Amidst the ongoing Covid-19 lock down in India, yesterday the prime minister announced continuation of the lock down in its fourth phase in little less restricted mode. More importantly, he also announced an economic stimulus package worth 20 trillion rupees i.e., some 10% of India’s GDP. This package will also include already announced measures as well as RBI’s policies of injecting some 8 trillion rupees in the economy. Although the details of this package will be announced in the coming days, the basic background under which this package will work became clear in prime minister’s speech. While announcing this package prime minister said that,
Announcing an economic stimulus package for ₹20-lakh-crore (estimated at 10% of the GDP), with a clearly defined leap towards economic reforms that will, in his words, lead to Atmanirbhar Bharat, or a self-reliant, resilient India.
He also emphasised on achieving self-reliance for the country at a time when the pandemic has brought the economy to a standstill. “This era of self-reliance will be our new pledge, we have to move on with new resolve.”
Few more general details are,
“Land, labour, liquidity and laws” — that was how the PM defined the key themes of the package. This is likely to translate into: steps to bolster liquidity for the Micro, Small and Medium Enterprises (MSMEs), among the worst impacted sectors; a push to the process of monetisation of surplus land assets held by Ministries and Central PSUs; a state-led easing of labour regulations and additional tax breaks for companies investing above a certain threshold in technology-intensive sectors like pharma, medical devices and telecom equipment.
All in all, this stimulus package burns down to present government’s new scheme of ‘Atmanirbhar Bharat Abhiyan’ i.e., Self reliant India.
Let us see how sound this idea of ‘self reliance’ is.
Importance of Trading
First of all, this move towards self reliance is not unique to India. Since last 10-15 years we are seeing globalization forces in retreat world over. Nationalism and with it its protectionist ideology of ‘self reliance’ are rising their heads again. We are seeing one after another populist leaders like Narendra Modi or Donald Trump etc., coming to power and announcing their nationalistic policies of make in India or Make America Great Again etc.
Now, the fallacy of this ideology of self-reliance can be quickly exposed by using the logical method of reductio ad absurdum. For example, if self reliance is such a good idea then why restrict it arbitrarily to the nation state only? That is, if make in India is good for Indians then why not make in Gujarat be good for Gujaratis? Why not make in Maharashtra be good for Maharashtrians? Further, why not make in Delhi be good for Delhites? Why not make in Mumbai be good for Mumbaikars? Why not make in Surat be good for Suratis? Stretching the idea of self reliance to its logical end, is it not true that it will be good for all of us individuals to produce everything that we consume on our own? That will be a true self reliance, isn’t it? I am sure my readers can see how absurd this whole idea of self reliance is when we analyze it logically to its ends. We all cannot produce everything on our own that we consume daily. Can we? Can you dear reader produce the jeans that you are wearing right now on your own? Or the refrigerator or air conditioner that you are using? Or the pen and pencil that you are using? Tooth brush? Floss? Car? School bag? Utensils? Gas cylinder? Wheat? Apple? Rice? Hammer? Sickle? etc., etc. Can you make any of these goods on your own? May be, but even then it will take a life time for you to produce them and meanwhile you will die of hunger. This is why the idea of self reliance is not a very good idea after all.
So as Individuals cannot produce everything on their own, similarly countries cannot also produce everything on their own. This is because different countries are endowed with different kinds of natural and human resources i.e., different kinds of geography and people. Countries like Saudi Arabia is full of oil reserves but they do not have enough skilled manpower to extract that oil out of the ground and so they need to import American and British talent and technology to do that work. On the other hand, a country like Japan has no natural resources but its people are so hard working, smart and disciplined that it could become a developed country quickly. Similarly for all other countries around the world including India.
We do not become rich (wealthy) by becoming self reliant, but by trading with others. Most importantly, by trading with complete strangers who are not part of our tribe i.e., foreigners. If trading between Indians is good then trading with foreigners is even better. That is the story of human progress so far. We all were living in jungle few million years ago, but the modern man emerged from that jungle with this unique skill of trading with others i.e., exchanging goods with others. Not trading with outsiders will only mean we are going back to jungle!
Trading is what makes us rich and so we must trade with others. Instead of trying to make (everything) in India, we should import those things from outside which we are not good at producing. As Adam Smith’s law of absolute advantage and David Ricardo’s famous law of comparative advantage tell us, by freely trading internationally is how countries can become wealthy. That is the whole teaching of the science of economics.
What Protectionism will Do?
On the other hand, government’s make in India push is just going to cost us more. To realize the goal of self-reliance, the BJP government has already embarked upon the policy of protectionism. Government will force us to buy local to realize this goal of self reliance because left to their own devices people are not going to follow the diktat of the government. As consumers we all like to buy high quality goods at the lowest possible prices. We hardly bother to know where the good was produced. If anything, Indians are more fond of imported goods because of inferior quality pricey local manufactured goods. This means, nudging us in the direction of self reliant India is going to be the policy of the government. They have already raised import duties and imposed anti-dumping duties on myriad of goods coming from everywhere outside India. They have imposed import quotas also. We have to now inquire about the consequences of this policy of protectionism. Let us take one example and try to understand these consequences.
