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Welcome Measures. Work for 10X Change
NotwNotwithstanding the bitter criticism of demonetisation, GST and the Insolvency and Bankruptcy Code, independent observers have found the reforms beneficial over the medium and longer term. The latest is the global credit rating agency Moody’s Investors Services raising India’s sovereign rating after 13 years. It has commended India’s high growth potential arising out of economic and institutional reforms. We should look for more. Withstanding the bitter criticism of demonetisation, GST and the Insolvency and Bankruptcy Code, independent observers have found the reforms beneficial over the medium and longer term. The latest is the global credit rating agency Moody’s Investors Services raising India’s sovereign rating after 13 years. It has commended India’s high growth potential arising out of economic and institutional reforms. We should look for more.

The Modi government, buttressed by the strong team of finance experts led by Arun Jaitley, has taken bold to attempt reforms in the financial sector in no small measure. I suggest such bold reforms in several other sectors as well. Foreign trade and agriculture come readily to my mind. 

I discuss issues relating to trade to attempt quantum jumps as did China. 

Despite expectations of sustained high growth in exports, the performance in recent years has been poor. The chart points to a faster rate of increase in imports than the growth in exports, resulting in widening trade deficits.

 

A comparison with China

Three decades ago China struggled with such deficits. Today, China has built massive exports. Even with large increases in imports, the country has created handsome surpluses in trade. This has happened thanks to the liberalisation of trade and investment policies and opening its large market for multinationals in developed countries. From the US to Germany, from Japan to  South Korea, large economies rushed to China, to set up shop for catering to both domestic and export markets. China intelligently utilised the massive jump in production volumes to build rapidly its infrastructure. It has emerged as the second largest economy after the US in less than two decades. 

The era of weak coalition governments that began in1989, the lack of coherent, consistent trade policies and a divisive polity with vastly divergent views came in the way of India recording such growth. The country has settled down to a new Hindu rate of growth of around 6.5 per cent, missing out on the potential to grow at 12 per cent plus. 

Like in the financial sector, the country needs a bold thrust in the trade sector. We need policies aligned to the goal of production of goods to a global scale. This is feasible and necessary. I cite a few instances of policy changes that could help. 

1. The first is to eliminate ruthlessly import of products that can competitively be produced in India. Look at a few instances of such wasteful imports:

a) Populist leaders of Tamil Nadu believed in spending their way to power and offered freebies that ranged from colour television sets to mixies and fans. The 

state spent around Rs 60,000 crore on subsidies on a revenue of Rs 147,000 crore (for 2015-16). These included free fans, mixies and grinders valued at Rs 2000 crore per year for five years. Logic demands that such a large order would go to local industries in Tamil Nadu and neighbouring states. These have well-equipped small and medium enterprises capable of producing such products. But no, the system of tendering at the lowest price and the proverbial ‘speed money’ involved, resulted in importing these lock, stock and barrel from China. 

b.An equally bizarre wastage on such imports is seen in the free laptop schemes. Several states, including Maharashtra, Tamil Nadu and UP have been providing laptops free to higher secondary school students. For these three states alone the expenditure is around Rs 10,000 crore  per year. This is approximately equivalent to the cost of 500,000 laptops. 

The Dell computer factory at Sriperumbudur in Tamil Nadu produces around 3000 PCs and laptops a day. In my visit a couple of years ago, I noticed young women assembling the components received in CKD packs from Foxconn, China. I was curious to know the indigenous content of these computers. They mentioned three items - paperboard cartons, the sponge used in packing the products and the CD manual!  

Did India benefit in spending such a significant amount on procuring laptops? 

I related this with the objective of the government to build progressive manufacture of such items imported.  Of course, it also needs tweaking policy through suitable tax rates for components. Maruti Suzuki under the lead of 

V Krishnamurthy, successfully indigenised the manufacture of components that resulted in massive jumps in the production of quality automobiles in a short time. Today global auto manufacturers prefer India to produce cars on the attraction of low costs and assured quality. 

At the launch of its small car Kwid in 2015, chairman of Renault-Nissan, Carlos Ghosn, explained the impressive R&D efforts in designing and engineering the Kwid that was produced with a 97 per cent indigenous content and was priced attractively in the small car segment with the design features of a SUV. Kwid quickly built a reputation for an affordable, quality small car and built volume production. 

The lesson here relates to volume, local skills and infrastructure to produce at competitive rates for the global markets. 

 

Scale matters...

Of the above, the scale of production assumes importance. Lack of this has resulted in the demise of a number of industrial units. I cite the instance of office furniture notably, steel chairs. Over a decade ago, Chennai had dozens of small industrial units manufacturing such chairs at modest prices. In recent years this position has changed. Most of the units have closed shop but continue to trade in these with chairs imported from China at much lower prices. Not just in India, I come across such chairs stacked in hundreds in large stores like Walmart and Costco in the US and sold at half the Indian prices of comparable products. Reason: scale. While China produces such products in few large factories at several thousand pieces a month, India with decades of protection to the small sector, still continues to produce at the rate of a few hundreds  a month. This denies the economies of scale. 

The Chinese also built enormous volumes of essential raw materials like steel. Over the last three decades, crude steel production of China had increased from around 15 million tonnes to 700 million tonnes. Today that country accounts for more than half the global steel production. At such volumes, China could make available steel at prices much lower than those in India. 

The lesson again is to aim at volume production of the vast range of primary, intermediate and finished goods. 

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