Back to the new-old: West wind, East wind, or the warnings of a storm?

Source: The post is based on the article “Back to the new-old: West wind, East wind, or the warnings of a storm?” published in Business Standard on 15^th July 2023.

Syllabus: GS 3 – Growth & Development, Industrial Policy

Relevance: concerns associated with protectionist measures adopted by countries against China.

News: India implemented economic reforms in 1991. It was influenced by the Reagan-Thatcher era, which focused on reduced governmental role in the economy.

What were the results of implementing 1991 reforms?

The reforms of 1991 were driven by the principles of liberalization, privatization, and globalization (LPG).

The aim was to increase market orientation and stimulate economic growth, lower inflation, improve the trade balance, and ensure external economic viability. The reform was successful in achieving these objectives.

However, the reform has not been able to boost manufacturing.

What are the consequences of the failure of reforms in boosting the manufacturing sector?

It has resulted in a lack of quality jobs, increased inequality and made India vulnerable to China by depending on it for strategic material imports.

In order to reduce its vulnerability, India has adopted a more restrictive approach to trade by implementing tariff hikes, non-tariff barriers, and restrictions on Chinese products.

This has given re-birth of government-directed industrial investment through policy tools like Investment subsidies, production incentives, tariff protection, etc.

How is the situation of manufacturing in the US and in the Western countries?

The US and countries in the West have also faced similar outcomes due to their incapability in reviving the manufacturing sector.

Hence, to decrease their vulnerability to China, companies in the West have started investing in the US and establishing their plants.

The US has also imposed import barriers against Chinese goods and restricted the transfer of strategic technologies to China.

In response, China has imposed export bans on gallium and germanium, essential materials in the electronic, electric vehicle, and telecom sectors.

Further, governments in the West are allocating significant sums of money to avoid reliance on Chinese imports.

For instance, subsidies per electric vehicle in the US and Europe amount to around $7,500. Companies like General Electric, which had de-emphasised manufacturing, are getting back into the sector.

What can be the implications of the measures adopted by countries against China?

These policies raise concern over the possibility of trade wars. Tariff hikes could also result in increased product prices and contribute to inflation.

Although the talks have now shifted from decoupling from China towards de-risking and diversification, the risks still remain over retaliatory actions and beggar-thy-neighbour subsidies from China.

This may lead to an increase in the government debt of the Western countries.

Must Read: De-risking, not decoupling: What’s this G7 strategy against China?

What can be the way ahead for India?

While de-risking and diversification are being taken up by other countries, India can focus on creating jobs in the manufacturing sector.

However, India has chosen to follow other countries, focusing only on import substitution rather than creating jobs.