A cycle of reversals

The recent measures aimed at changing the trajectory of India's economic journey with tariff walls and import restrictions are unlikely to end well

A few days ago, there was some bad publicity on social media for “Make in India”. Shreyas Hareesh, a young motorcycle racer, suffered a fatal crash on the Madras MiniGP circuit. According to bikers, the injuries would not have been fatal if Hareesh’s crash helmet had been of international racing standards. But, in order to promote Make in India, very high import duties have been placed on crash helmets and, in the absence of competition, Indian helmet-makers don’t bother to aim for high quality.

Tragic though this particular incident might have been, the narrative that’s grown around it shouldn’t surprise anybody. In the absence of competition, businesses get lazy. Service providers have shoddy standards. Manufacturers cut corners. Moreover, businesses charge more than they should, given a combination of assured markets and an absence of competition.

This is not theoretical waffle for Indians who lived through the pre-liberalisation period. Between 1947 and 1991, India’s economic policy followed a clear trend of isolationism. Red tape in the form of licensing went up, import duties went up, and the import of item after item was banned.

Very few companies had manufacturing licences and innovation froze because, for example, a new design for a bicycle lamp (just the lamp, not even the bicycle) needed a licence. Moreover, sector after key sector was nationalised —banks, aviation, mining, telecom — and turned into government monopolies. That cut competition down even more.

For over 30 years, Indians had a choice between two car models, and any prospective car-owner had to put down a deposit and wait for months for the vehicle to arrive. A new telephone connection took three years to be energised, and it usually didn’t work anyway. If you needed to fly, you had to use Indian Airlines, and it charged higher fares than any other major world airline.

The cars in question were 50-year-old designs. The telephone service was the most expensive in the world, apart from being poor in quality. Almost everything manufactured in India was shoddy. Screw on bottle-caps needed to be cut open, and the bottle couldn’t be closed properly again. Admittedly, this did lead to higher sales of alcohol. Plugs didn’t go into plug points. Hammering a nail into the wall of the average flat was a complex exercise that required sticking a plug of wood into the wall and hammering the nail into the wood because the plaster was of such poor quality, it would not hold a nail.

Most household appliances were simply unavailable. There were no microwaves, no washing machines, no dishwashers, no racing bicycles, no fancy designer clothes, no walkmans. Imports were difficult. There were huge controls on foreign exchange, apart from the necessity for import licences, and many items were banned. An Indian travelling abroad got an allowance of $50 a year. Even geniuses who won scholarships to top quality educational institutions abroad struggled to eat three meals a day as a result.

As a consequence, the economy was a basket case by 1991. As liberalisation was triggered by India’s near-default on overseas payments, consumers gradually realised what had been missing. Almost miraculously, quality improved across sector after sector as competition was allowed and the new entrants differentiated themselves by providing better quality and lower prices.

From being the most expensive telecom market in the world, India suddenly turned into the cheapest. Instead of three car models — one each from three manufacturers, you had the choice of over 100 models from over a dozen automobile companies. Students could take loans from private banks and go abroad to study even if they didn’t come from affluent backgrounds.

In 1993, the government even promised to make the rupee fully convertible in the Budget. Far from that happening, 30 years on, economic policy has come full circle. More and more imports are being banned, or put under licensing, with higher import duties. There’s an increasing trend of currency controls, with taxes on overseas spending. Given India’s decades of experience, this is not going to end well.