Our Atmanirbhar policy is not about isolationism but a unique strategy to leverage internal strengths against uncertainty

 

The year 2020 saw the biggest disruption of the global economy since the Great Depression of the 1930s and World War II. Not surprisingly, Indian policymakers simultaneously faced many challenges—the need to manage the health impact of covid, the economic impact of a prolonged lockdown and the second-order impact of a stuttering global economy. This article attempts to lay out the basic intellectual framework of India’s policy response so that readers understand why certain measures and trade-offs were made, and also get a sense of future policies.

The single biggest issue faced by policymakers was the sheer uncertainty of a rapidly evolving situation. Around mid-March, when the pandemic started spreading rapidly outside China, the nature of the disease was still not understood. Expert opinion ranged from those that saw it as just a nasty flu to those that predicted millions of deaths in India alone. Different governments around the world, therefore, opted for very different responses.

Indian policymakers had an additional problem. They knew that, given India’s size, it would not be possible to change direction once a path was taken. This is the context in which the total lockdown was first announced. It was meant as a cushion against the worst while using the time to create quarantine facilities, testing capacity, and learn from international experience. Since then, the government has been steadily unwinding restrictions based on a step-by-step Bayesian updating of information.

 

The same approach has been taken for the economy. Unlike other governments, Indian policymakers judged that it was inefficient to use limited resources to attempt a grand demand stimulus during a lockdown. Instead, the focus was on providing a cushion to vulnerable sections of society and small businesses—hence, the rollout of the world’s largest food programme, generous liquidity support and so on. As the lockdown was unwound, the government has been step-by-step rolling out medium-sized packages. Let it be clear that there is both monetary and fiscal space to do more when appropriate.

The Indian strategy is unique in another aspect—the strong emphasis on supply-side structural reforms. This derives from a view that the post-covid world will be fundamentally different from the pre-covid world, with its own technologies, consumer preferences, geopolitics and supply-chains. The problem is that it is impossible to predict how this new world will evolve. Therefore, the structural reforms are based on two principles: “resilience" and “flexibility". Note that this is analogous to the strategy of combining cushioning and iterative adaptation described earlier.

The emphasis on making the Indian economy more flexible explains the choice of recent structural reforms—liberalization of agricultural markets, new labour laws, bilateral netting for financial sector, removal of telecom restrictions on the information technology/business process outsourcing sector, and so on. More are on the way. At the same time, an ambitious production-linked incentive scheme is being used to encourage domestic and foreign companies to ramp up investment where India can insert itself into post-covid supply chains.

Less appreciated is the systematic rationalization of outdated or superfluous government bodies. In the last few months, the ministry of textiles alone has abolished the All India Handicrafts Board, Cotton Advisory Board, Jute Advisory Board, and the All India Handloom Board. Their duties have been transferred to other existing bodies for better delivery. Again, the idea is to trim government where it is not needed, and to focus on governance.

 

It is in this context that the idea of Atmanirbhar Bharat (self-reliant India) needs to be understood. It is explicitly not a return to the import-substitution and licence-permit raj of pre-1991 India. Instead, it is about leveraging India’s internal strengths in order to make it competitive and resilient. For instance, India has a large, globally competitive pharmaceutical industry. However, the covid pandemic exposed its vulnerability to single-source foreign supplies of key inputs. Providing support for domestic production of these inputs is not about isolationism, but about the resilience of a globally competitive industry. Similarly, India’s reluctance to join the Regional Comprehensive Economic Partnership (RCEP) is a judgement about the costs and benefits of a particular trade pact, and not a withdrawal from global trade. Far from it, many of the structural reforms are about attracting foreign direct investment and building export capacity. Indian policymakers remain open to trade deals where it works in India’s favour.

Meanwhile, despite the severity of the economic shock, India’s macro-economic conditions remain broadly stable. The rupee is stable, foreign exchange reserves and financial markets are at all-time highs, and the current account is in surplus (albeit reflecting demand compression). Although supply disruptions have caused some vegetable prices to spike, demand-driven inflation is well contained and there is little risk of an inflationary spiral. Latest readings of high frequency indicators suggest that the economy is steadily gathering momentum after the sharp lockdown-induced contraction of the April-June quarter.

As the reader will recognize, India’s recent economic strategy is driven by the need to respond to extreme uncertainty and a recognition that it is a marathon, not a sprint. Hence, demand and supply-side policies have been combined to provide a cushion against shocks while flexibly adapting to an evolving situation. While it may not provide the headlines of a grand one-time demand stimulus, the benefits of this approach are becoming clearer as time passes. These are the author’s personal views.

Sanjeev Sanyal is principal economic adviser, Government of India