Silver lining to import substitution

With election approaching, fears are being expressed about a return to the pre-1991 import substitution regime. “We’ll have to start using Capsico if they stop importing Tabasco!” is the lament from Malabar Hill to Alipore, South Extension to Adyar, referring to the cheaper Indian substitute for the tangy imported sauce. The serious threat of going back to autarky is that the long heralded take-off in manufacturing won’t happen. Exports will continue to languish, and the fear of overwhelming imports will mean higher protectionist taxes and more friction with Donald Trump’s US.

We’ve been here before. P V Narasimha Rao’s panicky foodgrains subsidy and whispers of differences with Manmohan Singh fed fears of reforms being abandoned and prompted Singapore’s Lee Kuan Yew to visit India in 1996. Singaporeans believed Dr Singh felt “Rao was holding him back”. A worried Goh Chok Tong, Singapore’s prime minister, asked Lee to find out. Anxious as ever to see a strong India balance resurgent China, Lee was concerned that despite liberalisation, only one Singaporean businessman risked India against the five or six who went to China. The newly active Gulf states were also emerging as rivals. The BJP seemed to be making waves in India.

“I thought Narasimha Rao needed to be encouraged,” Lee told me afterwards. “So I went there.” It was eight years since his last visit when he was prime minister. Prem Singh, a bluff Jat former army officer who was then India’s high commissioner in Singapore, recalls a lunch at Hyderabad House where Lee, sitting between the prime minister and Atal Bihari Vajpayee, told the latter. “If your party comes to power, you will also waste four or five years discovering that socialism doesn’t work.” Not so, Vajpayee retorted immediately. “He has stolen our policies,” he said, pointing to Narasimha Rao. Lee was sceptical. “Vajpayee and Advani came to see me,” he said. “They were unreformed. They were not at all convinced that what Manmohan Singh and Narasimha Rao were doing was right. They said — wrong policies, giving away the country on the cheap. So I said, ‘Oh God! This is back to square one again’. And I warned Goh Chok Tong. ‘I said one step forward, one step ba’."

Actually, there was little difference by then between the Congress’ and the Bharatiya Janata Party’s (BJP) economic programmes. Differences were mainly over emphasis. But the BJP was never candid about its pragmatism, focussing more on culture and identity. Nor was it keen to stress its origin in the Jana Sangh, the original free market party. Several years later I asked Mr Advani about the inaccurate impression that Lee had been given. “We strongly opposed the Congress’s licence-permit-quota raj,” he said. “We were against a controlled economy, but we also felt that a fully free economy was not suited to a large country like India with a strong democratic tradition and large areas of poverty.”

He knew Lee had got it wrong. But the Swadeshi Jagran Manch was a force then. The role of multinationals was being fiercely debated, and the media was absorbed in the Hindutva angle. So, Mr Advani thought it prudent not to commit himself. He couldn’t tell Lee that India’s electoral style obliges the Opposition to oppose irrespective of substance. Or that the easiest way of demolishing an adversary is to accuse him of colluding with the Foreign Hand. 

That was on the eve of Vajpayee assuming office. The chorus in 2014 was that not only was Narendra Modi committed to a dynamic free market economy but that he would ensure that the country at large benefited from what was hailed as the “Gujarat Model”. I don’t know what the model was or whether it owed anything to Modi’s endeavours since Gujarat was a prosperous and progressive state long before he was a twinkle in Damodardas Mulchand Modi’s eye. Far from transforming India into Gujarat, he seems to be doing his best to make the country another West Bengal. Just as bright young Bengalis seek jobs in Maharashtra or Kerala, bright young Indians lead the global pack of economic migrants. The “Make in India” campaign seems to have petered out. Customs duties and import tariffs have increased. Among the five taxes on capital the RBI has identified, the long-term capital gains tax further discourages investment.

The silver lining is that no one will have to make do with Capsico. India’s flourishing crony capitalism guarantees that, as with Rafale fighters, some favoured tycoon will be licensed to make Tabasco at home.  

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