Context: Recently, the Prime Minister of India gave a call for being vocal about local and about the need to be self-sufficient.
In this line there is a need to understand self-sufficiency and how it is different from the liberalization of trade policy.
The meaning of self-sufficiency in the context of India
- Does it imply protectionism?- No
Existing trade deficit scenario of India
- India has maintained a trade deficit as it imports more goods than it exports.
- This is due to the rise in domestic demand in a situation, where production at home has largely been weak in catering to this demand.
- As a result, even in sectors in which India has production capabilities, it depends on other countries for raw material.
- As in the case of India’s pharmaceutical sector, the bulk of the active pharmaceutical ingredients is imported from China.
- According to the Trade Promotion Council of India (TCPI), India imports 70% of its API requirements from China, mostly antibiotics and vitamins.
- Thus the self-sufficiency in the present context refers to a specific task of improving efficiency, competing with the world, and helping the world.
- Divergence from swadeshi and import substitution policies
- Self-sufficiency is different from swadeshi and import substitution policies followed earlier in terms of the choice of policy instrument.
- Import substitution has earlier relied extensively on imposing high import tariffs and discouraging foreign trade.
- However the present move focuses on reforms and improving ease of doing business, including for foreign firms in the country.
Probability of raising import tariffs by India
- There is a possibility of raising import duties on a wide range of final goods and services.
- Some of these changes might focus on specific countries to address India’s trade deficit with them.
- Some tariffs may also be moderately hiked in India to correct for an inverted duty structure and incentivize the final production of goods and services in India.
- Inverted duty structure refers to taxation of inputs at higher rates than finished products that results in build-up of credits and cascading costs.
- In a worldwide scenario as well, such tariffs may rise due to geopolitical considerations as the world decides to move towards globalization 2.0, which relies a lot on trade between rules-based economies.
Importance of achieving the goal of self-sufficiency
- There has been a long need for efficiency-enhancing reforms that could make Indian producers competitive in the global market.
- These reforms are also critical for creating domestic production capabilities.
- During the unprecedented threat of COVID-19
- The disruption in supply chains due to the COVID-19 outbreak and the lockdown in China have had an adverse effect on several world economies.
- More countries are currently looking at boosting domestic production capabilities to be able to absorb supply chain shocks.
- The move is also important in terms of strategic and geopolitical considerations, as India looks to punch above its weight in international affairs.
- India’s ability to recover from the effects of COVID-19 and its economic fallout depends on the ability to protect industries.
- This is why it’s necessary to promote Indian industries while making them competitive through reforms and government interventions.
Image Source: Mint