AFTER Indians took over the governance of India, it had a payments crisis roughly once every decade. It was not written in India’s destiny; it was engineered by its policymakers. Those who ruled newly independent India believed that its long political dependence had made it a primitive land dependent on imports for industrial products, and that independence required it to reindustrialize. Their remedy was to stimulate the growth of industry by protecting it from imports. This line of thinking was attributed to Jawaharlal Nehru, who has been unjustly reviled for it. He did think so, but he was not the only one: there was hardly anyone in his time who disagreed. They went wrong because they removed competition in goods and technology from abroad, and competition is essential to growth of efficiency in the long run. Also, protection of particular industries is essentially arbitrary; if industry is to be protected, it is better to do so with neutral policy instruments like devaluation.

I stumbled upon this error in establishment thinking when I took on a study of Indian import policies in the late 1980s. The study led to my induction into the finance ministry in 1991 where I helped design the economic reforms. The government’s interest in liberalization was fading even before I was eased out in 1993. It took the next, BJP-led government to abolish import licensing and reduce tariffs. But the results of liberalization have been spectacular. Over the past two decades, the Indian economy has become much more open, grown faster, and paradoxically, less vulnerable to external shocks. As they learnt to face competition, Indian entrepreneurs gained confidence. Some have spread out wings across the world, others are selling their wares across the world.

As it has grown, India has attracted greater attention – one might say respect – across the world. It was chosen member of the Group of 20 in 1999 and of BRIC in 2000.¹ In 2011, India was fifth in the world league tables of GDP by purchasing power parity, behind the European Union, US, China, and Japan, and it was about to overtake Japan to become fourth. It is far behind the others, and is unlikely to overtake any of them in the next decade or two. Still, India is seen as a major regional power, and sees itself as one. Some see it, rather wishfully, as competing and eventually overtaking China. India has had great-power status thrust upon it, and does not mind it; in fact, most Indians are rather chuffed by it.

But India does not know what to do with this new status; its foreign policy continues to be as disarticulated and unfocused as it has been since 1991. Till then, India did not matter economically in the world, and hence did not have to think of economic strategy. It created a so-called non-aligned policy which had no relevance to its economic interests. That policy is now outdated, but India has not found another one. It vacillates between the view of the West, which is disturbed by the economic rise of China and would like India to compete with it, and the old-style non-aligned view that seeks a global role unconnected with economic relationships.

 

In my view, India has unequivocally lost the economic race with China; not only is the Chinese economy more than twice the size of the Indian economy, but it is technologically far more advanced and capable. The ambition of its competing with China and becoming like China is unrealistic. At the same time, the idea that India has to model itself on the US or China is naive. It is true that in recent history, world powers have demonstrated military power across the globe and used it to their economic advantage. But it is an historical accident that there has been only one global hegemon at a time for more than two centuries. This will not hold, at least for the next few decades; and nuclear weapons have distorted the world power balance so much that even such an insignificant power like Israel can throw its weight around as long as it knows the limits of impunity. If even Israel can find an international role, India certainly can; the question it should ask itself is, what role.

It will almost certainly not be a global role; neighbouring China is so dominant and so sensitive about its dominance that it will prevent India from developing into even a semi-global power. The present prime minister is an admirer of Nehru, and has retreated into a passive version of non-alignment. His government gets a front seat in all global fora, but it shows no initiative or activity fit for a leading power. Non-alignment was a role without any influence or international pursuit of self-interest; it is a non-sequitur best left behind. At the same time, India is too small yet to be a global power. But it can play a regional, and an economic role. This role has two dimensions, a domestic and an international one.

The domestic role should strengthen and build upon India’s revealed comparative advantage, especially in information technology, health care and education. These services can be delivered abroad, and there is no reason why they should not; but India is good at delivering them at home, and its services are cheap precisely because they are delivered in India where all costs are lower. So they should be sold to foreigners coming to India. Medication and education have to be tailored for individual requirements. To sell them at home, India must liberalize its policies on the entry and residence of foreigners; it must reverse its restrictive visa policies. And it must manage its exchange rate so as to maintain the cost advantage.

 

Although the Indian Navy has been venturing into the Pacific on friendly visits, India cannot afford to compete with China in both the Pacific and the Indian Ocean; it would stand a better chance if it confined itself to the Indian Ocean. However, defence devoid of economic interests is a waste of resources; hence India should concentrate on developing closer economic relations with its neighbours in the Indian Ocean.

It should use services to do so. It must not only seek to export services to them; it must liberalize imports of every kind from them, to bring them closer to India and enable them to pay for its services. The opening up must not be confined to them; in respect of goods, India should follow a policy of unilateral free trade. But it must make a special effort to import goods from them, and aim to increase its share of their exports. In other words, India should achieve higher economic interdependence with countries in the Indian Ocean. This should not be done at the expense of relationships with other countries, but as part of a policy of further opening up.

