Sustaining Atmanirbharta: The right policy mix

Experience of countries that have successfully transformed themselves suggests that an integrated approach over the medium term, based on the first and third sets of policies will improve domestic capabilities, and help achieve atmanirbharta with a greater share in GVCs.

By Harsha Vardhana Singh

Prime minister Narendra Modi recently specified some very important economic concepts based on atmanirbhar or self-reliant India. He emphasised strengthening the supply chain and empowering every stakeholder in “our supply chain”. He explained that the reforms to be announced subsequently were for the “Self-Reliant India Campaign”. They include a “rational tax system, simple and clear rules-of-law, good infrastructure, capable and competent human resources, and a strong financial system.” Very significantly, he said, “Self-reliance also prepares the country for tough competition in the global supply chain. And today, it is the need of the hour that India should play a big role in the global supply chain.”

From a policy perspective, the statement could be read in more than one way. Given the trade policy stance of India over the past few years, one interpretation could be that the message emphasises an inward-looking or even a protectionist approach. However, India’s commerce and industry minister has explained that “Atmanirbharta is not an inward-looking economy detached from the globe. It is not about disassociating yourself from all the good things that one can learn from the world. It is about working and engaging with the world from a position of strength.”

Atmanirbharta requires a consideration of three types of policies. One, policies to improve the domestic operational conditions to enhance competitiveness, through better cost-effectiveness, quality, technological capabilities, and reducing delays due to policy or infrastructural constraints. The policies mentioned by the PM belong mostly to this category. These policies are required, irrespective of the approach being inward- or outward-oriented.

The nature and magnitude of their impact and effectiveness, however, depend on the other policies adopted. The government has, in the past, adopted a number of policies to achieve the above-mentioned objectives. Experience suggests that implementation of the existing and new policies needs to be improved, especially for policies with a large impact in the near term. Identifying such priority policies needs consultations with industry, and a process of periodic monitoring, identifying and addressing implementation problems in a timely manner.

A revised conceptual framework is needed. Policies, too, must be considered in terms of the supply chain. By definition, this implies a need for co-ordination and collaboration amongst the relevant ministries/departments. Institutional mechanisms with high-level oversight should be established for this purpose.

Second, are the policies which encourage domestic activity using protection through higher tariffs or quotas on imports. For a large market like India, production under trade protection will focus on the domestic market. The policy will lead to higher cost of production and reduce export competitiveness, including for the domestic ecosystem required for greater participation in the global value chains (GVCs). Developing the required domestic ecosystem needs major effort and time. For technology-intensive products that are not easy to produce domestically, imported inputs are the main option. Protection makes them more costly, reducing India’s ability to link up with GVCs.

Further, this is a time of major evolution of technological paradigms that will change products (e.g. pharmaceuticals)/ production processes (M2M and 3D printing), as well as the underlying factors which affect competitiveness. Some of these technologies will “jump over” or bypass the protectionist barriers; others will require a more integral connection with the changing regulatory regimes. Regulatory consistency is a crucial part of facilitation and connecting with GVCs. Often, they need close co-ordination with regulatory agencies of other economies and with the international “lead firms” that manage major GVCs.

A protectionist regime is not the best operational framework for getting such collaboration or to encourage major forward-looking investment.

With a protectionist regime, the focus of Indian production will thus be largely on the domestic market, and not exports or GVCs. These policies will reduce export potential over time, unless a number of mitigating or incentive policies are adopted to enable firms to compete better in global markets.

The third category includes the support and incentive policies for attracting investment, and to increase competitiveness, domestic output and exports. The government has begun with some major initiatives in this context. These policies take account of the support and incentives provided by major competing economies, and other mechanisms to enable larger access to markets abroad. They combine facilitation and efforts to incrementally raise domestic capabilities, expanding the domestic ecosystem to increase participation of domestic firms in GVCs.

These policies cannot be fully successful without relying on imports as inputs or expanding access to external markets through initiatives that include FTAs as well as bilateral agreements on regulatory coherence or to address non-tariff barriers abroad.

A major focus on protectionism will not achieve the objective: “India should play a big role in the global supply chain”. Experience of countries that have successfully transformed themselves suggests that an integrated approach over the medium term, based on the first and third sets of policies will improve domestic capabilities, and help achieve atmanirbharta with a greater share in GVCs.

The author is chairman, Ikdhvaj Advisers LLP, and non-resident senior fellow, South Asia Center, Atlantic Council