Author: shyam

Image by matt.hintsa via Flickr

India’s path to economic liberalization hasn’t been easy. The most enduring question since the 90’s was how a capital-starved emerging country like us can avoid being a dumping ground for foreign goods? Our fear has always been that given our lack of basic infrastructure, it might be economically cheaper to import than to produce capital goods here, turning India into a raw-material exporter rather than a robust economic power. So up went tariffs and duties.

I am reminded of the story of Sri Ramakrishna. He once remarked about a monk returned to meet his brother. When the brother questioned about what had he got after leaving the home and practicing strenuous tapasya, the monk proudly answered, “Look, I can walk on the river waters”. And he actually showed his brother how he could walk on the waters! The brother exclaimed, “Oh! Only for ‘walking on the waters’ you spent 12 long years! See by paying to the boatman half a rupee I can cross this river!”

Do we really want to be the monk who spends 12 years learning how to walk on water or should we focus on the easiest way to achieve the end result of being able to cross the river? How have our policies worked out, in the end?

Lets take the automobile sector for instance. We were in duo-poly hell right up till the 80’s. When India opened up, a lot of pent-up demand would have been met by merely importing finished vehicles. Used American cars would have been snapped up by cash constrained consumers here. The car rental companies in the US would’ve had a field day dumping their fleet of cars on us. But thanks to the duty structure put in place, importing these beasts would have been twice as expensive as producing a new car locally. And in came the flood of car manufacturers wanting to setup factories, raising employment levels which, in turn, created more demand for vehicles.

So we lost out a bit by making consumers pay more for cars. But in the end, it worked out pretty well for everybody. Today, importing kits is so expensive, that even companies that focus on the luxury sector like BMW and Harley Davidson plan on increasing the Indian content of the parts that go into their cars and bikes to bring down their ticker price. The forced indenisation has led to the creation of an entire ecosystem of parts and ancillary suppliers, creating opportunities along the way.

If the goal was to give some breathing space for infant industries to catch-up, trade protectionism worked in our context.