Illustration by Arindam Mukherjee | ThePrint
Illustration by Arindam Mukherjee | ThePrint
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One of the lessons which the Modi government has yet to learn is that the solutions to economic problems can be counter-intuitive. In other words, not the first thing that strikes your mind. As we saw with demonetisation, the solution to black money is not necessarily to attack cash holdings, since most of the old notes came back to the Reserve Bank. Similarly, the solution to a tax shortfall is not necessarily to raise tax rates — a suggestion aired briefly in the context of the goods and services tax — any more than the solution to a trade deficit is to put up the shutters to imports.

As the 1991 experience showed, the solution to a large trade deficit may be to open up the economy and not putting up protective walls; encouraging exports could be done more effectively by scrapping export subsidies and adjusting the external value of the rupee instead.

These and similar lessons don’t seem to have been learnt, if recent experience is anything to go by. Thus, the response to pharmaceutical price increases has been to impose price ceilings, just as the response last September to a domestic shortage of onions was to impose an export ban.

As critics of Donald Trump’s trade policies have pointed out, imposing additional import duties on goods from China has raised the cost of supplies domestically (JP Morgan calculates the impact on a family budget to be $1,000 in a year). Someone should do a similar exercise in India to work out the cumulative costs of the additional duties imposed on steel imports, the cost of tariff hikes and export subsidies on offer in the effort to make India a manufacturing hub for things like mobile phones, the potential impact of additional duties on imports in the “others” category, the likely cost to the consumer of banning palm oil imports from Malaysia and petroleum from Turkey, and so on.


Also read: To pull Indian economy back, Modi govt first needs to admit that it’s not business as usual


Then, we have the snarky response to Jeff Bezos and Amazon. Given how much of world trade is intra-firm, and how important it is to become a part of global supply chains, Bezos’s promise of additional exports of $10 billion should have encouraged the government to welcome the announcement, or at least to hold its peace. Instead, the response was far from friendly — influenced, no doubt, by the fact that Bezos owns a newspaper that is critical of the Modi government, and by lobby pressure from small traders who fear unfair competition from a company with deep pockets.

But the Competition Commission was created to deal with such problems, even if it does not always move when it should (such as in the Jio case). The larger point is that small store owners do not have the ability to create large supply chains that feed into international markets, nor to create a manufacturing base that generates quality jobs. Once again, the tactical response has been the wrong one.

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A particularly striking example is offered by Jharkhand, which gives employers a subsidy of Rs 5,000 per month for every employee taken on board in the garment industry. Surely, this is a measure of the lack of competitiveness of the country’s garment industry — bear in mind that labour cost cannot be the most important reason for lack of competitiveness because China is by far the world’s leading garment exporter despite having much higher labour costs. Although the subsidy seems to be generating a positive response from industry, there has to be doubt about whether this really is a “good news” story.

Any industry will invest if it is given a large enough incentive, but there may be better ways of using the taxpayer’s money if the underlying reasons for lack of competitiveness were to be addressed — like a bloated currency that prices India out of world markets. It might be argued that sometimes the best can be the enemy of the good, especially if the former is hard to deliver. But too many such lazy compromises are what create a high-cost economy of the kind that we have lived with for long, and from which we had been moving away until recently.


Also read: In Modi’s India, Kashmir’s economic catastrophe makes no dent in collective conscience


 

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8 Comments Share Your Views

8 COMMENTS

  1. Modi and his team’s priority was never the smooth sailing of the Indian economy. Now that the economy is in distress, their priority is not its repair.

    Their only priority was the growth of BJP party and filling up its coffers. It used the electoral bonds to make political funding opaque. It used the funds thus collected for political games as seen in Mumbai and other states. It used nationalism, a biased media and government machinery for its growth.

    India cannot set correct it’s economic problems unless Modi and the BJP recognizes the scale of the problem, need of the hour and set the well being of the country as their top priority rather than that of the BJP party.

  2. I think The Prime Minister knows what he is doing, intuitive or otherwise,His track record in Politics has given him the
    confidence to move ahead.He has built a team of core politicians to assist him in carrying his message as true torch bearers around the
    country. They all speak in one voice without conflicts.
    I f media is to play an effective contribution,it has to come together and present some intelligent alternatives to problems keeping the good of the people in mind, a challenge to media experts and strategists. Hope they will rise to the occasion.

  3. Indian economy is burning ,protests and riots everywhere because of this prime minister and we are worried about Pakistan? Indian media is one of the worst on earth .

  4. A first, rough cut of modern history by Shri Ramchandra Guha in his column in Telegraph. For the sake of 1.3 billion Indians, one prays he turns out to be dead wrong.

  5. Many have observed that a nearly $ 3 trillion economy needs to be mentored tapping into the knowledge, experience and advice of world class professionals. Consider the rigorous evaluation and selection procedures to assemble the men who will fly Air Force One.

    • Self confidence increases when you beat all odds. A chaiwala becomes a PM and he thinks “hey, I must be smarter than even I thought. Gut use, instinct and yes-luck” played parts but when repeatedly he succeeds, he begins to get overconfident and demonetization occurs.. Peter principle says it differently. A man rises to the level of his incompetence.

  6. Common to all incidence is shooting of your own foot. If you give a kid a drum, it will make a racket so loud, you go for a walk. Certain people must not be allowed to respond spontaneously to anything…

  7. The word ‘instinctive’ is of much significance. I always wonder what kind of decision maker is our PM. Is he an instinctive decision maker? I have read that he is a good listener. Such kind of person will not usually decide instinctively or impulsively. Yet, the worst decision he has taken is obviously the demonetisation. How did arrive at the decision, who did he consult is a mystery. In the history books of the 22nd century, PM Modi will be perhaps remembered only for one thing – demonetisation. It’s long term and short term effects on the economy shall always be debated. Yes, Modi is still work in progress. His evaluation will be done only after his tenure gets completed. Yet, the decision making abilities of Modi will always remain a matter of debate. My own perception is that he likes to revel in decisions that would test his risk-taking abilities. In this regard, he can be compared with Indira Gandhi.

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