Globalisation is dying; India needs sound industrial policy

Source: The post is based on an article “Globalization is dying; India needs sound industrial policy” published in the Live Mint on 26th July 2022. 

Syllabus: GS 3 Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth. 

Relevance: Industrial Policy; Globalization etc. 

News: In the recent times, the concept of free market globalization, has been exposed due to its inherent shortcomings.  

The concept of free market globalization means free flow of goods, and knowledge around the world unimpeded by national boundaries.  

What are the Issues in Free Market globalization? 

In this, the national governments ceded their powers of governance to international bodies that set the rules of the game.  

The principle of cumulative causation suggests those who have more wealth, knowledge and power than others accumulate even more because they have the power to fix the rules.  This is exactly what is happening as per this concept. It has led to increase in the inequalities both within and among nations. Beneficiaries will advocate the continuation of this model until they start to face loses.  some of examples are:  

• the US sanction on Russia for the Ukraine War, has disrupted global flows of fuel and food. 
• Efforts by western countries when it found its economic power slipping to China.  

Its weaknesses were exposed during emergencies like the global covid lock-down, which disrupted the global supply chains of manufactured goods.  

Global trade is also subject to geopolitical considerations. For example, Citizens of poorer countries in the global South and East suffer more than the West in case of disruption in global trade flow. For example, the situation at present due to the Ukraine war and sanctions. 

Various Free trade economists criticised the industrial policies of the developing countries. These policies aim to increase domestic production and competition among domestic producers (and with foreign producers) through adjustment of tariffs and correction in the inverted duties, etc.  

These “industrial policies” were banned by Washington Consensus economics, and were labelled as protectionist measures. It halted the growth in the Indian industries compared to China.  

But now the same policies are being adopted by the western countries. For example, the US government supports the growth of its defence and technological industries with large subsidies and preferential treatment. The US’s CHIPS Act will subsidize domestic production of chips.  

How the ban on the Industrial Policy widened gap between India and China? 

The economies of both China and India, was roughly the similar size around 1990. 

After the 1990s Indian producers of power equipment, commercial vehicles, machine tools, etc, were as competent or more than Chinese companies. They built capabilities with technology legally transferred by foreign companies under ‘phased manufacturing programmes’ guided by India’s industrial policies.  

Such phased manufacturing programmes were explicitly banned under the World Trade Organization (WTO) regime post 1990. India complied with its new global rules. But despite the ban on phased manufacturing programme, China managed industry and trade in its own way.  

Therefore, the Chinese economy became six times larger than the Indian economy, and its manufacturing sector was 12 times larger and its capital goods sector was 50 times larger, by the year 2010.  

What should be done? 

The economic paradigm that frees trade is the only way has passed away. The myth of fair governance of the global economy by institutions controlled by Western powers has been exposed.  

Therefore, India must build more depth into its economy instead of focussing only to increase its size.  India’s trade policies must be guided by a sound industrial policy, rather than trade policy controlling industry, which has been the paradigm of policymaking since the 1990s’ liberalization of the Indian economy.  

The new paradigm of economic policies demands the countries to adopt what is called as “productivism” instead of protectionism. India needs ‘productive’ economic policies to increase domestic manufacturing for defence of its national sovereignty and resilience in its economic growth.