Last Friday, talks at the World Trade Organization on extending the Information Technology Agreement, or ITA, collapsed. The ITA is now almost two decades old, and enforces zero tariffs on hundreds of high-tech products. Had another agreement been signed, it would have been extended to cover hundreds more, including some that had not been dreamt of 17 years ago. China and the United States had come to an agreement on extending the ITA; but overall agreement was not found, since China and South Korea reportedly did not agree on whether liquid crystal display (LCD) screens - dominated by South Korea's LG - should be part of the agreement. India did not participate in the talks, although it is part of the original ITA. The original ITA has made consumer electronics much cheaper and better quality in India; but Indian electronics producers, unable to compete, ensured that the government avoided the talks meant to expand the agreement. In other words, Indian producers may benefit marginally from the failure of the talks; but since the failure is likely only temporary, it should serve as more of a reminder that India does not have much time to build competitiveness at home.
The building of competitiveness is central to a prosperous India - but as Reserve Bank of India Governor Raghuram Rajan pointed out in a perceptive speech on Friday, it may not be sufficiently central to the government's "Make in India" policy. The thrust of that policy is an assumption that India should be able to become another China, a centre for low-cost manufacturing. Dr Rajan argued that with the global downturn, there might be no room for two Chinas immediately. The conditions for export-led growth might not be met at the moment, and India would have to continue to rely on internal demand. Whether or not Dr Rajan is right about manufacturing and exports, he is certainly right about one thing: "Make in India" sounds too close to import substitution and old-style industrial policy for comfort. Indeed it has been reported that the prime minister himself has asked secretaries to the government to appraise imports on a quarterly basis and work out how to reduce them.
Dr Rajan is correct when he says that "subsidising inputs to specific industries because they are deemed important or labour-intensive" is a strategy that has not yielded rich dividends for India over the years. The government should work instead on fixing the availability of public goods, and on promoting entrepreneurship. He is right. Entrepreneurs should determine how India gets rich, and they will do so better than the government can - especially India's government, which has an abysmal track record in this respect. And India must join the next expansion of the ITA, not hide behind tariff walls - allowing in imports is essential for any attempt to "Make in India". Nothing raises competitiveness and quality like actual competition.
