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Modi needs to learn self-sufficiency won’t put food on the table, jobs will

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An essential part of creating myths around Indian Prime Minister Narendra Modi is to downplay the contribution of the country’s fundamental figures. No one has suffered more than Jawaharlal Nehru, the man who laid the rails on which the republic has run for 74 years. Which makes it surprising that Modi emulates a Nehru signature policy and, paradoxically, the one that failed: self-sufficiency. Why does a 21st century leader borrow a discredited idea from the 1940s that was scrapped in the 1990s?

Nehru, who was educated in Harrow and Cambridge, the son of a wealthy lawyer, was an internationalist. But when it comes to choosing a development strategy, he never had much of a choice. Taking charge in 1947 of a newly independent nation ravaged by two centuries of British colonial plunder, he was forced to follow a closed economy approach. On the one hand, World War II caused a huge global shortage of capital goods. The steel that could get into the tractors ended up in tanks. How to import or pay for machines? Especially when India’s export advantage in cotton and jute was lost after partition to West and East Pakistan, now Bangladesh.

Nehru’s other problem was the Soviets. By the mid-1950s, they had infiltrated the Indian planning process with their model of rapid and heavy industrialization. The idea of ​​producing your own steel to make machines and then making bicycles was appealing, even if it meant not having enough pants and toys, or shirts and shoes, to sell cheaply at home and abroad. the world and absorb the surplus agricultural labor. This put India on a path of slower urbanization and growth than in the Tiger economies of East Asia.

Modi approaches the problem from a different angle. A popular leader who came to politics on a platform of muscular nationalism, he dismantled Nehru’s planning apparatus shortly after becoming prime minister in 2014. Modi had none of Nehru’s class privileges. As a young boy, he helped his father sell tea at a small train station in Gujarat, according to a 2013 biography. In his second five-year term as prime minister, Modi relies on the same formula that has earned him success as chief minister of the state of Gujarat: capital-intensive industrialization, supported by investor-friendly infrastructure and policies.

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To turn India into a factory for the world, Modi has set up a five-year pipeline of infrastructure projects worth Rs 111 trillion ($ 1.5 trillion), more than the country has invested over the previous two decades. He cut corporate tax rates, merged 29 labor codes into four, and announced $ 28 billion in production-related tax incentives. The money is intended for companies setting up factories manufacturing everything from mobile phones and auto parts to solar panels and sportswear. If things go as planned, it could yield up to $ 37 billion in investment over two to three years and increase salaries by $ 55 billion per year, according to Crisil, a subsidiary of S&P Global Inc.

This is the good part, the one that has a chance to succeed in the current climate. Growing tensions between the United States and China are forcing global companies to expand their supply chains. Where Modi goes wrong – and repeats Nehru’s mistake – is in choosing self-sufficiency over openness.

East Asian countries like Taiwan and South Korea recognized early enough that labor-intensive manufacturing was their natural advantage. They played there. India did not. Nehru’s heavy industrial approach failed to create jobs for the shriveled masses. Perhaps the Soviets wanted the consequences of their model to spill over into India and lead to a collectivization of agriculture under the pressure of a growing and restless population who was not really needed on earth but had little jobs in factories. Fortunately for India, Nehru has never gone so far.

The economy started to open up in the 1990s. Industrial licenses disappeared, prices started to fall. Led by computer software, skills-based exports have grown rapidly. Yet the mistake of not tapping into cheap, unskilled labor has never really ceased to matter. India was home to 500 million people when Nehru died in 1964. Modi must create jobs for a population of over 1.3 billion that is teeming with young people – and underemployed young people.

The era of Covid-19 has overturned the long-standing problem, masked in recent years by the rise of an urban economy. With 75 million people pushed back into poverty, a hollowed out middle class, and less than 6% of jobs for women in cities, there is no point in claiming that India has somehow taken a giant leap forward. agriculture to software, and will not need it. make shirts and shoes.

But to make anything for the world, you have to import something. Take windbreakers. Indian suppliers have asked the government for more than four years to remove the anti-dumping duty on purified terephthalic acid, a key raw material. This drove up costs along the value chain and made India uncompetitive in the field of synthetic textiles. Finally, the duty disappeared last year.

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Other industries are less fortunate. Even prominent trade economists like Arvind Panagariya, who served in the early years of the Modi regime and who is sensitive to his zeal to reform certain things, are dismayed by rampant protectionism. As the Columbia University professor noted in a recent conference, the proportion of import tariff lines in India with rates above 15% exceeded a quarter of last year, more than double d ‘a decade earlier. With tariffs on inputs in many cases higher than tariffs on finished goods, researchers wonder whether India will be able to replicate China’s success with global assembly lines.

India has the opportunity to compete. Chinese manufacturers are raising prices, fueling fears of global inflation. Washington wants a prosperous security partner in Asia to contain China’s influence. No Soviet Gosplan expert breathes into Modi’s neck like they did in Nehru’s time. So why is the current Prime Minister choosing autarky and turning away from trade liberalization?

Perhaps the domestic political economy is forcing Modi’s hand. From steel to cement and automobiles, telecommunications to airports and seaports, India’s economic power has been heavily concentrated in recent years. A monopolist likes the protection of high import barriers. Modi is more and more obliging. Yet on the contrary, the time has come for India to duplicate the successes of the 1990s by expanding skill-intensive exports to include labor-intensive products. On this measure, Vietnam and Bangladesh do better.

Modi can also talk about self-sufficiency to avoid India’s overdependence on China. The industries India is betting on, from telecommunications equipment to photovoltaic cells and active pharmaceutical ingredients, all import heavily from the People’s Republic. It is a vulnerability. Territorial tensions dating back to Nehru’s time are still a thorn on Modi’s side today.

The more Modi tries to relegate Nehru to the last pages of history, the more the Prime Minister jumps. The fact that import substitution is the common ground between two such different rulers and regimes is worrying. In the late 1950s, Nehru had criticized the “gigantism disease” triggered by planning. Modi also needs to learn that self-sufficiency will not put food on the table. Only jobs will.


© 2021 Bloomberg LP



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