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Self-Reliance and Chinese Challenge

Admin April 20, 2021

Self-reliance must ensure macroeconomic sustainability by enabling India to meet its import bill from own exports without leaving any trade deficit and the country should be able to mobilize fiscal resources or revenue enough to meet the targets of major heads of expenditure. — Prof. Bhagwati Prakash Sharma, Miss Kriti and Dr. Jaya. 

Dream of Self Reliant Five Trillion Dollar Economy

The twin declarations of making Bharat Aatm-Nirbhar and turning into a $5 trillion economy has coincided with the pronouncement of National Education Policy 2020, aimed at making India a knowledge super power. Self-reliance is key to prosperity and sustained economic growth. But, self-reliance should not be interpreted in a narrower sense of isolating from the global economy. Self-reliance must ensure macroeconomic sustainability by enabling India to meet its import bill from own exports without leaving any trade deficit and the country should be able to mobilize fiscal resources or revenue enough to meet the targets of major heads of expenditure on education, health, R&D, defense, welfare and social security, along with mobilizing domestic resources investment needed for industry, commerce and infrastructure development.

Fastest Growth Projection 

Bharat is slated to grow fastest at a pace of 11% in 2021-22, even overtaking China as well. India has already left 6 countries behind in last 7 years on the basis of the nominal GDP and has acquired 5th rank worldwide. India has pipped Russia, Italy, Brazil, France and UK. The production linked incentive scheme announced recently is going to add $500 billion in the manufacturing value with some degree of technological self-sufficiency as well.

Getting Rid of Dependence on China

India is endowed with largest arable area, 150% of China, largest number of micro, small and medium scale enterprises (MSME) and largest share of 20% in the world’s youth. Our over-dependence upon a single country, the China for meeting most of the needs of components needed for domestic manufacturing of majority of products has to be remedied. Today, China alone is the key source of inputs for most of our domestic manufacturing, as we are over-dependent to source most of the components needed for manufacturing of the majority of products from mobile phones to the personal computers. 

We are solely dependent on this single country for several finished products too, portraying enmity towards India. For almost 85% of our crucial mobile phone components, 70% of active pharmaceutical ingredients, 100% of 57 important product categories, 80% supplies of 375 products categories, most crucial for our manufacturing activities we are badly dependent upon China. Almost 30% plus contents for pharma, electronics, automobile and several other industries are coming from China. India has now been offering Production Linked Incentives for a variety of sectors, as on an average we import 90% of solar panels and allied equipments at a cost of approx Rs 25,000 crores per annum, which helps China to generate an employment for 2 lac persons, engaged in manufacturing these solar equipments and components for India. Same is true in case of several other products, including the Li-ion batteries. The import of Li-ion batteries has grown 3-fold from 17 crore in 2016 to 47 crore batteries in 2019, of which mostly from China. The cost of Li-ion battery imports has gone up from Rs 2600 crore to Rs 6500 crore per annum. China dominates over the Li-ion battery market. Around three-fourths (75%) of Li-ion battery cell manufacturing capacity is in China. Chinese companies, under active State support from Chinese government has developed unparalled control on the global supply of raw materials and processing facilities. India has been making rapid strides to resolve even the issue of raw materials for Li-ion batteries, as we do not have Lithium and Cobalt reserves. 

Need to Add Downstream Value Chain in Manufacturing

Country has well laid assembly lines for most of the products ranging from mobile phones to metro-trains and from refrigerators and TV sets to pass-book printers being assembled out of the imported components or completely knocked down kits. Efforts need to made to add the down-stream value chain of original equipment manufacturing through technological self-sufficiency. As on date inspite of having 17.6% share in world population Bharat has mere 3% share in world. Whereas, China has 28.4% share in world manufacturing and 30 times more high-technology exports than India. Japan has just 1.6% share in world population, but 10% share in world manufacturing. 

The policy of local content requirement for public procurement would soon boost domestic manufacturing. The public procurement order of September 18,000 shall remedy it and boost domestic value addition.

Local Content requirement to Boost Manufacturing

India has allowed higher ‘local content requirement’ (LCR) for public procurement to the tune of 50% or more in the government order of September 18, 2020. This order seeks to promote manufacturing and production of goods and services indigenously by allowing ministries and departments to mandate local content requirements to minimum 50% and 20% or even more for two categories of suppliers viz Class I and Class II local suppliers. The OECD countries, China and the ASEAN countries like Malaysia and several other countries have been pursuing these LCR policies since long back to move in an era of deglobalisation.

