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Modi Looks Inward to Save Indian Economy as Crisis Bites

Vrishti Beniwal and Shwetha Sunil
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Modi Looks Inward to Save Indian Economy as Crisis Bites

(Bloomberg) -- Prime Minister Narendra Modi wants to make India more self-reliant, but if the experience over the past few years is anything to go by, it’s not going to be easy.

Faced with disruptions to raw material supplies from China because of the pandemic and millions of job losses following a nationwide lockdown, Modi has ratcheted up calls to boost local manufacturing and reduce India’s reliance on imports.

A shortage of personal protective equipment at the beginning of the outbreak increased his resolve -- and within the space of just two months, India has become the world’s biggest maker of PPE kits after China. That success has only emboldened Modi as he exhorts Indians to buy local goods.

A military standoff with China -- resulting in the death of 20 Indian soldiers along a contested Himalayan border -- is now adding fuel to those calls. The government is reviewing rules and tariffs on imports from its neighbor, people familiar with the matter said, amid a call from local political leaders for a boycott of everything from China. Traders, who were previously reluctant to snub cheap Chinese imports, have now come up with a list of 3,000 items, including toys, watches and plastic products, that can easily be replaced by local manufacturing.

The push to cut imports this time is “more pronounced in its economic nationalism,” said Amitendu Palit, a senior research fellow at the National University of Singapore. “The dominant thinking is if businesses give up imports, and start making the same products at home, then they would create jobs, and generate incomes in a self-sustaining process.”

Deja Vu

Modi previously attempted to boost domestic manufacturing with his Make in India plan, but that had limited success. Under that initiative, the government pledged to cut red tape and assist companies looking to set up shop in the country. The ambition was to grow the share of manufacturing in the economy to 25% by 2020, from 15% in 2014.

But strict local-content rules in that plan backfired by raising production costs for companies, while waning domestic consumption amid a protracted slowdown in the economy saw the manufacturing sector’s share remaining almost stagnant at about 15%.

Modi has little choice but to focus on manufacturing, given the slump in the dominant services sector -- the primary driver for employment growth. With the economy on course for its first full-year contraction in four decades, authorities see industrial growth as key to creating jobs for some 1 million young people entering the workforce every month.

India has outlined new measures to promote self-reliance, including prohibiting global companies from bidding for government contracts up to a value of 2 billion rupees ($26.4 million), and giving collateral-free loans to small businesses that account for about 48% of India’s goods exports.

Analysts say the latest measures will do little to make local firms more competitive.

“These are all medium-term strategies India already had. Now it is taking a little bit of political color,” said N.R. Bhanumurthy, vice chancellor of Bengaluru Dr. B.R. Ambedkar School of Economics. “If you want to really deal with China you need to be very competitive. That’s not an overnight job.”

The politically influential Swadeshi Jagran Manch -- a group aligned with Modi’s ruling party -- has been at the forefront of pushing Indians to reduce their dependence on imports.​

But doing so is easier said than done. China is India’s biggest source of imports, with purchases including electronic goods, nuclear reactors and organic chemicals running into almost $70 billion last year. Beijing enjoys a trade surplus of about $50 billion with New Delhi.

“Self-reliance should be interpreted as making India more resilient in the coming years, rather than interpreting those words in its narrowest terms,” said Kaushik Das, chief India economist at Deutsche Bank AG. “The objective is not to reduce imports at any cost.”

Modi is also hoping to lure investment as businesses around the world look to reassess their supply chains and diversify their China operations.

“While this vision is good, we need policies,” said Ram Upendra Das, head of the Centre for Regional Trade in New Delhi, describing the recent self-reliance pledge as “more of a reiteration” of the Make in India program. “We need to upgrade physical infrastructure, social infrastructure.”

India has been trying to woo investors since the U.S.-China trade war, but many favored places like Vietnam, Thailand and the Philippines instead, given concerns about India’s archaic land and labor laws.

Frustrating Delays

While India is in the process of simplifying labor laws and has cut corporate tax rates to bring it on par with Asian peers, challenges remain in the form of cumbersome land acquisition rules, foreign-exchange controls and lethargic bureaucracy.

Companies including South Korea’s top steelmaker, Posco, have given up on their India investment plans, owing to frustrating delays in land acquisition. The result is that India imports 6.69 million tons of finished steel despite being a net exporter of iron ore.

Words alone won’t be enough to attract investors, said Jayati Ghosh, an economics professor at the Jawaharlal Nehru University in New Delhi.

“The economy is in a state of collapse,” she said. “If you’re a global company interested in a new location for part of your supply chain, you need excellent infrastructure.”

(Updates with details of measures to check imports in fourth paragraph)

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