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Modi must not repeat Nehru's mistakes on China front :Swaminathan Aiyar

'India is uncompetitive because it has become a high-cost economy'

ET Now|Last Updated: Jun 20, 2020, 04.22 PM IST

Let us hope the coronavirus crisis has now brought about a situation wherein Mr. Modi feels that let me go ahead with the reforms, let me bring down the Indian cost relatively of land, labour, capital, electricity, freight. If he can do all these, India will become competitive again and our exports will boom, says eminent economist and ET NOW's Consulting Editor.
 
How can India truly reduce its dependence on Chinese imports?
People are asking how can India become less dependent on China. Frankly, it is a wrong question and it is a very bad idea. India wants to become part of global value chains; we want to have huge cellphone, solar and electronic industries as part of the global chains but in all of these global chains, China is an extremely important part. Therefore, if you want to become a big manufacturing hub, catering to not only Indian needs but the whole global needs, it means importing many-many more Chinese machinery and components. This means no self-sufficiency, it means interdependence; it means not just cutting off from China, it means deepening relations with China.

Now, Mr. Modi has come out with this new policy or what he calls 'Atmanirbhar' which can be interpreted in English as self-sufficiency or self-reliance. He means self-sufficiency in the sense of import substitution and trying to make everything yourself. This was tried by Jawaharlal Nehru and Indira Gandhi and it was an economic disaster, it produced what was called the Hindu rate of growth, funnily enough, although it was done by two secular persons and we were left far behind everybody else. And that, unfortunately, happens to be the philosophy also of the Swadeshi Jagaran Manch and the Bharatiya Mazdoor Sangh -- two arms of the BJP which also wants to have self-sufficiency. They may love that Atal Bihari Vajpayee went in the opposite direction of globalisation and he is the one who therefore took India towards the record growth of more than 8-9% in the 2000s. That is what Modi must go for. It is all very well to use Atmanirbhar, just to say satisfy the Swadeshi Jagaran Manch and Bharatiya Mazdoor Sangh, but do not get confused, it should not mean a return to Nehruvian self-sufficiency. It means becoming part of global value chains, exporting enough to import all your needs without asking for any favours or begging around for more aid or more concessions. Now, the BJP has in the last three-four budgets been consistently increasing import duties on a series of things. Some of them have been simple products like kites, candles, clocks, some textiles, fruit juices, processed food. They say why do you want to import these when you can make these locally. But this is a small part of your total imports. Frankly, it does not change the totality of the picture although the trend is worrying, it is worryingly protectionist. But the key point is this China is no longer a low-wage country, exporting these very simple products. China is not exporting $70 billion to India in the form of kites and candles and clocks. It has gone into high-quality cellphones and it is getting into higher and higher areas of equipment, including power equipment, machinery, hi-tech areas and 5G.

Let us be clear when Mr. Modi was at Davos two years ago, he was saying how terrible it was that people are trying to erode WTO and that we needed WTO for a rule-based regime the world over. If that is the way you want to go you cannot discriminate against China, the point about being in WTO is other countries cannot selectively put tariffs or discriminate against exports of India, they have to give India the same treatment as everybody else. By the same token, India has to give all WTO members the same treatment, including China, you cannot select it out. Now you can try some tricks, some people do antidumping duties, phytosanitary conditions, at the margin you can take some action selectively against some Chinese suppliers, claiming that they are dumping but these are exceptions and not the rule and that is what a rule-based trading system means.

What do you make of this whole call to boycott Chinese goods, uninstall Chinese apps etc?
Anybody who wants to say I do not want to buy Chinese goods it is okay, boycott them but please understand that if you are not buying the Chinese goods, it does not automatically mean you are buying Indian goods. It would mean that you may be buying more from Bangladesh, more from Vietnam, more from Laos and more from Cambodia. Do not confuse these issues. A part of this whole problem arose because of the border conflict with China wherein 20 Indians were and you had TV anchors and fire-eating politicians saying not an inch of ground shall be given and how do we increase our distance. Please, do not make the same mistake as Jawaharlal Nehru. In 1962, he also got very angry with Chinese incursions and said we will throw them out. He sent his army out and the Chinese came in and gave an utter thrashing. Today, the gap between China and India militarily and economically is five times bigger than it was in 1962. Attempting military adventures out there is asking to be thrashed again, humiliated on a scale five times bigger than in 1962. Please understand that India is not the only country that finds it uncomfortable to be a neighbour of China. You will find that as the ASEAN countries have claims on the South China Sea, they have claims on the Spratly Islands, Paracel Islands which China has coolly declared that the whole South China Sea belongs to me. It has put up military structures on the Spratly Islands and it has told all these countries that you cannot do offshore drilling in this area because they all belong to me. All the others are using diplomatic means and trying to get diplomatic support but nobody is rushing into military adventures to try and take on China. For the same reason, we should act the same way. Try and get diplomatic support but do not rush into military adventures. Do not repeat the mistakes of Nehru on self-sufficiency, do not repeat the mistakes of Nehru on precipitating military action against China.

What do we do so that we are globally competitive?
Compared with our Asian neighbours or Asian rivals, India has very high costs of many items, relatively high cost of land, labour, capital, electricity, rail freight, air freight, the time taken of turnaround, the general logistic costs. So if we are high cost on so many items, obviously, we are not competitive and to become more competitive, we need action on all of these.

Mr. Modi is proposing some steps along all these lines, the question is how far, how quickly can you take it. Land acquisition has to become much quicker that is very-very clear if you want projects to come up. You also want to make land cheaper. If there are large amounts of land that Mr. Modi can identify as the one government owns or which are in rocky areas or otherwise available at a low price then that is extremely important in order to attract industry and make it competitive. As far as labour rules are concerned, because of the Bharatiya Mazdoor Sangh, Modi’s attempts to actually make Indian labour more flexible and low cost have not really worked very much. Let us hope he can do a little more because despite what he has done, the fact is that most Indian industrialists are trying to reduce their labour force and not increase it and none of them wants to set up factories with 50.000 workers as you see in Bangladesh. They see labour as a problem and not as a solution. If you want to be competitive, then cheap labour should be a solution. Then there is the capital, India’s interest rates have been relatively high compared to all our neighbours. The RBI has been cutting them because of the coronavirus crisis but other countries have cut it even more. At the end of it all, one problem is the total amount of household savings or the financial savings in India are hardy 7-9% of the GDP. If the government’s fiscal deficit of centre and states is more than that then there is just not enough left over for private investment and this pushes up interest costs. So we will have to reduce our fiscal deficit very substantially if we want to bring interest rates down competitively on a long term basis. Our electricity rates for the industry are very high because high industrial tariffs are being used to subsidise farmers and urban consumers with cheap rates. There are some proposals to reform that and get rid of those cross-subsidies and they have to be pursued very aggressively. The same applies to railway freight rates. They are high in order to subsidise passenger traffic. You have to stop doing that again because it makes your rail freights uncompetitive. It is understood that India is uncompetitive because it has become a high-cost economy in all these areas. It needs reforms in all these areas to bring down rates and Mr. Modi has started talking about ways to push forward. I am afraid progress on this front till now has been very limited. Let us hope the coronavirus crisis has now brought about a situation wherein he feels that in these conditions I can push through various things which would be more difficult in normal times; let me go ahead with all these reforms, let me bring down the Indian cost relatively of land, labour, capital, electricity, freight. If he can do all these, India will become competitive again and our exports will boom.

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