Article By: Gaurav Kumar
Trade wars in modern world is not new. World has always followed protectionist policies to favour domestic industries. In modern Indian history we can easily relate to it. We were world-famous for red-tapism which resulted in the famous “Hindu growth rate” of 2-3%. Due to too much protectionist policies we got modern technologies late by 20-25 years. Modern cars, engines, computers, telecom devices, textile machines etc reached us very late which resulted in very low export potential. After breaking up of Soviet Union, our economy too got affected. Before the breaking of Soviet Union, we had options of paying in our currency for the defence imports but later we had to pay in international currencies. Dollar became the global currency for trade and energy. With negligible exports, our foreign reserves came down and at a point of time we had foreign reserves which could have managed only 13 days of import. The circumstances led to adoption of LPG reforms. In my views, we didn’t have any option other than to be dictated by IMF for the currency devaluation and economic reforms. Even after India adopted LPG reforms and devalued its currency by more than 25% we had too much red-tapism which was an obstacle for business environment.
Globalisation has helped every country. Most people think globalisation helps in trade and reduces tariffs on foreign goods which results in increase in global trade. But, the main point which most of us miss is, with globalisation, liberalisation and privatisation comes the free flow of capital. With the foreign ownership of companies and assets, a country sees huge flow of capital which could not have been possible if economy was kept isolated from the world. It’s worth mentioning that globalisation has helped every country, even though most countries say they got negatively affected by globalisation. If it was not globalisation, we could not have seen tech giants like Google, Apple, TCS, Infosys grow so rapidly. On contrary, we can say we also saw homogenization of culture, technology, tradition, thoughts etc. In the long-term, after 30-35 years we may not be able to differentiate cultural differences between countries. Companies are so big and influencing nowadays that they have influenced culture to a big extent. On demand Tv streaming companies like Netflix help spreading western culture throughout the world. Even though we feel we don’t get affected but in the long term we all become “same cultured”. We can’t differentiate with the others.
What I mean is, globalisation is not just about trade and technology, it changes the world in every aspect.
India has come a long way in terms of economic prosperity. Our economy became 5 times in the past two decades. Our foreign exchange reserves are now more than 420 billion dollars. But there are new challenges we are facing now.
Understanding our close neighbour China.
Our country saw huge population growth in 1970-80. After Independence we were just 33 crores individuals and now we are more than 133 crores. According to some reports, China being the largest population is wrong and India has long surpassed China in population. It sounds good surpassing China in some aspect, but its a matter of deep concern.
Till 1970, China and India had almost same economy. In fact India was better on many parameters. China liberalised its economy a decade before India did and went for pro market reforms. It spent a lot on infrastructure development. With the wages rising in Europe and USA, china became the manufacturing hub of the world. Although the concept of special economic zones was conceptualised in India, China implemented it beautifully and became the export hub. Meanwhile when world was growing at 3-4%, India at 7-8%, China saw double-digit growth rate for three decades.
Just for comparison, we are the second largest steel producers of the world and produce 102 million metric tonnes steel. China in comparison produces 800 million metric tonnes of steel every year which is approximately 50% of the world’s steel production.
Many people say if we stop importing Chinese goods, china will be hugely affected. It many sound patriotic but in real it won’t affect china much as India’s import of Chinese goods comprise just 2% of Chinese exports. In fact, Indian industries are dependent on China. We saw the big telecom revolution in India due to cheap import of telecom equipments from china. Our generic Pharmaceutical industry is dependent on China as the APIs (basic chemicals for medicine manufacture) are imported from China.
If someone says, “God made the earth and the rest of the things were made in china” it won’t be exaggeration.
Even though Chinese wages has grown a lot, 45% of world textile exports are done by China. In comparison, we have too much surplus labour with low wages but hardly manage 5% of the world’s textile exports.
So, What should India do?
I have seen many economists and politicians suggesting “India should replicate China” and be the next growth centre and export hub. But the point we all are missing or fail to realise is most of the world’s governments are now following protectionist policies. Recently Trump’s statements of introducing 25% tax on aluminium and steel and warning for Indian import duty of 50% on Harley Davidson shows we can’t replicate chinese model now. With ASEAN and EU we are having FTA for more than a decade but nothing considerable comes out of talks. It reminds us that countries are no more liberal towards trade and it will not be one-sided favour which China enjoyed for more than three decades.
