Shortly before the 2014 election that made him prime minister, Narendra Modi came up with the idea that India's youngpopulation, constitutional checks on arbitrary political powerand large domestic marketwould bringprosperityover adecade.
He even coinedaslogan, calling it the nation's 3D advantage demographics, democracy and demand.India's democratic institutions, such as the judiciary and a free press,havefrayed under Modi.
With just over 40% of the labor force engaged in the economy among the worst rates of worker participation anywhere in the worldthe youth-bulgenarrative has also lostits sheen.
Whatremains of the 2014 mantrais demand.
But how big an advantage is the domestic Indian economy? Can an inward-lookinggrowth strategycreate enough jobs and attractthe capital that's fleeing China?In aForeign Affairsarticle, economist Arvind Subramanian, anadviser to the Modi administration until 2018, and Josh Felman, a formerInternational Monetary Fundrepresentativein New Delhi, have attempted to answer these questions.
Team Modi has done a decent job providingphysical and digital infrastructureas well as basic services like cheap housing,electricity, water, cooking gas and bank accounts;but this boosting ofthe hardware of the economy, the authorsargue, has been accompanied by a weakening of itssoftware, including the centerpiece of the government's growth frameworkits industrial policy.The chest-thumping nationalism of the last eight years has led toarepudiation of the gradual opening up of the previous three decades.
More than 3,000 tariff increases have affected 70% ofimports.India entered 11 trade agreements in the 10 years under previous Prime Minister Manmohan Singh.
OnModi's watch, ithasn't signed evenone.
Although the countryis starting negotiations withpost-Brexit Britainand Australia, and claims to beclose to a pactwith the United Arab Emirates, bilateral dealswon'tcompensate for theRegional Comprehensive Economic Partnership, a free-trade accord linkingAsia's exporting powerhouses.
New Delhiturned its back on RCEPin 2019.This protectionist driftsprings from the beliefthat an economyof 1.4 billion consumers is large enough to be powered by internal demand.But, as Subramanian's previouswork with PennsylvaniaState University economist Shoumitro Chatterjee hasshown, evenbefore Covid-19,no more than 1%-to-2% of the population couldbe described as middle class, compared with 25% in China.
Such a tiny fontofpurchasing power couldat best drive $500 billion in spending.
Worldtrade, meanwhile, is a$28trillion opportunity, withmuch smaller countries like Vietnam making a determined play to winmarket share.Willself-reliant Indiawork? Subramanian and Felman are skeptical.
India has seen this movie before, they say.
Indeed, the current leitmotifis reminiscent of the pre-1991licenseraj,in which thestate controlledcapacityin the private sector, but shielded it from global competition by erectinghigh tariff walls.
The lynchpin of the new system is subsidies,with New Delhipromising2 trillion rupees($27 billion) to investors for makingtheir widgetsin India.
Theidea is to dangle fiscal sops in front of a company like Tesla Inc.
and win a large electric-vehicle factory.
(Elon Musk, however, isproving to be a hard catch.)India is parched for capital expenditure, and its trade deficits are ballooning,particularly with China.
Every new investmentis a victory of sorts for policymakers.Still,a subsidy raj carries all the risks of the old licenseregime:It is hard to enforce, is driven by arbitrary decision-making, and creates a system of entitlements from which it will be difficult to exit, according to Subramanian and Felman.It's impossible to become a factory to the world by coaxing firms to substitute imports with domestic production.
Take mobilephones.
Twoyears of tariff increases on camera modules, display and touch panels, printed circuit boards, and parts used in chargershave pushed up the cost ofassembly in India by 8%.
That's about 6% of a phone's ex-factory priceand fullynegatesthe5% subsidy on offer, according to astudyby the country's Cellular - Electronics Association.
The net benefit forMake in Indiais zero.Contrast this with Vietnam, which iscopyingthe winningformulaofEast Asian Tiger economies:free and frictionless trade.Out of120 tariff lines of relevance to the handsetindustry, 59 are duty-free in Vietnam, compared with only 32 in India.
And while India imposesimport duties of 15% or more on 28 items, Vietnam's tariffs are that high only for16 components.
These, too,are mostly sourcedfrom countries with which Vietnamhas free-trade deals.
Sothey're effectivelyzero-duty imports as well.India's inward turnhas coincided with arise in economic concentration.
Just two conglomerates, led by billionaire tycoons Mukesh Ambani and Gautam Adani, have amassed vast influence across sectors.
The danger of dependingon a small coterie of national champions is that itwon'tbuild widespread public support for market-based reforms.
In fact, it already has turned many Indians against them, Subramanian and Felman say, citing the yearlongfarmers' protests that forcedModi to drop his plan of a market-orientedmakeover ofagriculture.The pandemic has hollowed out India's middle class by destroying10 million manufacturing jobs.
Industrial output in November was slightly lower than two years ago.And yet, by skipping out on large free-trade areas and putting upprotectionist obstacles, New Delhiis crimping the country's chances inlabor-intensive industries liketextiles and footwearjust as China is vacating the space because it has run out of cheap labor.
For a second time in India's history, self-reliance mightprove to be a costly mistake.(Except for the headline, this story has not been edited by TheIndianSubcontinent staff and is published from a syndicated feed.)