’s illusory pursuit for self-reliance has found a new push under Narendra Modi. The ingenuity of Mahalanobis is no longer around to guide our macro-policy plan in terms of lucid statistical goals, but the ‘intent’ and ‘rhetoric’ to make India self-sufficient is still invoked in similar fervour.
However, if we were to look at the numbers for India’s trade position now, we’ll find that unlike before, it is much more import-dependent on countries like China, the UAE, Switzerland, and the US, for most of its needs.
Why Does India Import 'Project Goods'?
Among other oil-producing countries and major developed nations such as the US and China, Switzerland stands out simply through its merchandise and bullion imports to India. The imports not only meet the increased consumption of gold in the country, but they also contribute to stabilising the largely unstructured market and increasing the trust across local and global markets. India’s total gold imports have also increased by 14.65% during 2013-2019. This rise, combined with the news of the most recent splurge on gold in the year 2022, confirms India’s increased need to improve its local gold market in comparison with international standards, as per the most recent report by the World Gold Council.
India has been trying to move away from its dependence on one country for each category of commodity imported over the past decade. Plastics form one of India’s highest imported merchandise. China has remained the top importer of plastics to India, with South Korea following close behind.
India has been a net importer of a category of goods labelled ‘project goods’, referring to their eventual usage for the set-up or maintenance of industrial infrastructure. Broadly referring to the input materials required for civil and private infrastructure projects, the import of project goods may act as a barometer for the pace of infrastructure creation, both public and private, in the country.
The import of project goods decreased by around 48% between 2013 and 2019, which could either mean that India was producing the raw materials domestically or that the focus on major infrastructure projects largely declined during this period (as domestic private investment did slow down).
These ‘project goods’ were mostly imported from China and Germany in the early years, but the last leg saw an increased import from Russia, too. Still, contrary to expectations, there is no reduction in the monthly imports of project goods from Russia.
India's Widening Trade Deficit With China
Looking at the non-POL trading systems, a positive change in India’s trade pattern would be the increased import of intermediate goods as compared to finished goods. This has historically led to higher domestic productivity and the manufacturing of new and varied products in sectors like automobile, consumer durables, and electronics for the domestic market.
A caveat to the behaviour lies in the export side.
The pattern most followed by export-led industrial nations, such as the US and China, is that of importing intermediaries and exporting most of the final goods to international markets. China still takes the spot of the highest importer for India, including for commodities ranging from electrical parts and machinery to waste scrap. India doesn’t export the final products made with the intermediate goods it imports from China anywhere, else but rather produces them for domestic production-consumption needs. Unsurprisingly, India’s trade deficit with China has become the highest.
Despite the massive domestic anti-Chinese sentiments, India’s “banning” of Chinese imports has been short-lived. Chinese imports, which were around $3,331 million in June of 2020, increased by 96.5% by December of the same year. Two major sectors – health and telecom – depend mostly on cheap Chinese intermediaries to supply local demands.
Japan’s bilateral trade relationship with India deepened after India’s rising tensions with China. But considering that both India and Japan depend heavily on Chinese imports themselves, a closer Japan-India trade axis is less likely to put any serious dent over Indo-Chinese trade volumes.
Still, the hope is that slowly switching and matching each other’s needs will not only help in reducing Japan and India’s import dependence on China but will also help balance the existing trade partnership between China and the rest of East and South Asia. Japan has a strong manufacturing strength that India can benefit from.
Moreover, as the world’s value chains get more linked, the trade gets affected by shocks in any part of the world. COVID-19 taught everyone that. In recent months, as the Russia-Ukraine conflict escalated, and mineral oil and fuel prices rose, most countries, including India, faced the brunt. Surprisingly, India’s total exports and imports to Russia have only increased since December 2021 (imports have increased more than exports) despite the ongoing political conflict.
Are PLI Schemes Helping?
There are two channels or categories for which India is currently import-dependent. The first is the goods-based dependence for sectors such as pharmaceuticals, electricals, and Solar PV cells. The second is country-based dependence for different categories of goods, whether it is from China for electricals, Switzerland for gold, or the US for capital goods (say, machinery).
To address the first category of import dependence, the government of India introduced its Production Linked Incentive Scheme in November of 2020 to encourage the domestic production of various electronic parts that it otherwise imports. In the Union Budget 2021-22, presented on 1 February 2021, the Finance Minister announced an outlay of Rs 1.97 lakh crore for the Production-Linked Incentive (PLI) schemes for 13 key sectors. This means that minimum production in India because of PLI schemes is expected to be over US$ 500 billion in 5 years.
The schemes have been specifically designed to boost domestic manufacturing in sunrise and strategic sectors, curb cheaper imports and reduce import bills, improve the cost competitiveness of domestically manufactured goods, and enhance domestic capacity and exports.
The scheme, for example, for the automobile sector, proposes financial incentives of up to 18% to boost domestic manufacturing of advanced automotive technology products and attract investments in the automotive manufacturing value chain. So far, the scheme has had mixed success.
For the second category of import dependence, which is more ‘country-based’ than goods-based, there was an effort to reduce India’s imports from China due to the burgeoning trade deficit.