 

India has developed a good reputation for medical services, not because of government action, but because of the presence of a large number of medical colleges and a small number of high-quality private hospitals. Especially important amongst them are a few branded hospital chains. Most of them are not teaching hospitals. Medical teaching is under the dual control of the government and the Medical Council of India, which is an overstretched and inefficient body. India needs to import medical regulation from countries that do it well, generally European countries; their institutions should be encouraged to set up hospitals in India. If they want to set up teaching hospitals, they should be allowed to do so; but non-teaching hospitals are also desirable, both because they would raise service standards and because they would increase local demand for doctors, nurses and other staff.

This point applies to all education. Regulation of education is shared between the Centre and the states, and has resulted in extremely poor standards. The solution is to invite renowned universities abroad to set up teaching facilities in India. This will have the dual advantage of extending the benefits of foreign education to a much larger number of students, and to poorer students. Luckily for India, regulation of education is equally politicized and ineffective in its neighbouring countries. If Indian education improves with foreign inputs, it will make India more attractive to foreign students. So importing educational standards is also an export strategy.

 

Amongst goods, India’s most successful exports are engineering goods, pharmaceuticals and chemicals; it should build upon them. In particular, it should advance its engineering technology to build better and more comprehensive equipment. In pharmaceuticals, it should progress from simple genetic drugs to more custom-made pharmaceuticals; it should use its own health care sector to develop them. Its Ayurvedic products occupy a small niche today; mass manufacture of proven remedies amongst them could lead to significant volumes. Amongst chemical products, India is a significant producer of plastics and fertilizers, but does not lead in either. It has a large market for fertilizers and could become their competitive producer; but for that, the government would have to dismantle its price and distribution controls.

Whilst the three major services (information technology, health care and education) and the three product groups (engineering goods, pharmaceuticals and chemicals) should form the vanguard of Indian exports, Indian Ocean countries can be brought closer more easily if India begins to take a larger share of their exports. It therefore needs to look at their principal exports, be especially liberal towards their imports, and where desirable, make room for them by increasing our import dependence.

Trade requires ships and ports. India divides ports into major ones under the Union government and minor ones under state governments. The central government is richer and hence has invested heavily in major ports. State governments’ resources are more limited, and their priorities are inland. So minor ports have been neglected. The navy also prefers this; low volume of trade and dominance of a few major ports make naval defence easier. However, marine transport is enormously cheaper than land transport; and there is no capacity limit on seaways. India has a 7500 km coastline with 185 minor ports; two-thirds of them are not functioning. So there is enormous port capacity that can be developed; investment in small local ports can lead to lower transport costs and diversification of traffic flows.

 

One of the obstacles to development of coastal shipping is cabotage laws, which give preference to Indian-owned ships. Just as import substitution policies slowed down the growth of industry, cabotage laws have hindered development of shipping. This is well recognized; but such relaxations that have been made have been short-term, opportunistic and limited to individual ports. Cabotage laws need to be repealed as comprehensively as were import licensing and tariff protection.

Small ports would need good road and rail connections to their hinterland if they were to develop local traffic. Gujarat has improved the logistics of its small ports; but other states have been inactive. The central government needs to make special allocation for coastal roads and railways if small ports are to develop.

Finally, small ports can be used only by small ships. Investment in them has been small because of missing port capacity; but it would be a good idea to accompany investment in small ports with special encouragement to investment in small ships. The assisted ships should be of a few standard sizes to encourage mass production; and they should be general cargo ships to encourage development of diversified traffic. Once ports come up, specialized ships for cargo and passengers will be financed by private investors who see the market.

 

The ship sizes that are encouraged should not be only for coastal shipping. A major objective of the investment should be to extend India’s reach across the Indian Ocean; both the ships and the port facilities should be designed with this in view. Big ports can always be used by small ships, but not vice versa. Hence, the standard ships should be capable of travelling, for instance, from the east coast of India to South Africa. The share of ASEAN and Africa in India’s trade is roughly 10 and 7 per cent respectively; petty trade in small ships could raise it considerably.

Trade brings people closer. Larger volumes of trade will make the Indian Ocean familiar to Indians. Just now, Indians who get rich make a beeline for America and Europe in the West and Thailand and Malaysia in the East; Africa is a dark continent for Indian tourists. Once ships begin to ply frequently between India and its southern neighbours, tourists too will venture out.

To sum up, India should make coordinated investments in (a) minor ports, (b) their logistics with the hinterland, (c) small ships suitable for movement in the Indian Ocean, and (d) a navy with a large number of smaller boats capable of protecting a much larger number of small ships. Such a strategy would have the quadruple impact of (i) low-cost development of the coastal regions, (ii) stimulus to the development of Indian Ocean countries, (iii) greater interdependence between them and India, and (iv) greater influence of India in a region where it is less likely to face competition.

 

Footnote:

1. The Group of 20 was created in September 1999 when the finance ministers of the Group of Seven industrial countries invited their counterparts from another 12 developing countries to discuss the East Asian crisis of 1997-99. BRIC was conceived of soon after in a paper of Goldman Sachs (2000). The four BRIC countries admitted South Africa in December 2011 and made themselves BRICS.