I believe that the policy of import substitution was correct. The reason of its failure was that we did not simultaneously promote domestic competition and import of advanced technologies.The policy of import substitution was not meant to chain us to obsolete technologies.
THE income of a Chinese Citizen was 1.2 times that of an Indian Citizen in 1980 according to the data released by the International Monetary Fund. The income of a Chinese Citizen became 4.4 times that of Indian Citizen in 2018. We have been left behind. China focused on manufacturing. It opened its economy to the global markets. It invited Multinational Corporations to build factories in China and received huge amounts as Foreign Direct Investment (FDI).
The goods produced were exported in large quantities. This led to growth of GDP as well as the generation of large numbers of jobs in China. In contrast, we followed the strategy of import substitution. We built barriers to FDI. These barriers were only partially dismantled when we liberalised our economy after 1992. Our basic mindset was of encouraging domestic companies. Indian industrialists had formed “Bombay Club” to oppose FDI. A few economists, including myself, supported this policy of import substitution. We argued that FDI should be restricted to high technology areas. The slogan was “We want computer chips, not potato chips.” I believe that the policy of import substitution was correct. The reason of its failure was that we did not simultaneously promote domestic competition and import of advanced technologies. The policy of import substitution was not meant to chain us to obsolete technologies.
The policy was meant to encourage domestic businesses to adopt advanced technologies. For example, we could have produced fuel-efficient cars without having to invite Suzuki if the Government had promoted competition between domestic car manufacturers like Birlas (makers of Ambassador cars) and Walchands (makers of Fiat cars). The Tatas reportedly wanted to make cars but were denied license. The lack of domestic competition led to the failure of import substitution. It is a matter of curiosity why the Government did not promote domestic competition. I suspect there was a tacit alliance between bureaucracy and businessmen.
The bureaucracy wanted to hold the power to grant licenses and the businessmen were happy to make obsolete cars. Be that as it may, the fact remains that China has moved in the fast lane in manufacturing and achieved fast economic growth. Even this “failure” of Indian economic policy has a positive side to it. Our growth has focused on the service sectors such as computer software, call centers and medical transcription. Thankfully, these sectors have been spared the bureaucratic shackles such as of licensing. These service sectors are the engines of global economic growth. About 90 per cent of the GDP in advanced economies like the United States today comes from the service sectors. Therefore, we have made the correct decision by default. By abstaining from global manufacturing we have by default embraced the services sectors. In conclusion, the failure of manufacturing in India was due to the alliance between bureaucracy and businessmen. This has by default led to us focusing on services sectors. And, we can expect to reap the benefits of the same in the times to come even though we have lost the race for the present. The second reason for our poor economic performance is the weakness of health and education.
India’s rank in the Human Development Index made by the United Nations is 131 against China’s 89. India’s rank in the Innovation Index is 66 against China’s 25. This difference is serious matter. I believe that the main reason of our weakness is, again, the bureaucratic control of health and education sectors. We promoted Government-funded universities and colleges and hospitals. The Government teachers and doctors have no incentive to perform. They are more preoccupied in counting their holidays and making TA Bills. This Government control has led to the poor state of health and education in the country, which has then fed into poor economic growth rates. The nail in the coffin was put by the Fifth Pay Commission which raised the salaries of Government servants to such levels that the Union- as well as State Government budgets were exhausted in paying their salaries and investment in infrastructure took the back seat. The combined development expenditure of the Union and State Governments declined from 14.7 per cent of GDP in 1991 to 12.0 per cent in 2001.
The non-development expenditures rose from 12.5 per cent to 14.3 per cent in the same period—thanks to the Fifth Pay Commission. The Indian economy has become like a huge funnel that sucks out all the incomes and supplies it to the bureaucracy. The culprit of India’s failure is the bureaucracy which did not promote domestic competition to preserve its control on licensing, killed health and education by promoting non-performing Government teachers and doctors; and killed infrastructure by capturing the Government revenues. Another major difference is the nature of governance. China is ruled by the Communist Party while India is ruled by a Government elected by popular vote. This makes it necessary for the Government to provide freebies to the voters every five years. While this is true, I think the impact has been overblown. For example, the Congress Government won the elections in 2009 on the back of MNREGA and farmers’ loan waivers.
However, the total expenditure on MNREGA is about one per cent of total Government expenditures while that of salaries and pensions of Government servants exceeds 50 per cent. The total budgetary impact of these freebies was much smaller than the impact of the Fifth Pay Commission. We cannot blame democracy also because democratic countries like the United States, United Kingdom and Singapore have marched ahead. Our mistake has been that our leaders have pushed the dialogue of democracy around issues like Ayodhya, Mandal Commission and cow protection; and not around infrastructure and good governance. We were quenching the fires of Mandal Commission while China was building world-class bullet trains. It was the responsibility of the politicians to give direction to the thinking of the voters. It is said, “As King, so the people” (yatha raja tatha praja). The problem is not democracy. The problem is the narrative around which the politicians have built democracy. The challenge for the next Government is to hold on to the correct path of the service sectors; remove the shackles of bureaucracy on health and education; and change the dialogue of democracy to infrastructure and good governance instead of Ayodhya.