Nickeled & Dimed

Penny for your thoughts?

We are accepting articles on our new email:

Is Inward-Orientation a Big Deal?

The slowdown of the Indian economy had begun before the pandemic set in. Arvind Subramanian, the former Chief Economic Advisor wrote, “Since the Global Financial Crisis, India’s long-term growth has slowed as the two engines propelling rapid growth — investment and exports — sputtered. Today, the other engine — consumption — has also stalled.” The weakening domestic demand and consumption is a cause of serious concern that thwarts growth.

It is under the light of a weak domestic demand that the COVID-19 pandemic has plagued the nation. The pandemic has only exacerbated the situation and economic contraction has been witnessed globally. Optimistically, there is a slow reversal in the trend, nevertheless, the wound  is deep and requires careful planning to speed the recuperation.

One strategy to survive the black-swan event which caused India to see a historic contraction in the GDP by 23.9% was the Aatmanirbhar Bharat Abhiyan stimulus package. The term Aatmanirbhar — self-reliant India — has become a popular phrase subject to immense discussion. Prime Minister Narendra Modi stated, “The state of the world today teaches us that a self-reliant India is the only path”. While the term hints at an inward leaning approach, the government has made repeated assertions that it is not an inward-looking policy. Piyush Goyal, the Commerce and Industry Minister, claimed that the economic package, Aatmanirbhar, is about self-confidence that the country is not overly dependent on the world. It is about a strong belief in the ability of the country to become a quality and cost-competitive competitor in the world market. 

Despite the assurance, it is hard to believe that India is not inward-looking. Evidence proves that the Indian economy is leaning in this direction where domestic demand is gaining importance over export. Import substituting policy threatens to cut down 2% points off the GDP growth rate annually. Former chairman of NITI Ayog Arvind Panagariya says, “Import substitution has returned but in a different form, but harmful nevertheless”. This return can also be seen in the tariffs imposed by India. To support the domestic market, the import tariffs have increased in the recent past. The average MFN (Most-Favored Nation) tariff between 1991 and 2014 went down from 125% to 13%. But since 2014 there has been an evident reversal whereby the average tariff has increased from 13 to 18%. This is a reversal of a three-decade old agreement and today India sits on the top five list of countries imposing the highest tariffs. 

Furthermore, in 2019, India declined to join the Regional Comprehensive Economic Partnership (RCEP) Asia Pacific trade pact through which it had also rejected to form a trade bloc that covers a third of the global GDP. India being removed from the beneficiary list US’s Generalized System of Preferences suggests the same. Failing to provide reasonable access to the Indian market was pointed as a reason for terminating India. All of these allude to the protectionist nature of India. Rick Rossow, the former deputy director at the US-India business council says, “India’s strategy has always been pro-investment and anti-trade”.

Shoumitro Chatterjee and Arvind Subramanian in their recent paper on ‘India’s Inward (Re)Turn: Is it Warranted? Will it Work?’ debunk the myths that have caused the inward orientation of India’s policies.  The first myth is about the size of the domestic market — “India’s domestic market is large and buoyant”. The size of the Indian population (1.38 billion) is perceived to be large enough to make up for the loss of customers overseas. From this view, considering the large size of the domestic market, import substitution is a reality. Furthermore,  India could become an export base as it can take advantage of the huge labour force.

The authors disprove, “the true market size of India is roughly 15-20 % of China’s true market size; and a tiny 1.5-5 % of the global market”. They argue that this is the result of the modest buying power of the consumers. Though the population is large, a large proportion of consumers is relatively poor with limited purchasing power. A study by the Institute of Human Development revealed that the growth rate across industries of wages and salaries in India had fallen by more than 5% points between 2011-12 and 2017-18. The outcome is lower consumption as the purchasing power does not grow. On the other end, a small proportion of the rich have a greater propensity to save. As a result, the real size of the Indian market is small, and it is substantially smaller as compared to the global market.

Therefore, an inward-looking policy whereby excessive focus is directed to the domestic market, overlooking the export possibilities, and discouraging imports through protectionist measures makes the country a victim to retaliatory measures. This further limits the scope of the country to the domestic market. As we have seen that the market size is relatively small, the loss from such an orientation will be immense. Additionally, it is a fait accompli that no economy has ever been able to achieve high and sustained rates of growth by being a closed economy. India’s experience before and after the 1991 liberalization has precisely taught us this.

A simple Keynesian view on demand deficiency would be relevant to look at. With uncertainty shrouding the future, it is only through creating optimism that it will be possible to stimulate investment. Cutting interest rates are less likely to stimulate consumption and this dissuades investment despite attractive interest rates for borrowing. Government intervention is crucial to inspire confidence by promising to step in to boost demand. Additionally, the Keynesian model views that complete reliance on the domestic market cannot guarantee full employment. It is through free international trade with little barriers, that  would equally benefit the world and the domestic economy.

Under this understanding, both insufficient government intervention and inward orientation of the Indian economy is likely to have an adverse effect on the economy. While the Indian government is mulling over a second stimulus package, the view that the financial stimulus was insufficient is prevalent. IMF’s Chief Economist, Gita Gopinath, recommends more direct fiscal support and monetary easing, in spite of the fiscal constraints because there is “scope to do more”.

India needs to revisit its policy prescriptions and redefine it in a way that corresponds to the actual need of the economy. While on paper we might not be inward-looking, data and action say the contrary. Measures need to be taken to create a healthy economy by exploiting the export opportunities that India has. Focusing overly on the domestic demand at the cost of exports is not ideal. In a time when globalization is integral, overly focusing on inside or outside is bad. Both require attention. India needs to improve its competitiveness and expand by availing of the opportunities it has. While we have a world demand to cater to, why limit to domestic demand?

Gby Atee is a second-year student at Ashoka University pursuing her major in Economics.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: