A way in the world

SUMAN BERY

back to issue

I am grateful to the editors for inviting me to contribute to Seminar’s annual issue for a second successive year. While I was free to explore a completely new theme, 2020 has been so significant for the issues that I discussed last year, I have not resisted the temptation to take that story forward.

Last year’s essay was intended as an economist’s contribution to the national discourse on India’s global choices and options, especially the challenges confronting India’s economic diplomacy in a fast-changing world. That essay was written six months after Prime Minister Modi’s May 2019 re-election. India’s slowing economic growth had been a concern for much of that year. The ill-health (and subsequent premature demise) of ministers Sushma Swaraj and Arun Jaitley had compelled changes in the critical portfolios of External Affairs and Finance while the earlier death of Manohar Parrikar had created a further vacancy in the Ministry of Defence.

Accordingly, despite continuity at the level of the prime minister, the government had the look and feel of a new administration (Modi 2.0 as it was dubbed by the media). While the government moved quickly in its first parliamentary session on such domestic issues as the abolition of Article 370, a new political and administrative order in Jammu and Kashmir (J&K) and the Citizens Amendment Act (CAA), it took somewhat longer to show its hand on global economic engagement.

This changed in November 2019. In hindsight two developments stand out. The first was the announcement by the prime minister on 4 November, while he was in Bangkok at an ASEAN summit, that India would withdraw from final negotiations for the Regional Comprehensive Partnership Agreement (RCEP). This was an ASEAN-centred regional trade agreement launched in 2012 under the umbrella of a grouping called the East Asia Summit, a group of which India had been a founding member. The fact that the withdrawal was announced directly by the prime minister signalled that this was a strategic choice, made at the highest political level. Events in 2020, analysed below, make it even clearer that 4 November 2019 was a crossing of the Rubicon for Narendra Modi.

Less than two weeks later, in a landmark speech (quoted by me in last year’s essay) the External Affairs Minister (EAM) S. Jaishankar articulated the principles that would guide foreign policy in Modi’s second term: nimbleness and flexibility; issue based partnerships rather than stable alliances; a vision of India’s global links that had economic (and technological) engagement at its heart. All this suggests that government decisions made in 2020, reviewed below, were not impulsive, but formed part of a considered doctrine. External developments in 2020 have subjected these principles to a harsh confrontation with reality, crystallizing the implications of the choices that face India.

 

Over the past year there has been extensive domestic and foreign commentary on the issues I will discuss. Some of this has been critical of the government on both geopolitical and economic grounds, while in the eyes of others the government can do no wrong. I have my own views, committed elsewhere in print, but I will not defend these here. As was the case last year, my primary purpose is synthesis and interpretation, with two goals in mind. First, in what is a polarized and often partisan media debate, non-specialist readers of a journal of ideas deserve exploration of the assumptions and perspectives that underlie these divergent views on policy and strategy. Since my parent discipline is economics, I will use the framework that it offers to illuminate the issues at hand.

Second, India in common with other large, populous, continental economies (the U.S., Brazil, China, and Indonesia come to mind) has a public debate dominated by domestic developments. Yet we are deeply affected by global developments and have no alternative but to react to them. This indeed was the purport of the minister’s remarks last year. Accordingly, my second goal is to put the tumultuous events of 2020 within a larger context to judge quite how consequential they could be for India.

 

The events of the year now ending are well known. I list them here as the chronology is relevant for the analysis that is to follow. The year’s arc has been defined by the Covid-19 illness caused by the SARS-CoV-2 (Severe Acute Respiratory Syndrome-Coronavirus strain 2) virus, and the wide variety of national and international responses to it. The Covid-19 designation indicates that the illness was first identified in humans in 2019, even though it was only on 11 March 2020 that the WHO saw fit to declare it a pandemic.

A year later there is little professional consensus on the origins of the virus, the best approaches to its management and control, or appropriate metrics of national success. What can be said is that the measures taken by most governments have been economically costly and regressive in their distributional impact when compared to the pre-virus status quo, but this is not a particularly helpful observation in the absence of well-specified alternatives.

Not all has been dismal: learning from their experience in the 2008 financial crisis, the initial domestic economic policy response of the large, advanced economies was unprecedented in scale and speed. Innovations in public funding significantly de-risked the development and production of a broad array of vaccines in the advanced economies, leading to regulatory approval in less than a year for the first successful beneficiaries of these initiatives. While there is less transparency regarding parallel vaccine development initiatives in Russia and China, country reports suggest substantial progress there as well.

Without denigrating these extra-ordinary scientific achievements, there is little question that the harder issues still lie ahead, in prioritizing access to these vaccines, in dealing with uncertainty and resistance to their administration, and in monitoring, identifying and addressing possible side effects. Even if all goes well, a return to some semblance of normality seems unlikely until the middle of 2021.

