by Bhaskar Dutta
The recent Chinese aggression in the Galwan valley has understandably ignited our sense of outrage. Calls for retaliatory action have come from all quarters. There have been suggestions to destroy Chinese made consumer durables and to stop eating Chinese food. Unfortunately, while such knee-jerk actions may have their uses as symbolic gestures, they are practically useless as measures of reprisal.
Cutting off or reducing trade and similar economic actions can have a punitive effect only if the country adopting these measures has sufficient economic clout. The US economic embargo, for instance, has caused serious damage to the Iranian economy. The ground reality is very different insofar as Indo-China economic relations are concerned. Indian imports from China are less than 5% of total Chinese exports, while Indian exports to China constitute a miniscule fraction of total Chinese imports. Moreover, none of the items exported by India to China is of an essential or strategic nature. So, China can absorb the effects of any economic weapon employed by India without batting the proverbial eyelid.
In fact, the shoe may well be on the other foot. Consider a scenario in which China bans its exports to India. Over the years, China has become an increasingly important trading partner for India. In fact, China is now at the top of the list of countries exporting to India. China also occupies the third position in terms of destination for Indian exports.
We import a range of goods from consumer durables, automobile components to active pharmaceutical ingredients (API) from China. Any disruption in Chinese exports to India will have a differential impact on the Indian economy. For instance, any interruption in the supply of Chinese consumer durables will affect some Indian consumers. They will now have to pay higher prices for similar products imported from Korea or Japan. Of course, this is a “cost” for the Indian economy, but one that is borne by a small and relatively rich section of the population.
On the other hand, any sudden disruption in the import of raw materials and intermediate goods can have a significantly larger impact on the economy. Consider, for instance, the example of API. China supplies 70% of our API imports. Any break in the supply of APIs will result in a temporary reduction in the production of a number of essential drugs such as paracetamol and several antibiotics in common use. It will take some time before the supply chain is restored.
It is also very likely that there will be a rise in costs of production. So, the inevitable consequence of disruptions in the current pharmaceutical supply chain will be a rise in prices of many essential drugs, impacting a large section of the population.
This example actually has a more general significance since it highlights both the positive as well as negative aspects of self-reliance as a goal of national policy. A self-reliant economy is protected from any disruptions in supply chains arising out of external threats. If domestic production indeed displaces imports, it also creates jobs and possibly increases national income. That is the rationale for the recent call for “Atmanirbhar Bharat” and the earlier “Make in India” slogan.
However, goods are normally imported because they are either cheaper than their domestic counterparts or are of superior quality. So, an attempt to replace imports with domestically produced goods through artificial barriers such as tariffs or quantitative controls results in higher prices or goods of inferior quality in the domestic market. If the good is an intermediate good, this in turn affects the competitiveness of domestic producers in international markets. So, self-reliance does not come for free. As economists are fond of saying, “There is no free lunch.”
In practice, complete self-reliance is not even a practical objective for any country – no country can produce everything it consumes. A better option is to build an efficient, globally competitive economy. Our size will then ensure that we have economic bargaining power. Perhaps we should also develop, to the extent possible, alternative sources of supply of crucial inputs. That will surely act as insurance against any external blackmail.
Source: indiatimes.com
