WHAT IS THE POLICY?
Following the COVID-19 lockdown, the Centre announced an ‘Aatmanirbhar Bharat Abhiyan’ (ABA) package in mid-May 2020, which amounted to 10.3% of GDP, to stimulate the economy.
While the direct fiscal stimulus was less than 1.3% of the GDP, more than 7.8% of GDP was about providing easy credit to the MSMEs and the farmers and liquidity infusion by various RBI measures.
Out of the Rs. 21 lakh crore package, Rs 9.73 lakh crore has been accounted for by the potential liquidity injection into the banking and financial system through various measures of the RBI (Rs 8 lakh crore) and otherwise, and Rs 6.25 lakh crore for the expected collateral free or partially guaranteed easy loans (even with lower credit ratings) to the MSMEs, farmers and so on.
ANALYSIS OF THE POLICY:
INDIA’S POVERTY AND GDP STATUS:
There are a lot of poor people with limited purchasing power and very few people with a lot of purchasing power but who are however very less affected by the pandemic. The poor have no jobs in their rural areas. Agriculture is also not able to sustain them and so, migration from their hinterlands is seen steadily increasing.
There will be a more sustained and overt push towards protecting domestic industries under the self-reliance initiative.
Meanwhile, the real GDP growth has been falling for three consecutive years, slowing to 4.2 percent in the last fiscal year 2019-20. The ongoing pandemic pushed the economy to a steep landslide of a 23.9 percent contraction in the first quarter of the current fiscal. This was the steepest economic contraction among any G20 economy over that period.
While the economy was already struggling with a low number of jobs and thus finding employment for the nearly 50 lakh workers entering the labour force annually was difficult, the job situation in the country is poised to face severe damage due to the pandemic. India’s low state capacity, poor healthcare infrastructure, and highly populated urban centers have left it particularly affected by the pandemic.
LACK OF DEFINITION:
Unless “Aatmanirbhar” is defined properly, the government will fail to effectively implement its economic philosophy.
It is not protectionism. It is not inward-looking. It is not just import substitution and it is not economic nationalism. Indian companies are weighed down by multiple factors that put them at a clear disadvantage vis-a-vis their competitors elsewhere in the world, apart from dependence on imports. The issues need to be addressed.
India is not exactly a low-cost production base. It may be cheaper than developed economies but other emerging countries fare better. Take the power cost. It costs 11 cents a unit in India compared to 8 cents in Vietnam and 9 in China. Labour cost, in real terms, is low but if one has to factor productivity, it falls way below China, Brazil or South Korea.
Indian companies suffer from high regulatory and other compliance costs. Even though the government has been working to reduce this through digitalization, it remains high and puts them at a disadvantage on the world stage.
AGGREGATE DEMAND PROBLEM:
The aggregate demand for credit would increase only if the aggregate investment demand rises, which in turn, depends on the expected profitability of the investment projects. The profitability of the businesses/investments is subject to the demand for the products in the market. The aggregate demand for goods and services again is dependent on the income and purchasing power of the people, which has come down drastically, at the aggregate level, due to consistent back economic policies, like demonetization, poorly executed GST implementation and then the back-breaking economic blunder of a 4-hour notice lock-down and thereafter no cohesive plan to revive demand. Most Indians are engaged in low-wage activities, which limits growth driven by domestic consumption.
Export promotion in India revolves around fiddling with duties and exemptions that have a marginal impact on the creation of industrial capacity, which is what drives export competitiveness.
INDIA’S IMPORT DEPENDENCE AND TRADE DEFICIT:
India’s imports actually increased. In fact, India’s trade with China has increased. Between 2019-20 and 2020-21, while India’s trade with the world declined by 13%, its trade with China increased by 6%. All the noise about “boycott China” meant political actions like banning “Tik-tok” and other ill-planned actions which adversely affected Indian manufacturers and traders rather than resulting in any promotion of Indian manufacturing. In 2020-21, India’s trade with China stood at $86.4 billion, accounting for a share of 12.62% of India’s total trade with the world. The share of China in India’s trade has in fact been increasing over the last three years.
India has developed a significant amount of dependence on trade with China. In 2020-21, China also replaced the US to become India’s largest trading partner.
In the last four years, India’s trade with China has averaged around $86.3 billion, with imports exceeding exports resulting in a big trade deficit. In 2020-21, India registered a trade deficit of $44 billion.
In 2020-21, India’s top ten exports to China included iron ores and concentrates, cotton, light oils and preparations, shrimps and prawns, fruits of the genus capsicum or of the genus pimento, parts of telephone sets, telephones for cellular networks, semi-finished products of iron, castor oil and its fractions, and granite.
While, India’s top ten imports from China mostly comprised of machinery and mechanical appliances such as portable digital automatic data processing machines, parts of cellular phones and radio terminals, processors and controllers, photo intensity semiconductor devices, machines and machinery parts, telephones for cellular networks or for other wireless networks, parts of electronic integrated circuits and micro assemblies and static converters.
The findings of growing import dependence on China, resulting in the widening of trade deficit warrant a deeper investigation of the difference between policy and practice.
WAY AHEAD FOR INDIA:
To bridge the trade deficit and to achieve the vision of a self-reliant India, the country is in dire need of undertaking structural reforms.
These reforms ought to focus on building the kind of infrastructure and technological expertise, manufacturing hubs, that are required to make the country globally competitive.
To promote growth, the government would have to spend more.
If issues are not addressed, ‘Aatmanirbhar Bharat’ will join the ranks of other catchy slogans that did not translate into anything worthwhile.
To conclude, in its the design and approach of the ‘Aatmanirbhar Bharat Abhiyan’ the scheme needs to be reviewed keeping in mind the emerging trade data trends and domestic economic requirements.