Any superpower we see today had seen revolution in textile sector first, which led to increase in income for the poorest sections of society. Later on they saw more advanced industries like iron and steel and finally shifted to the service sector which provide highest wages. China too developed like this, but in case of India we directly shifted from agriculture based economy to service sector based economy. That is why we lack manufacturing jobs. China is losing its textile business due to increasing wages but India is not able to fill the gaps because poorer nations like Bangladesh, Vietnam and African nations are capturing these low paying jobs due to comparative wages with India. So, we have missed textile revolution too.
Now the question arises is how to provide high paying jobs to such a huge population?
Demographic dividend or disaster?
We saw population growth from 33 crores after independence to 133 crores now. Although we are able to feed our population by PDS distribution network, it is not something to be proud of.
India has seen 6-7% average growth rates for more than 3 decades. Although, we have manageable external debt, we need to bring it under 60% of Debt to GDP ratio to reduce interest payments. With growing automation in every sector, we need at least double-digit growth rates for 3-4 decades to compete with China.
Manufacturing and agriculture are the only sectors which can absorb a large workforce. India has more than 50% population below the age of 25 years and more than 65% population below the age of 35 years. So, it contributes in both consumption and cheap workforce.
The most worrying part is, after 25-30 years these people will become old and government will have to spend a lot of money on these people. Countries like japan and South Korea has too much old people compared to young ones and a significant portion of GDP is spent on them. They have very small population compared to India and have huge per capita income and so, they can manage their old population but in case of India, when our present demography becomes old after 25-30 years, it may become demographic disaster for India. With no pension facilities and families getting nuclear day by day, we will be seeing huge fiscal burden on state. With significant amount of money spent on them in future, we will be having very less infrastructure spending for other welfare activities.
So, the only way to avoid “demographic dividend” becoming “demographic disaster is to formulate better policies. Some of the policies which I think government should prioritize are :
1. Health care
Most of the developed countries have a good healthcare ecosystem. We can’t spend so much per capita as developed countries do, due to fiscal problems. In spite of spending so much on government hospitals we always see medical negligence and bad treatment of patients. private sector charge so much that it is out of common people’s reach, which leaves us only option of developing PPP approach. We can all agree on one thing that we can have efficiency only by the participation of private sector, But if the private sector is left independent, they will exploit the policies in their favour. So, there is a need to create competition within private sector itself to bring down the medical service prices.
Thailand is a poor country but they are known to have good medical infrastructure. We too introduced of ASHA workers on Thailand model which has helped India a lot in controlling maternity deaths and providing basic care to pregnant and lactating mothers. Similarly more such methods and policies should be introduced which are cost-effective and result oriented.
Capping of prices of medicines and medical devices has led to huge reduction in medical bills but more needs to be done. This year the government introduced health insurance for poor families which will affect more than 50% population. Although this will take many years to be implemented effectively, it can help India achieve the dream of “universal healthcare”. Government will have to implement and adopt policies which provide private insurance and healthcare companies a significant role and make healthcare accessible to the remotest and poorest people. Advances in telemedicine, biotechnology, biomedical and robotics should be exploited to make healthcare better and efficient.
2. Skill training and management
Skills matter more than human capital nowadays. In developed countries, after class 10th, most of the students go for vocational training which help them gain skills relevant for modern industries. Nowadays technology changes very fast and thus employees need to be re-skillied every few years. According to some reports more than 90% jobs in IT sector will be lost if workers are not re-skilled. That is why skill training institutes play a vital role in any country.
There is a very good example how much skills matter. Recently trump was pressurizing American companies bring back manufacturing jobs back to America. Apple CEO, Tim Cook said that even if they want, they can’t bring the jobs back as American workers are not as skilled as Chinese and even if they are skilled, they are not as efficient as Chinese. So, we need better efficiency and skills.
Government skill development centres can never be as efficient as private sectors as technology changes fast nowadays. That’s why government should follow PPP structure for skill development. Private sector involvement is too much-needed here as they are the ones who will employ these skilled workers.
GOI has signed many pacts with developed economies like Singapore and Japan for skill development. Nearly 40000 Indian workers are to be sent to Japan in the coming years for skill development. There are chances that they will be employed there itself. With ageing demography, developed countries will need a lot of skilled labourers in future. India can grab this opportunity. We can export our skilled labourers and gain significant amount of foreign exchange reserves. With the protectionist policies being adopted in Saudi Arabia and gulf countries, many Indian workers are coming back who will need to skilled again so that they can get better job opportunities.
We are seeing rapid growth in electronic manufacturing. We have nearly lost our opportunity in textile industry. So, it’s better not to lose opportunity in electronic manufacturing.