Over the year the global coronavirus story became deeply entangled with President Trump’s re-election bid. Chinese domestic and global conduct, particularly its handling of the coronavirus was a central element in his campaign. Of more direct relevance to India, Modi invested heavily in his personal diplomacy with President Trump symbolized by back-to-back rallies featuring the two leaders, in Houston, Texas in September 2019, and in Ahmedabad in February 2020.

 

The second rally took place less than a month before India imposed a strict national lockdown. This was on 21 March, approximately two months after the first recorded infection (in Kerala, on 30 January). In imposing the lockdown India was following what at the time was considered recommended practice in terms of ‘non-pharmaceutical interventions’ to address the spread of the virus. For their part such interventions drew their legitimacy from truly frightening epidemiological models that began to be released in the first half of February, and by the experience of Northern Italy which followed China as a new hotspot for the disease.

It now appears that at approximately this time China began to strengthen its forward positions along its un-demarcated frontier with India, particularly in the eastern sector of the newly established Union Territory of Ladakh, but also at other disputed points. These actions were noticed by India in May, triggering talks designed to build confidence and to restore the earlier status quo as seen by each side.

 

In circumstances that remain obscure Indian and Chinese patrols engaged in a brutal night-time scuffle on June 15 leading to the loss of fifteen Indian soldiers’ lives and unacknowledged casualties for China. While casualties are unfortunately not uncommon on India’s other contested frontier, the so-called Line of Control in Kashmir, they had been successfully avoided through diplomacy in the long, if uneasy, stand-off with China, so these events came as a rude shock. While both countries have declared their desire to achieve a negotiated withdrawal there has been little progress on the ground even as the extremely harsh winter has set in.

Even as the border build-up became publicly known, the economic news remained grim. When numbers for the final quarter of FY21 became available they revealed that, at growth of 4.2% for the year as a whole, the economy had clocked its slowest annual growth since the financial crisis more than a decade earlier. This was at a time when world economic growth was fairly buoyant even though this required the continued application of massive monetary stimulus in the advanced economies.

The lockdown, initially for three weeks but extended in stages till the end of May hit an already weak economy, with poor fiscal and financial buffers. The severe economic lockdown coupled with the near-complete suspension of air, bus and rail trunk transport services generated panic among urban migrant labour who took desperate measures in large numbers to return to their native places.

This exodus dominated the news for much of April and early May. Each extension of the lockdown was preceded by a speech by the prime minister to the nation and it was in his speech of 12 May (delivered in Hindi, as were the others) that the prime minister presented the economic doctrine intended to guide his government. This was the pursuit of what he christened ‘Atmanirbhar Bharat’ (self-reliant India). This doctrine was enunciated at a time of deep domestic distress. While the announcement preceded the clash at the border, there is little doubt that India’s economic relationship with China was an important driver of the new doctrine. Even though there was studied ambiguity in Modi’s formulation, the underlying message was clear: the pursuit of deeper global integration which had provided direction to Indian policy since the early 1990s was no longer considered appropriate in a changed global environment. India’s development and security needs would require it to be more discriminating and selective (in ways still to be defined) in its external engagement.

 

The second half of the year was marked by the reversal of the physical lockdown, the continued expression of the coronavirus in Covid-19 cases across a wider geographic expanse but also greater experience in its treatment, the announcement of successive packages of measures to address the economic effects of the lockdown and reforms, notably in agricultural trade and marketing to establish a policy basis for the new economic vision.

The border clash led to the imposition of symbolic sanctions which were couched in general terms but clearly directed against Chinese economic interests. November heralded the conclusion of the RCEP agreement among the remaining fifteen nations; the victory of Joe Biden in the US Presidential elections; and the victory of the BJP coalition in the Bihar Assembly election. This last was seen as political vindication of the prime minister in a state which is among the largest sources of domestic urban migrants in the country. At the time of writing the Union government is facing street protests from north Indian farmers against its flagship economic reform measures in agriculture.

‘An honest self-assessment of our economic performance must begin with the recognition that it was not our karma to see the state of our manufacturing today… we not only failed to develop the deep strengths that a large industrial economy like ours should have; we actually created an employment challenge by becoming over-dependent on imports. And in doing so, we neglected what is my principal message to you today: adequate awareness of the world.

After all, we are in many ways a unique economy that is heavily reliant on mobility and migration that had no preparedness for such an enormous crisis. As it is, the effect of past trade agreements has been to deindustrialize some sectors. The consequences of future ones would lock us into global commitments, many of them not to our advantage. Those who argue stressing openness and efficiency do not present the full picture. This is equally a world of non-tariff barriers of subsidies and state capitalism. In the name of openness, we have allowed subsidized products and unfair production advantages from abroad to prevail.

And that is why, the outlook of Atmanirbhar Bharat is so crucial. This approach, instead of allowing others to decide our future prospects, is a case for building strong national capabilities and deep strengths. It is far from turning our back on the world; in fact, it is to enter the global arena with cards to play, not just to provide a market for others. This is really about seriously building comprehensive national power. Our success in doing so will determine future terms of engagement and our standing with the world.’1

 

I have so far argued that Modi’s second term marked a palpable shift in the government’s view of India’s global economic integration and that the ravages wreaked by the SARS2-coronavirus have since generated announcement of a fundamental change of economic course. The speech of the external affairs minister quoted above provides a clear statement of why and in what way the earlier dispensation had been found wanting by the present government.

