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No substitutes

Prime Minister Narendra Modi’s emphasis on creating a manufacturing base for India is laudable. As he himself has said, his aim is “mass production, and production by the masses” – in other words, only through factory employment is India’s thirst for jobs likely to be satisfied. It is difficult to disagree with the enhancement of manufacturing and the creation of such jobs as the goal of government policy. As is the PM’s wont, this emphasis has been elegantly branded, and packaged into an easy-to-understand mission with a logo and a title: ‘Make in India’. The stylised lions that are the symbols of ‘Make in India’ are even now going up all over the small Swiss town of Davos where the world’s geo-political and financial elite are shortly to gather.

However, as the world looks at ‘Make in India’, it seems there is a cause for concern – and, when examined objectively, this concern is one that most Indian observers, too, should share. And this is that the emphasis on domestic manufacturing must not be allowed to encourage import substitution. As India ramps up its production, access to markets abroad will be a priority. But it will be difficult to ensure this if foreign countries feel that India has itself put up unfair barriers to trade. Indeed, such delicate negotiations over relative openness will be an important facet of the agenda when President Barack Obama visits India. India must be seen to be continuing on the path of reducing tariff and non-tariff barriers, if it is to fulfil its ambitions to export to the rest of the world.

There are important, and very self-interested, reasons why ‘Make in India’ must not become import substitution, and should instead emphasise openness to trade. The first is that, after all, the nature of world trade has changed. The days when goods were all made in a single country are gone. Now, in order to build a manufacturing base, a country will have to rely on supply chains. This cannot happen unless tariff and non-tariff barriers to trade are low. The second reason is that such barriers lead to a sheltered domestic manufacturing sector that puts quality and competitiveness last. Such, indeed, has been India’s experience with import substitution, and it is not one that the government should seek to repeat. There have been worrying reports that the prime minister has himself told secretaries to the Union government to take responsibility for certain sectors, and then to identify which imports relevant to those sectors can be substituted. This is not the right approach.

Instead of import substitution, the focus should squarely be on enhancing competitiveness – and ensuring that domestic manufacturing faces external competition is a crucial requirement in order to boost India’s competitiveness overall. This means that the government should continue to focus on the costs of doing business in India – the red tape, the lack of infrastructure, the problems with formal contracting and financing. Instead of putting up tariff and non-tariff barriers to imports, it should reduce the discretion of customs officials and the red tape, so that companies can slot themselves more easily into global supply chains.

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