Chinese Citadel Bound to Fall

China aspires to be the largest economy of the world by 2035 by doubling its GDP to become a $30 trillion economy by 2035 at 2020 price level with self-sufficiency in all kind of technologies. According to Homi Kharas, the deputy director for the global economy and development program at the Brookings Institution, China is on the course to surpass US as the biggest economy in 2028. China has now even proclaimed to be self-sufficient in high technology to eliminate its dependence upon foreign technology in most of the sectors, including semiconductors, robotics, new energy vehicles, aerospace and so on. So, India too needs to make rapid strides after attaining the scale of $5 trillion economy by 2025, as already declared by the government. At least India has to quadruplate if to $20 trillion by 2035. China would fail to attain the goal of $30 trillion economy with the exiting of foreign supply chains. 

Declaration of Aatm-Nirbhar Bharat: A Moment of Pride

It is for the first time after 72 years of Independence that the Prime Minister Narendra Modi has declared the intent of making Bharat, Aatm-Nirbhar or self-reliant. Otherwise, ever since the Independence, India has focused at borrowings from abroad or inviting the FDI to bridge the trade deficit without matching the FDI without-bound direct investment (ODI). These twin banes had been responsible for our economic decline. It would be enough to give a brief mention of the three devaluations of the Rupee done for major borrowings by the Nehru, Indira and Narsimha Rao governments in1949, 1966 and 1991 respectively from the World Bank (in 1949 and 1966) and the International Monetary Fund (IMF in 1991). On these three occasions, one of the conditionalities for grant of the loan was devaluation of rupee. 

In 1949 the Rupee value was brought down to Rs 4.76 per dollar from Rs 3.50, in 1966 from Rs 4.76 to Rs 7.50 and from Rs 17.50 to Rs 24.58 in 1991. There are several other occasions of devaluing and depreciating currency. India had to pay mere Rs 350 for every import of goods worth USD 100, for which today we pay mere Rs 7500, merely because of devaluations and depreciations done to borrow from abroad. 

Three Pillars of Self-Reliance

Self-reliance should not be interpreted in a narrower sense of isolationist self-sufficiency of the Indian economy. Foreign trade account for 48.8% of country’s GDP. Export kitty of 7500 commodities destined for 190 countries of the world and an imports list of 6000 commodities, originating from 140 countries. This broad base of our trade relations is going to be more broad-based for self-reliance. But, macroeconomic sustainability with respect to external sector as well as fiscal sustainability on the domestic front is key to self-sufficiency to meet the targets of expenditure outlays. Technological self-sufficiency is also key to be able to run our assembly lines with more than 50% domestic share in the manufacture of original equipments of downstream value chain for our assembly lines. Country should also think of one step ahead of developing the sunrise technologies for the ensuing decade instead of merely focusing upon providing skilled manpower to foreign assembly lines. So, for attaining self-reliance trade and investment balances, fiscal sustainability and technological self-sufficiency needs to be given paramount importance. 

(i) Macroeconomic Sustainability in the External sector: As already stated here above that India must be able to meet its import bill from its export earnings. The trade deficit of $165 billion in the pre-Covid year is the major stumbling block, which has ballooned hundred-fold from $1.62 in 1991-92. This ballooning trade deficit has compelled the governments over the years to meet this deficit from foreign direct investments and portfolio investments, leading to take over of most of manufacturing by foreign MNCs. It has led to foreign control and ownership of industry and commerce. Excess of FDI leads to precarious deficit in the investment income as well. Our outbound direct investments (ODI) are very low when compared to the ballooning FDI. So, more and more profits and royalties are repatriated out of country, vis a vis the profits received from the ODI. So, along with a trade deficit of approx $160 billion, India has an investment income deficit of around $30-40 billion. This has led to the depreciation of Indian rupee value against the American dollar from Rs 18 in 1991 to Rs 76 per dollar today. Most of the inflation in the country has resulted solely from the more than four-fold fall of Indian rupee in the post reforms period. So, Bharat needs to balance its trade and current account deficits along with investment income deficit.

(ii) Fiscal Sustainability: Adequate fiscal resources are key to meet various expenditure targets. India has since last more than five decades been trying hard to raise government expenditures on education to 6%, health to 4%, R&D at 2%, defence at 4%, welfare at 6%, social security at 6% of the GDP. Besides, the government has to spend 8% of GDP on salaries. The composite expenditure stands at 34% of GDP. At present the Tax-GDP ratio for the centre is 9.76% and 16.92% or say 17% for the centre and states together. So, unless the tax-GDP ratio rises, the country cannot conduct itself as a truly sovereign nation. The tax-GDP ratio can grow only if GST revenues rise. But, unless we raise our manufacturing, it won’t to feasible with mere assembly lines, being run by foreign MNCs or few domestic players from the imported original equipments. It would be feasible only with technological self-sufficiency in the manufacture of the original equipments of downstream value chain. 

[The third pillar, Technological self-sufficiency shall be discussed in the next article].

[To be concluded]

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