Numerous efforts to de-link India’s supply chain from China have resulted in importing the same goods at a higher price from countries like the US, Japan and Vietnam, which has made domestic production more costly and difficult.
Most local manufacturers, including MSMEs, have continued their dependence on Chinese imports to remain price/cost-competitive in a market where the ‘willingness to pay’ for consumer goods remains low.
The ‘Illusion’ of Aatmanirbharta
India’s weak growth combined with a low domestic private investment has made its overall domestic production and productivity frontier weak over the last decade and a half. Foreign direct investment in some sectors might have remained net positive, but depending solely on foreign capital for sustained investment-production would always have its limitations.
While the need for more goods and services has continued to expand, a weak domestic economy presents less room for India to grow both domestically and as an external economy. Expansive import dependence on other nations means less scope for actualising India’s vision of ‘strategic autonomy’ in its foreign policy, and/or in negotiating better deals for trade bilaterally, plurilaterally, or multilaterally.
In India’s current macro-economic scenario, beyond the reasons cited for its extensive import dependence, a poor level of trade competitiveness is because of two interplaying factors:
a weak demonstrable domestic manufacturing strength (for which schemes like PLI and Make in India are vital)
an uncompetitive currency-pricing mechanism for the Rupee (viz-a-viz other emerging market currencies).
In fact, since the reforms of the early 1990s, India has been faced with some structural challenges in prioritising both of these aspects. On the other hand, countries like Bangladesh, Vietnam, Indonesia and Thailand, to name a few, have done way better in aligning an export-oriented industrial vision with a set of policies that make their products (including their cost) more competitive at a global level.
In the case of an agreement like the RCEP, too, one of the key issues that prevented India from coming on board included ‘inadequate’ protection against a surge in imports.
Even though several countries within the RCEP expressed a desire to have India present as part of the partnership. Still, India’s own comparative weakness in terms of trade and competitiveness levels triggered a fear about how Chinese commodity products may ‘flood’ Indian markets (a concern that wasn’t misplaced).
Why India Needs to Sign Better Trade Deals
At the same time, there have been other pressing issues in signing better trade deals: India’s request for added provisions for more trade in services; an assurance for better market access for Indian products in Chinese markets; making 2019 the base year for tariff-reduction calculations (all of which couldn’t happen during the RCEP deal).
Further, India has also been trying to develop (and negotiate) an auto-trigger mechanism that would allow it to raise tariffs on products in instances where a basket of imports from a given nation crosses a certain threshold. This was not accepted by many RCEP members at the time.
What all of this does is make India dependent on signing more FTAs bilaterally, which takes time, and many countries (say, the US) are less keen on more advanced FTAs.
Still, a key question is, how can India focus more on improving its poor performance in trade competitiveness levels?
Enabling competitiveness for Indian products and services across regional and international markets would require a set of both ‘market’ and ‘extra-market’ arrangements.
‘Market-centric’ steps would require a set of liberalising measures with incentives for cross-border trade and reforms in factor markets (land, labour in particular), which allow enterprises to increase production for export. Simultaneously, ‘extra-market arrangements’ shall require fiscal and other targeted socio-legal interventions to make the very outlook of Indian businesses – including those entering new markets – more globally aligned.
Weak Rupee Meets Low Domestic Manufacturing
It must be mentioned though that there is little possibility of India experiencing a dynamic, more rapid, export-oriented pattern of industrialisation, as seen in East Asian economies like South Korea and Taiwan around the 1970s and 1980s.
However, there is still a critical need and economic case for the government to continue its focus on stronger manufacturing capacity for trade, which accrues positive returns on domestic employment creation while also attracting foreign direct investment into manufacturing.
The auto industry in India, because of the way it grew since the pro-market sectoral focus in the 1990s, is a case in point in this regard.
Why India Must Strengthen the Rupee
Further, for greater trade competitiveness, a strong manufacturing capacity requires a competitive Indian Rupee. In comparison to China, over the last decade, we can observe how India’s exchange rate has appreciated over time (primarily due to the influx of foreign capital mobility), while China has managed to maintain an undervalued Renminbi to make its currency (and its products) cheaper and more competitive in export markets.
While the underlying factors affecting the volatility of exchange rates may differ from one country to another, it is possible for India to strategically manage exchange rates and keep them in alignment with the country’s production patterns, as seen in the case of China and other countries too.
Going forward, it will be vital for both the Indian government and the Reserve Bank of India (RBI) to ensure a more favourable INR-USD exchange rate.
Without a competitive Indian Rupee and a strong manufacturing sector (enabled through structural reforms guided by market principles), it is likely that India’s performance in exports and overall current account position may only weaken in the years ahead.
And this will only make its own economic vision for foreign policy more exclusionary in nature by being sceptical towards critical regional trade partnerships. Whether it was Nehru in the 1950s or Modi now, a combination of all these factors makes the goal of actualising economic ‘aatmanirbharta’ seem illusory.
(Deepanshu Mohan is Associate Professor and Director, Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, OP Jindal Global University. He is Visiting Professor of Economics to Department of Economics, Carleton University, Ottawa, Canada. Ashika Thomas is Research Analyst with Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, OP Jindal Global University. This is an Opinion article and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)