Suppose, before the imposition of protectionist measure of higher import tax on Chinese steel, Indians were buying that cheap but better quality Chinese steel at the price of 1000 rupees per tonne. The Indian steel of the same quality was selling at 1500 rupees per tonne and so Indian buyers were avoiding buying it. Now in the name of their new policy of self reliant India, government imposes 100% import duty on the Chinese steel. That will raise its price from 1000 to 2000 rupees per tonne making it artificially more costly compared to the Indian steel. Indian consumers will be now forced to buy the costly Indian steel at 1500 rupees per tonne. This extra spending of 500 rupees will now deprive Indian consumers that amount of purchasing power. Because they are forced to buy the costly Indian steel, they have 500 rupees less left in their pockets. They cannot spend that 500 rupees now on any other Indian manufactured goods like, let’s say, an ice cream. Indian ice cream manufacturers thus lose business and they will either have to shut down or reduce their operations firing workers making them unemployed. In this game of protectionism one industry wins while many others lose. Consumers are forced to pay higher prices so they are the losers also. Also, because of protectionism foreign competition pressure won’t be felt by the Indian producers and that will reduce their productivity and efficiency. In the absence of any competitive pressure, they will stop innovating and improving quality of their products; they will stop finding ways of reducing their costs too. Even politicians will lose in the end because India will become poorer and poorer Indians won’t be able to pay taxes and provide resources for the luxuries of the politicians and fascist corporate houses who are hooting for protectionist measures. A poor India will also be a vulnerable country because a poor country cannot defend itself from outside attacks. India will become an easy picking for a wealthy neighboring country like China.
Another dire effect of this imposition of steel duty is that now Chinese manufacturers can’t sell their products in India and so they have less rupees with them to, in turn, buy other Indian goods. Remember, China is also a big buyer of many Indian goods e.g., polished diamonds. This Chinese lack of demand for Indian goods means many Indian exporters will have to shut down their businesses now firing and making unemployed scores of laborers.
All in all, Indians are more poorer now after the imposition of import duty than they were before it. Self reliance policy will hurt Indians only. Overall, we all are going to be big losers.
Self reliance is a fairy tale idea which only feels good to heart. But it has no logical soundness. If followed to its limits, it will make us all very poor in the coming future.
Stimulus Package Impact
Although details of this stimulus package will only emerge slowly, we can analyze its impact based on general policy tools that this package is using. This stimulus package only means more money printing by RBI and spending by the government; it will also mean more borrowing. This money printing by RBI and spending by the government is not going to bring any positive results overall. As government will take sides and chose winners and losers in this game of printing and spending, some people, mostly large business houses, will benefit at the cost of vast majority of the public. This is nothing but an age old policy of inflation, and inflationary policies end up in three major consequences.
First, this policy will generate more business cycles into the economy as some sectors will be artificially pumped by rupees being injected into those sectors. But because this growth is only artificial in that it doesn’t correspond with the most urgent needs of the consumers, those pumped up sectors will come crashing down in future like what we are seeing today with the auto and real estate sectors. Such boom-bust cycles destroy capital stock of the economy thus making all of us poor in the future. As capital stock is used up in wrong sectors, when the bubbles go burst that capital stock is also destroyed with it. And as capital stock is what increases our future income, its destruction means destruction of our future incomes.
Second, this inflationary policy will result into higher prices of various goods and services. The money supply in India is rapidly rising right now. The probability of hyperinflation has now gone up because of this rapidly rising money supply on the one side and halted production on the other. As the freshly created rupees will enter one sector of the economy after another, it will go on lifting the prices slowly. As governments will give this money in the hands of poor people in rural areas, they will go and spend it on consumption because they have a high time preference i.e., they prefer to consumer rather than save their income. That reduced demand for money coupled with its very rapidly rising supply will reduce its purchasing power rapidly making everything else very costly that is trading against it in a transaction. If this money will enter the stock market then the asset bubble will just inflate even more risking a spectacular crash later on.
The third major consequence of inflationary policy will be increased inequality in an already hugely unequal Indian society. Whoever will get this freshly created money first will get rich at the cost of everyone else who will receive it in the end when prices will be already higher.
All in all, this stimulus package is just going to make matters even worse. It will bankrupt the Indian government itself in the end. Instead of this spending binge thinking demand is a problem, government should’ve freed up economy of all its complex controls and regulations so that the production can rapidly rise to feed the hungry people and fulfill other most urgent needs. As economists like David Ricardo or J S Mill said, demand is never a problem. It is the supply of goods that is the problem. Consumption is never a problem. Production is our chief problem. Government needed to do everything to boost that production by removing regulations and controls, ending all direct and indirect taxes or lowering them drastically to boost saving and investment. Remember, only peoples’ saving and investment activities can bring economy out of this major slump. Government should have tighten their own belt by cutting down on their expenditure drastically reducing the size of the government instead of looking for ways to boost their revenues by raising fuel duties or by borrowing or monetizing their deficits by printing money. And most importantly, they should’ve allowed businesses to import things from outside for their production. Remember, on its own India cannot produce even a needle. Without imported machinery and tools and technology, India will be quickly back in Paleolithic age. But alas, instead of taking these right and bold measures, Indian government has embarked on this unsound policy of self reliance.
Ironically, this policy of self-reliance is nothing new. This is the policy that India’s first prime minister Mr. Jawaharlal Nehru chose for himself. Nehru’s policies of import substitution and inward look resulted into the major crisis of 1990s which needed huge economic reforms in the direction of more market oriented economy. And as if that episode never happened in Indian history, the present government is just going to repeat that same failed history again. Few years ago present government’s former vice chairman of NITI Aayog Prof. Arvind Panagaria warned about this same Nehruvian era policies of protectionism and self reliance after abruptly resigning from his post. His warnings have also gone unheeded. Looking at how things are going on in India it becomes clear that India is reversing its course now and we are going back to where we began as a country.