Self-Reliance is Import Substitution on WhatsApp

One of the impacts of covid-19 has been the race among politicians all over the world to produce goods within their country rather than import them or more specifically import them from China.

India is no different on this front and a narrative of self-reliance especially from China is being propagated. In fact, this narrative was being propagated even before covid-19 had struck. I was a part of a discussion a few months back and a member of the Prime Minister’s economic advisory council complained that only if Indians bought enough Indian products, India would be much better placed economically. Politicians belonging to the ruling dispensation have said similar things in the recent past.

The logic, as it is offered, is very simple. If people buy only products made fully in India, Indian businesses will benefit, which means Indians will benefit. The economy will do well in the process. If this means clamping down on foreign companies operating in India, then, so be it. QED.

Of course, the current pandemic has brought this issue of imports being bad for any economy, out in the open again. But is that really the case?  

Are imports bad?

As David Boaz writes in The Libertarian Mind – A Manifesto for Freedom: “The real problem may be a fundamental economic mistake: regarding exports as good and imports as bad… The point of economic activity is consumption. We produce in order that we may consume. We sell in order to buy. And we export to pay for our imports. For each participant in international trade, the goal is to acquire consumption goods as cheaply as possible. The benefit of trade is import; the cost is export.”

In our personal lives we trade on a regular basis. And when we trade, we try selling anything at the highest price and buying anything at the lowest price. But introduce national boundaries into this and things become tricky, at least in the heads of people.

As Boaz writes: “Somehow the drawing of national boundaries confuses people’s thinking on the benefits of trade… For that matter, you could calculate your own balance of trade between yourself and everyone you deal with. If I did that, I would have huge trade deficits with my grocer, my dentist, and my department store, because I buy a great deal from them and they never buy anything from me. My only trade surpluses would be with my employer and the publisher of this book, because I buy almost nothing from them. What would be the sense of such calculations? I expect to benefit from each transaction, and the only balance I care about is that my income exceeds by expenditures.”

The point being it is best that I concentrate on what I do best and let the other do the rest. What applies at the individual level, applies at the national level as well.

India’s import substitution economy

In the decades gone by India has already gone through wanting to make everything on its own. India saw four decades of import substitution between 1947 and 1991, where imports were discouraged, and Indian businesses were encouraged to produce for Indian markets. The so-called self-reliance is nothing but import substitution with a new name.

Anyone who has lived through the 1970s, 1980s and even the early 1990s, would know the quality of products that one had access to and the time it took to buy them. In fact, there was a time in the 1970s, when second-hand cars cost more than a new one, simply because there was a long waiting for new cars. Only so many cars could be produced during a year and the government controlled the pricing. Second-hand cars did not have to face such limitations. 

As veteran journalist and economic commentator Swaminathan S Anklesaria Aiyar writes in From Narsimha Rao to Narendra Modi—25 Years of Swaminomics: “As an accredited journalist, I was entitled to a car from the government, and I bought a Fiat car for Rs 22,000 in 1972.  I sold it for Rs 35,000 after five years of use.”

As the economy opened up after 1991, the choice of products on offer in the open market (and not black) went up dramatically. Just look at the number of different types of cars that are available in the market currently. Or the different types of mobile phones. Or TVs. Or washing machines. Or ACs. One can go on and on about the choice that we have now.

This is primarily because there is competition among firms (both domestic and international) to offer the best product to the consumer at the lowest possible price.

Let’s look specifically at the number of car brands on offer. If you start right from scratch and look at all possible parameters on offer at different prices, it’s simply not possible to make a choice. There is so much choice. Until Maruti-Suzuki came along India had the choice of just two car brands, Ambassador and the Premier Padmini (more popularly known as the Fiat). As is well known, their engine model of the Ambassador didn’t change for decades.

In fact, when import substitution is the norm and companies need to produce just for the internal market, almost anything goes, simply because there is very limited competition. And given that, they are unable to compete in the international market. If you are wondering why many Indian companies still can’t compete on the international front, herein lies the reason. This explains why imported products from China have become so popular over the years. The Indian firms aren’t productive enough, that’s the long and the short of it.

