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There no clarity on what ‘Atmanirbhar’ means as an economic concept and a policy direction. Interpretations tend to be dominated by the literal translation of the word, which is reliance on the self. But this plays to fears of a reversal of liberalisation and a closing of the economy again.
The policy emphasis, however, is not on self-sufficiency but on self-confidence. This requires pragmatism and diversity, both of which entail more, not less openness to strengthen capabilities of people and the organisations they work for.
Capacity building
For learning and developing dynamic comparative advantage it is necessary to stay away from extremes of full liberalisation or full protection.
The current export competition regime differs from the earlier failed import substitution regime in that manufacturing has to become efficient in order to compete internationally. It is, however, being helped to develop economies of scale under a broad set of policies primarily aimed at lowering costs of doing business. Protection from unfair competition and incentives such as from the PLI schemes are to be temporary and targeted so they do not become permanent crutches.
In a country of India’s size and diversity growth requires multiple sources. Moreover, service exports alone cannot give the technological depth to rise to middle income levels. A labour force with varying skill levels requires a range of matching jobs. Graded protection is required until supportive ecosystems and industry clusters come up.
Domestic and foreign firms
Such trade policy also takes advantage of the post-pandemic impetus to diversify sourcing. But, in order to enhance economic security, many countries are giving inducements for ‘re-shoring’ of firms back from China.
It is difficult for India to compete with governments of high per capita income countries in giving incentives to foreign capital. It is more feasible to collaborate and use ‘friend-shoring’ to increase participation of domestic firms in global supply-chains.
In order not to compete to the bottom, multiple reinforcing strategies have to be adopted. Incentives alone will not work. PLI has had clear success so far only in a couple of areas. There is much potential in ‘green’ industry. Disbursal has been less than committed, partly since of stringent performance and audit requirements to prevent gaming of the system. Even so, there are many large MNCs that have come in and benefited from Indian markets.
Apple has contributed to India’s reversal from being an importer of mobile phones to an exporter. These success stories and good Indian prospects will attract others but the process will be gradual.
Last year gross FDI inflows slowed marginally to $59.9 billion in April-January 2023-24 from $61.7 billion over the same period last year, while net FDI inflows fell more sharply to $14.2 billion from $25 billion. The reason was that reparations rose. FDI sends back the large profit it earns to its home country. One estimate is that in 2024 there will be a net outflow of up to $50 billion from developing countries to advanced economies because of foreign debt repayment obligations.
While FDI has many benefits it also has costs, so in some ways it is better that tax-payer resources are used more to boost domestic firms. In any case FDI has never exceeded 2 per cent of GDP, while domestic investment exceeds 30 per cent. Diversification reduces risks and over-dependence on any one type of investment increases them.
So rather than pay FDI to come here, or give it special favours, it is better to work on making it more attractive for all types of firms to produce in India. These types of measures include further progress in ease of doing business, regulatory simplification, policy consistency, speeding up Indian courts, lowering logistics and other costs and so on.
Court reform is especially important since India has been correcting bilateral investment treaties that were biased in favour of foreign capital since they gave them the ability to bring cases against Indian policies in friendly foreign jurisdictions. This needs to be accompanied by reducing delays in Indian courts thus improving confidence of foreign capital in the domestic legal system. Indian courts have a reputation for fairness and impartiality but they take too long.
Education outcomes
Improving education outcomes is a major component of the multiple strategies required to build capabilities and confidence. Developing human capital, the required skills and technological capabilities is also the way to leverage India’s youth advantage.
India has a large number of universities and institutions but quality varies. Improvements in governance, more competition, independence and freedom to differentiate are essential reforms. Multiple sources of finance, including from CSR funds, can contribute to this as well as help develop industry integrated innovation clusters.
Countries with broadly inclusive political and economic institutions tend to succeed in the long run since inclusive institutions generate the creative destruction and innovation that sustains wealth even while they temper extractive state power. India started out with highly inclusive political institutions since it adopted democracy with universal suffrage at independence. Few democracies had that advantage.
In the West voting rights were initially restricted to white males. Inclusive politics should have led to inclusive economic policies with good public services like health and education that are essential to enhance human capital equitably. But a heterogeneous electorate allowed politicians to cultivate vote-banks and populist schemes instead of delivering on governance and public services.
Public goods for inclusion
The neglect of public goods such as health, education and environment hurts the poor more, for whom these are necessary not only to build capabilities but also to convert them to diverse functionings. The rich can pay for private substitutes. Many such services need to be delivered at the 3rd Tier, so patchy decentralization is a major bottleneck.
Even so, a policy focus on building assets for the poor has resulted in access to sanitation, nutrition, cooking fuel, financial inclusion, drinking water and electricity reaching adequate levels for an additional 135 million people in the five years to the end of the last decade, according to a UNDP study.
Such a reduction in multi-dimensional poverty and improvement in own assets creates confidence, ability to take risks and to participate in growth.
As more atmanirbharta reduces dependence, doles and distortions, government finances, which are not unlimited, can be spent on public goods that raise productivity and attract good jobs to match rising skills. Voter awareness and insistence on sustainable inclusion is a major way to ensure continuing delivery and rising capabilities.
The writer is Emeritus professor, IGIDR
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