The minister’s remarks were delivered a day after the RCEP agreement was finally signed among fifteen nations to the East of India. These include countries such as Japan and Australia with which India has increasingly deep strategic ties; it is also the first agreement to bring together China and Japan in a preferential agreement. Although not presented as such, the remarks can be seen both as an explanation of India’s decision not to re-enter the RCEP negotiations (despite repeated invitations to do so), as well as a clarification of the goals, if not yet the means, of the new doctrine of self-reliance.

The minister provides four reasons why his government believes a fundamental shift in mindset and in economic strategy has become imperative. First, that India’s manufacturing sector is sub-par for a country of India’s size and capabilities. Second, that an important reason for this perceived weakness has been ‘unfair’ trade practices underpinned by past trade agreements. Third, that ‘over-dependence’ on imports (presumably, again, of manufactured items) are an important reason for India’s employment challenges. Fourth, in a world of negotiated (rather than ‘free’) trade interactions, India as a large, though still poor economy needs to learn how to behave strategically rather than place its trust in laissez-faire.

This diagnosis prompts several reflections: on India’s manufacturing prowess and record; on its experience with trade agreements; on its employment challenges; and on the challenges and risks associated with strategic government intervention. Little in what I say is new, but it acquires urgency given the need to fashion a post-Covid strategy as well to prepare for likely geopolitical realignments under a Biden Administration.

 

India’s quest to return to its historic role as a major manufacturing power dates at least as far back as the celebrated Bombay Plan of 1944/45, followed after independence by the Industrial Policy Resolution (IPR) of 1948. This was followed by the celebrated IPR of 1956 which enshrined the public sector as the propulsive agent in Indian manufacturing. In keeping with the intellectual fashion of the time the focus was on increasing capital investment under protective external barriers.

This model was challenged by experience and research over the 1980s, leading to the industrial policy reforms of the 1990s with a sustained, gradual commitment to lowering of external tariffs to ‘East Asian levels’. Even though this degree of liberalization was not quite achieved, considerable tariff reductions were implemented through the 1990s until the arrival of the UPA-1 government in 2004. At that time unilateral tariff reductions got ensnared in negotiations at the WTO on the Doha round (which India initially opposed). It was also then that India, a committed multilateralist, began its tentative flirtation with the now-criticized bilateral ‘free’ (preferential) trade agreements.

 

In parallel successive governments addressed other impediments to modern large-scale manufacturing such as small-scale reservations. Yet in the more than 60 years since the 1956 Industrial Policy Resolution, the share of value-added in manufacturing has remained stubbornly around the 15% mark. Unlike its East Asian peers, India has found it difficult to sustain manufacturing growth at a rate faster than the overall growth of the economy, even in periods (unlike the present) when it has been a successful exporter of manufactured products.

The larger issue is whether (and why) it makes sense to target an overall share of manufacturing in GDP and how much it is worth distorting economic incentives in order to reach such an objective. This in turn links up with the other issues raised by the minister: ‘unfair’ trade; subsidies; and employment. Liberal trade theory views the world in terms of the gains to consumer welfare at the microeconomic level and improvements in the terms of trade at the level of the economy as a whole. In this framework the gains from trade are greatest when trade occurs between dissimilar economies (finessing the issue of fairness), and subsidies are a welcome transfer from the exchequer of the exporting economy to the consumers of the importing economy. By way of example India has been a major beneficiary of the massive public funding that first Germany and then China have invested in making renewable energy affordable by helping the relevant industries achieve scale.

From his remarks it is clear that the minister believes that this benign, positive-sum, market-driven, politics-neutral view of cross-border interactions is today as obsolete as the state-led model of the 1970s came to be seen by the 1990s. Implicit in his remarks (although articulated clearly by other BJP economic officials) is the corollary that India should not expect an early return of an effective rules-based global trading order, and that its economic sovereignty is better secured through bilateral negotiations than through multi-country agreements. Even before the virus the government was inching toward the conclusion that access to the Indian market was a prize to be awarded to those willing to reciprocate bilaterally. The deep pain inflicted by the virus has apparently only further strengthened this conviction, even at some sacrifice of consumer welfare.

At the end of the day what truly matters for India’s economic well-being is rising labour productivity (amid stronger labour force participation than at present), generated through a combination of education, skill development, competitive pressure and technological absorption. How much of this happens in the manufacturing sector ought to be a secondary matter. Most of the relevant agenda to make this happen is domestic, but access to foreign technology and to external markets is also essential. It is a brave bet that India can achieve these ends outside the mega-regional blocs that are replacing the multilateral trading order. We have to hope that it is a bet our leaders will win.

 

Footnote:

1. Keynote address by External Affairs Minister at the Deccan Dialogue (mea.gov.in), 16 November 2020.

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