The success of Chinese imports

Goods imports from China peaked at 16.4% of overall imports in 2017-18. They fell to 13.7% in 2018-19, after the country started making imports from China an ego issue. In 2019-20, the Chinese imports rose slightly to 13.8% of overall imports.

The question is why have Chinese imports (or even other imports in India or for that matter anywhere) been successful. It is worth remembering here that no one is forcing Indians to buy Chinese products.  But they still do it, simply because on an average at a given price, the Chinese products offer more value for money than a locally produced one. It’s as simple as that.

In the first 11 months of 2019-20, almost 97% of Chinese imports were manufactured products. Chemical products, engineering products and electronic goods, form 19.5%, 30.9% and 31.9%, of the overall Chinese imports, respectively.

There is a Chinese import in all aspects of our lives. The medicines we have (ingredients that go into making medicines are imported from China). The electricity we use (electrical machinery is imported from China). The computer I am typing this piece on (most laptops are assembled in China). Even, the milk I use to make coffee is dependent on Chinese imports (industrial machinery for dairy). One  can go on and on, about this.

In fact, recently, Chinese shipments of ingredients which go into the making of medicines, were held up at Indian ports for more than a week. The pharma industry had to send an SOS to the government. One doesn’t want these supplies to be disrupted in a middle of a pandemic.

Also, as economist Rathin Roy wrote in a recent column in the Business Standard: “ It is true that two-thirds of inputs for India’s pharma industry are sourced from China but most of these can easily be made in India, albeit more expensively.” And who will pay for these inputs being more expensive? The Indian consumer. Ultimately, there is no free lunch in economics. Someone’s got to foot the bill.

The larger point here is that mobile phones are not the only products being imported from China. The interesting thing is that mobile phone imports have gone down over the years. The import of mobile phones has fallen from 7.6 crore units in 2016-17 to 2.7 crore units in 2018-19. Meanwhile, the production of mobile phone in India has gone up from 6 crore units in 2014-15 to 29 crore units in 2018-19.

Nevertheless, as Rekha Mishra and Anand Shankar of Reserve Bank of India’s (RBI’s) international trade division write in an article titled India Connected: Transforming India’s Import Profile: “Mobile phone imports are negatively correlated with the…imports of mobile phone parts, implying that decline in mobile phone imports has been accompanied by an increase in imports of mobile phone parts.” So, mobile phones are being assembled in India, which is a very low value adding activity.

This has happened as customs duty on mobile phones has been increased thereby making imports expensive. As Philip Coggan writes in More—The 10,000 Year Rise of the World Economy: “It is possible that companies will switch to domestic suppliers. But those suppliers are bound to have higher costs. If they did not, companies would not be importing the product in the first place.” This higher costs of self-reliance will ultimately have to be paid by the Indian consumer. Again, as mentioned earlier, there is no free lunch in economics.

In fact, in order to apparently encourage Indian manufacturers and help the country become self-reliant, the Indian government has become increasingly protectionist over the last few years.

No one said this more clearly than former finance minister the late Arun Jaitley, in a budget speech he made in February 2018: “In this budget, I am making a calibrated departure from the underlying policy in the last two decades, wherein the trend largely was to reduce the customs duty… To further incentivise the domestic value addition and Make in India in some such sectors, I propose to increase customs duty on certain items…This measure will promote creation of more jobs in the country.”

The global supply chains

Interestingly, other than wanting the country to be self-reliant, the government also wants Indian manufacturers to become a part of global supply chains.

What is a global supply chain? A major reason for the Chinese exports success story has been in the manufacturing sector of the country becoming a part of global supply chains which make network products.

As the Economic Survey of 2019-20 puts it: “In general, these products are not produced from start to finish within a given country; instead, countries specialize in particular tasks or stages of the good’s production sequence… Labour abundant countries, like China, specialize in low skilled labour-intensive stages of production such as assembly while the richer countries specialise in capital and skill-intensive stages such as R&D.”

The government wants Indian firms to become a part of this model. And this is where the inherent contradiction lies.

In order to be a part of global supply chains, companies need to be able to compete globally. The question is how will they become competitive by only producing for the domestic economy and not face international competition (which a higher customs duty makes unviable).

Hence, rather than clamping down on imports and promoting the narrative of self-reliance mindlessly, it makes more sense for the government to work towards creating an environment which allow Indian entrepreneurs to become more competitive.

This includes doing away with tax terrorism, not changing regulations frequently (and with retrospective effect), improving physical infrastructure, doing away with inspector raj, ensuring a movement towards a simpler goods and services tax and so on. Only if India can compete economically with China will it be able to compete politically as well, in the long-term. But all this will involve a lot of hard work and persistence on part of the politicians. In comparison, it just so much more easier to sell a narrative.

It is hardly surprising that the Indian corporates and traders are mouthing the anti-China business rhetoric. For many corporates who were part of the pre-1991 era know that import substitution and crony capitalism go together. It is easier to manage a few politicians than compete in a free market. Also, if the government clamps down on Chinese imports in a big way, it gives Indian corporates an opportunity to sell products at higher prices to Indian consumers.

As Raghuram Rajan and Luigi Zingales write in Saving Capitalism from the Capitalists “Throughout its history, the free market system has been held back, not so much by its own economic deficiencies as Marxists would have it, but because of its reliance on political goodwill for its infrastructure. The threat primarily comes from…incumbents, those who already have an established position in the marketplace…The identity of the most dangerous incumbents depends on the country and the time period, but the part has been played at various times by the landed aristocracy, the owners and managers of large corporations, their financiers, and organised labour.” Less competition from outside works in favour of many corporates.

Hence, it is important to ensure that desi corporates keep competing with foreign companies. As Rajan and Zingales put it “The most effective way to reduce the power of incumbents to affect legislation is to keep domestic markets open to international competition…Openness creates competitions from outsiders—outsiders that incumbents cannot control through political means.”

The myth that India can hurt China more

One of that points that gets made over and over again is that India can hurt China more than China can hurt India. The logic being that we import much more from China than China imports from us. Or to put it differently, the Indian exports to China are much lower than the Chinese exports to India.

In 2019, India’s goods exports stood at $331.3 billion as per the World Bank. Of this around $17.1 billion were exports to China. Hence, India’s exports to China formed around 5.2% of its overall exports.

In 2019, China’s goods exports stood at $2.4 trillion. It’s exports to India stood at $68.4 billion. Hence, Chinese exports to India formed around 2.9% of their overall exports. What is the point here? It is important to know when to look at absolutes and when to look at percentages. This is one such situation.

As a proportion India’s exports to China are much more than vice versa. Further, the Chinese government has much more control over its economy than the Indian government does. Hence, their ability to influence Chinese importers of Indian goods is much more than vice versa. In this scenario, India will get hurt more than China will.

Also, the issue is not just about Chinese products, it is also about Chinese funded investments in India.

Chinese money in Indian startups

When it comes to Chinese money, a research paper titled Chinese Investments in India, published by the think tank Gateway House, points out: “Chinese tech investors have put an estimated $4 billion into Indian start-ups. Such is their success that over the five years ending March 2020, 18 of India’s 30 unicorns are now Chinese-funded.”

These include some of the biggest brands like BigBasket, Byju’s, Dream 11, Flipkart, MakeMyTrip, Ola, Oyo, Paytm, Policy Bazaar, SnapDeal, Swiggy and Zomato. Of course, there is also the now banned Chinese funded TikTok, which is the biggest video-app in India now.  

It is worth nothing here that despite the flawed business models of many of these companies, they have managed to create some jobs in urban India, particularly at the lower end of the spectrum.   

Conclusion

If people want to boycott China, they should start by not giving their money to above-mentioned brands and finally try figuring out if the electricity in their house is being produced by some machines imported from China.

The point being, Chinese products and Chinese brands are so well-entrenched into our daily lives, it is impossible to boycott them. The only thing we can possibly do is compete.

Hence, the so-called self-reliance that is currently being marketed politically is nothing but the bad idea of import substitution with a new name making a comeback. Only this time, it can be sold well over WhatsApp and other social media to the electorate.

A smaller version of this piece appeared in the Deccan Herald.