GOI had come up with phased manufacturing program in electronics which can make India the next hub of electronic manufacturing after China. These policies should be implemented effectively otherwise if we miss this opportunity, it will be difficult to regain it as many companies are preferring Vietnam instead of India.
3. Better pension schemes for unorganised sector
In India, employment is mostly unorganised ie. they don’t get facilities like healthcare/pension as availed by organised sector. More and more jobs are created in gig economy which leaves workers with short duration/temporary work which may be high paying. Thus we need to design a universal social security scheme which can protect their future. Presently Social security schemes are also highly unorganised. Many states have their own schemes for workers but they are also not in reach of the most poor class. As the families are becoming nuclear day by day, the requirement of social security increases more and more. It’s better to have a pre planned scheme now than to have full responsibility on state later. Right now, we are having demographic advantage and thus we can bring such schemes otherwise after 20-25 years, we may have a huge burden of demography and the advantage will become a disaster.
4. Supporting MSME sector
Medium, small and micro enterprises are the big employment providers and contribute a lot to GDP growth. MSME sector employs a lot of unskilled workers too.
India has significant area of agricultural land and we can create good job opportunities in food processing, packaging, value addition etc.
MSME sector, which provide parts of automobiles, aeroplanes, defence etc should be supported to tie up with foreign manufacturers to be in supply chain of components. Tie-ups with big corporations should be supported for technological improvements so that they can be a part of global manufacturing chains. The more trust a company gets, the more they will outsource. India can be the next outsourcing hub for automobile and defence companies. The recent tie up of Tata and Boeing for manufacture of Apache helicopter body is a good example in that direction.
5. Supporting research in newer and emerging technologies
The next technological revolution is going to be in biotechnology, nanotechnology, artificial intelligence, Internet of Things, Big data analytics etc. If the private sector lacks capital then government can subsidise their research facilities or can create technological research hubs in Universities. Private companies should be encouraged to step up their R&D spending and tie up with universities so that students can have industry oriented research and can also solve industrial problems.
In advanced countries, private sector spends a lot on R&D, whereas this culture lacks in India. Government should give tax breaks to companies investing in R&D.
Even though India is not able to fill the gaps in “textile export” vacated by china, we must look into sectors like Industrial and technical textile products. They require technological advancement and research in which India can play a big role.
With 5G cellular network, we are seeing huge scope in the field of Internet of Things in which every device is interconnected with a network. India has decided that it will launch 5G services with the whole world and we can thus become a manufacturing hub for IOT devices.
6. Supporting startup culture
India lacks startup culture and had failed to produce any unique startup. If we forget marketplace startups like Paytm or flipkart, we lack technological startups.
There are many reasons for this like lack of funding, lack of family and societal support or too much red-tapism, lack of tax breaks etc.
With startup India, government has started playing the required significant role but more can be done. University students should be motivated for startups or project based learning should be supported. Tie ups of Universities and companies should be promoted and startup ecosystem should be developed.
We lose most of our talented Ph.Ds to foreign universities because they get better scholarships there. loosing doctoral candidates to other countries has a huge impact on our economy which we fail to realise. On one hand we loose a good faculty and on the other hand they contribute research to other countries. Until we have good faculties in Universities, we can’t have a good future and it’s a catch 22 situation for India, we can’t produce good faculty which leads to out-migration of doctoral candidates. Government has planned almost 80000 rupee scholarship for IIT students which is commendable but ignoring other university doctoral candidates is not good. Government should understand that scholarships for research is not spending, it is assent being created which will have huge impact in long-term.
7. Spending huge in Defence research
It may sound odd that how can spending in defence research can have impact on society but we fail to realise that most of the advanced technologies we are using today in daily life was once researched for defence sector. Even the internet was invented for defence use, which after 20 years of defence use, it was unveiled for civilian use.
Military technology is the most superior and advanced of all existing technologies and can play an important role in technological advancement of a country. They also promote advance research in nuclear technologies, which can be further used for civilian purposes. If we promote defence research in Universities too, students can create/get familiar with the technological advancements and can help in our defence requirements.
We are the largest importer of weapons in the world. In spite of being the second largest population and so many engineers, we are unable to create defence manufacturing hubs in country. Government had never actively supported private sector in defence. In western countries, private sector create most of the weapons and defence technologies which we lack in India.
It is a known fact that private sector is more efficient and can quickly increase its production lines according to requirement. Government should create policy to create big defence companies in India. Our private sector is more than able to do so.
There are many more policies which should be adopted for job creation and technological advancements in the field of telecom, defence, pharmaceuticals, agriculture etc. We should remember that a strong economy can only have a strong influence on world policies.