In his address to the nation on May 12, Prime Minister Narendra Modi announced that self-reliance would be a central policy objective, and the ‘new normal’ for India, as the country takes first steps of its exit strategy, from the ongoing battle against the Coronavirus (COVID19). The Finance Minister, outlining the contours of an economic-cum-reforms package, has since made a series of announcements. The response mechanism (with its extant strengths and weaknesses) that continues to concurrently address health, humanitarian, and economic crises, is sought to also align to a pre-positioning strategy for the post COVID19 world order.
The roles and responsibilities of governments were redefined during last three decades, by the winds of change brought about by globalization. However, governance of globalization itself emerged as a daunting task, given its complex interplay in different realms. The three main realms have been – economic (linked to liberalization), political (linked to democratization) and cultural (linked to universalization), with war and diplomacy included within the political exchanges. In addition to numerous other challenges emerging from globalization, threats also changed in form, context, and scope. Simultaneous tensions between fragmentation and integration, as well as between localization and internationalization became more apparent over the last decade, and in the last few years, forces of nationalism and protectionism came in direct conflict with forces of globalization, blurring the distinction between global to local and local to global. For large corporations, choices for setting-up and/or running manufacturing and R&D facilities at diverse locations across the globe versus doing so locally in their respective countries today have become harder.
The potential impact of COVID19 on globalization itself has been a subject of intense debate in the last two months. New limitations, other than those related to trade wars/barriers, have been stressed. National and local self-sufficiency have been a key facilitator in driving sustenance and economic activity in some areas in these challenging times. Decentralization of industrial and commercial activities has been noted as an early lesson. Migration due to lack of opportunities in native areas, particularly from rural to urban, has exacerbated response challenges while making a significant contribution to new and additional unemployment.
The localization strategy of the government would essentially include steps for larger share of the national demand being met by local companies, and improving India’s position in the global supply chain through focus on cost competitiveness, quality, infrastructure, and system efficiencies. In some ways, it has some resemblance to US President Donald Trump’s call for ‘Making America Great Again’, by seeking to move substantial part of American manufacturing back to the continental United States.
A push for increasing local content has been attempted in India in the past, with suitable provisions in FDI policies, incentives, offsets (mainly in defence), Make in India etc., though with limited success. It is presumed that the new policy pronouncement would seek to make a radical departure from incrementalism (more of the same), and that we would see implementation of a clear strategy, which has quantified and laid down measures of effectiveness.
Self-Reliance in critical sectors like nuclear, space and defence has been a stated objective in India for a long time. Emphasis on this objective began to be stressed from early 1960s, with clear enunciation after the 1965 Indo-China war, as adverse situation and lessons learnt necessitated this approach. It was initially planned to be pursued through targeted import substitution. In the early 1980s, a gradual shift to export orientation of national industries was sought to be extended to the defence sector. However, substantial industrial capability remained reserved for the public sector (based on the first industrial policy resolution of 1948, which was renewed in successive five-year plans). Similarly, R&D effort in the defence sector was initiated in 1949, under the control of the government. Guiding thought of retaining sovereign control and freedom of action, devoid of external interference and pressures, as also capital and industrial base inadequacies limited the progress on self-reliance, though gradual and incremental progress was made in reducing the import content and increasing the indigenous content. Later, private sector participation was allowed in selected areas, Procurement and Production policies spelt out (with focus on self-reliance), and the overall system streamlined. Efforts were sustained to make technology transfers meaningful, to enable leapfrogging, and to move from technology imitation to technology innovation. FDI allowed in defence has been gradually increased in the last decade though the actual inflow has been small. Self-reliance in some critical technologies continues to remain elusive. Space segment has fared far better, for a variety of reasons.
After the Cold War, many western countries moved to the concept of ‘Value for Money’, as against total self-reliance. Joint and collaborative programs were considered more affordable, with advantages of avoiding duplication and accessing a wider technological base. In India too, an integrated approach of indigenization and value for money was adopted.
Sectors other than nuclear, space and defence, were also taken up in India, and many other countries, for enhancing self-reliance. The degree of success achieved varied substantially, from one end of the spectrum to other. In the recent years, India’s dependence on imports from China increased substantially, leading to supply chain concerns during the pandemic. High input costs, sub-optimal competitiveness, and limited market access have been the key reasons for many Indian manufacturing companies, particularly pharmaceuticals, electronics, automotive, chemicals etc., seeking cheaper raw materials from China. In addition, many companies depend on technologies from other countries. These challenges have been known for some time, but the current adversity makes them more pronounced and visible. Turning this adversity into an opportunity is a good aspirational objective, but needs to consider India’s experience in driving self-reliance, sector specific plans, scale-up strategies, CAPEX (both public and private) during this crisis (there has been no specific announcement in the package related to spurring CAPEX) and suppressed demand, and boosting R&D expenditure. The adversity is also a time to note that about half of the demographic dividend opportunity period is over and has not been optimally utilized, and that the same needs to be accorded priority, with speed and thoroughness of implementation.
Along with the announcement related to self-reliance, the Prime Minister also announced an economic package totaling over Rupees 20 lakh crores, corresponding to 10 percent of India’s current GDP. The Finance Minister, in five tranches, spelled out details over the next five days. It included some measures announced earlier during the COVID19 crisis, and factored in monetary, fiscal, regulatory, procedural, and structural aspects, in an endeavor to make it wholesome. Specific data and details of each tranche have been debated at length. Direct central government expenditure and fund infusion has been kept under control (keeping it to about 2 to 2.5 percent of GDP), with revised fiscal deficit currently pegged at 5.3 percent of GDP (as against 3.5 percent in the budget), based on additional borrowing of Rs 4.2 lakh crores indicated earlier. There have been comments on limited fiscal stimulus/relief, focus on credit and liquidity, supply side measures with insufficient push on the demand side, and debatable counting of some measures.
Contraction of India’s GDP in the current financial year appears inevitable; the extent will depend on the spread/containment of COVID19, level and speed of resumption of economic activity, and normalization of demand. It is likely that the government has considered it prudent to keep some headroom for additional fiscal stimulus in the coming months, which would likely take the deficit to over 7 or 8 percent of the GDP.
A key aspect that stands out is the central aim of providing enabling environment, to tide over consequences of abrupt stop of economic activity and initiate resumption, without radically upsetting government’s balance sheet. To ensure that these efforts are linked to the economic scenario in the terminal phase of COVID19, as also post COVID19, it was perhaps considered prudent to link these with structural reforms. Some of the reforms announced are indeed laudable (like agricultural and farm sector reforms, which include amending the Essential Commodities Act, changing the APMC structure, enabling Farmer to Customer, facilitating private investment across the value chain), while few others are repackaged/restructured schemes that already existed or were in the works. Overall, these schemes can have a major impact, subject to timely revival of the economy, and timely implementation and facilitation.
A concurrent package of stimulus/economic assistance and structural reforms is a novelty and is perhaps being done for the first time in India, while combating a pandemic. The government could have considered a different structure for the announcements by dividing them into immediate relief/measures, near-term measures, and structural reforms, for ease of common understanding. Nevertheless, implementation holds the key. At the same time, defeating COVID19 must remain uppermost. After all, Selection and Maintenance of Aim is the first Principal of War.
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Vice Admiral Girish Luthra is Distinguished Fellow at Observer Research Foundation, Mumbai. He is Former Commander-in-Chief of Western Naval Command, and Southern Naval Command, Indian ...
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