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Inflation and Import Substitution As rising inflation threatens to aground the Indian economy, those with genuine concern for the progress of the nation must ask themselves if the present Sonia-led UPA dispensation is capable of dealing with the problem. For over two years, the government has relied on constant monetary tightening to "solve" the problem. Yet, if anything, the problem has gotten worse. Under such circumstances, some very fundamental questions need to be asked about the government's general philosophy of development. Part of the problem is that the government doesn't really have any well-thought out economic strategy. Economic policies have been formulated in a largely ad-hoc anarchic fashion mostly to suit certain special interests and business lobbies with close ties to the Congress-led regime. For instance, the commerce ministry has been pushing a weak rupee and liberal imports supposedly to facilitate the "export" sector. But so far, the results have not been encouraging. By and large, when it comes to low-priced mass exports, Indian expoters have been no match for the Chinese. And even now, after some years of an appreciating Yuan (and a weakened rupee) India's exporters are still struggling. Some textile exporters have begun to outsource to Bangladesh and Vietnam while others are finding it difficult to compete because of the much higher power tarriffs that prevail in India. For countries with a small domestic market and a weak technological base, exporting textiles and low-end commodities may be the only choice. But for India to base its future on such myopic policies would be sheer idiocy. Not only does it defy basic economic logic (since average hourly wages in India are not only higher but rising faster than many other developing nations), it fails to leverage what is India's growing competitive advantage - a large and expanding pool of skilled labor that is competent in a wide variety of engineering and scientific skills. While there are areas where improvements are necessary and warranted (and should be constantly encouraged), it would nevertheless behoove India to stop thinking and behaving like some banana republic that is content to export cheap goods to the West. Given India's enormous dependance on commodity imports, a cheap rupee policy will always leave India exceedingly vulnerable to high inflation. On the other hand, a strong rupee can greatly reduce the effect of rising commodity prices. This means that the nation's policy makers should be worrying less about what is good for textile (or other) exporters but worrying more about leveraging India's scientists and engineers to maximize production of higher-value goods and services. Rather than champion liberal imports that come with the risk of importing high inflation, a policy of gradual import substitution (of expensive defence purchases, capital goods, aircraft, oil-drilling equipment, power plants and modern industrial assembly lines) should be pursued. Liberalization ought not be ad-hoc or arbitrary, but rather geared towards more strategic goals. Recently, there was a news report of how India's military bigwigs were reluctant to purchase India's indigenous tanks even though DRDO 's engineers were willing to demonstrate their strengths versus imported counterparts. While jawans were more than happy to use the Indian-made tanks, (and the DRDO was willing to work with defence agencies so that any kinks or operational glitches could be removed), the generals would have none of it. Time and time again, the nation has had to deal with serious problems and defects with imported military hardware. Recently, the new AJTs imported from Britain were not delivered as promised. Russia has repeatedly delayed delivery of a badly-needed aircraft carrier. Yet, the focus is always (and exclusively) on domestic lapses. Throughout the world, every developed nation has given very high priority to protecting its defence industry. But in India, self-reliance in this key area has been generally given short shrift. With Russia increasingly becoming a price hawk, India can ill-afford continued one-sided dependance on the Russians for the bulk of its military hardware. Some reasonable sacrifices must be made for the sake of the nation's economic security. India's military procurers have to stop behaving like spoiled children who want the latest toys without regard to cost. Moreover, in some instances, the only reason to favor imports has been the greed for kickbacks. In recent years, there have been some very significant and notable technological breakthroughs in space, missile technology and new materials that demonstrate India's strength and ability in not only building new weapons systems to keep India safe and secure, but also highlight its potential to develop civilian products that might be more energy and resource efficient and ergonomic as well. Achievements in the defence sector that have spin-offs in the consumer sector need to be esepcially encouraged. Recently, India's leading aviation scientists and technologists called for a focused program on developing a domestic civlian aircraft industry. Instead of merely focusing on (what have been quite ineffective) fiscal measures to bring down inflation, the government could limit all unessential imports (especially luxury imports) and concentrate on developing India's capabilities in those areas of production where the developed nations have a monopoly and where profit-margins are high and sustained over long periods. A reduction in such expensive imports could then compensate for the rising cost of oil and other commodities and allow the Indian economy to grow at a faster pace. Unfortunately, many in the country have yet to get over their unwarranted fascination with smooth-talking politicos like Kamal Nath or Chidambaram. Even seemingly "sincere" politicians like Manmohan Singh have little genuine grasp of what comprises the modern economy and ought not be entrusted with the leadesrhip of the nation. Somehow Indians have this very naive view of economists (and economist politicians). They fail to see that far too often, economists know little more than juggling numbers. They can make various fiscal concessions to one group or another. They can pass bills mandating quotas to keep different constituents happy. They can raise or lower interest rates. But they can't really build anything. In the end, real production requires a lot more than mere economic theories. It requires individuals who understand the laws of nature and how to apply them. It requires resource planners with a knowledge of geography and geology. It requires managers who know how to organize production in the most scientific and efficient mannner. But these skills cannot be developed overnight. It requires enlightened intervention during childhood. But once the child is an adult, quotas will not magically transform a child whose basic grounding in language, mathematics, the physical sciences, or logic (and epistemology) is inadequate. To ensure fairness and equity, equal opportunity must be provided during childhood so that (by adulthood) every one can find their productive niche and excel at it. While affirmative action can be very important at the early stages of a child's education, over time, the focus must shift to merit so that every productive member of society can be the very best in their particular field. A good economist (or politician) understands that advanced production also requires advanced scientists, technologists and managers. There can be no room for any type of discrimination and merit must inevitably take primacy over any other parasitic considerations. It is a very foolish government that neglects children's education and then covers up for this fault by imposing divisive quotas on young (or older) adults. Likewise, it is a very foolish government that ignores production bottlenecks by under-investing in infrastructure and then tries to fight the ensuing inflation by ratcheting up interest rates. Any government can look good when all is going well. A true test of a government is how it avoids or manages crises. It should be now abundantly clear that the present UPA government has failed this key test. Its lack of vision and understanding stand exposed. Its ad-hoc policies and opportunistic brand of politics cannot deliver what the country needs. Rather than follow a policy that leaves India more vulnerable to the vagaries of international capital flows and volatile commodity prices, the government should be paying much more attention to building advanced domestic capabilities that can lead to greater import substitution (in key areas) that could help buffer the Indian economy in times of external stress or externally-induced fiscal crises. In the log run, that would be a more effective remedy for managing inflation. Related
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Indian Agriculture Back for other selections from South Asian Voice for other articles on issues confronting India and the region. Also see South Asian History or Topics in Indian History for relevant essays that shed some light on the history of the subcontinent. (If you liked our site, or would like to help with the South Asian Voice project and help us expand our reach, please click here) To send an e-mail, write to india.resource @yahoo.com
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