The Gaps That Could Have Been Filled

The Gaps That Could Have Been Filled

Bibek Debroy
Tuesday, January 6, 1998

Bibek Debroy focuses on the five papers on trade and development in Isher Ahluwalia and IMD Little's book on Manmohan Singh.

Isher Ahluwalia and I M D Little have edited a volume of essays in honour of Manmohan Singh (India's Economic Reforms and Development, Essays for Manmohan Singh, Oxford University Press, 1998). Fifteen papers by well-known economists figure in the Festschrift. This is not a comprehensive book review and I only wish to focus on papers that have something to do with trade, directly or indirectly. There are five of these - Jagdish Bhagwati (in passing), Meghnad Desai (in passing), Amartya Sen, Ashok Gulati (in passing) and T. N. Srinivasan.

Since Bhagwati's paper is on the design of Indian development, trade enters the picture in a broader framework. The diagnosis has occurred several times in Bhagwati's work.

"My explanation of East Asia's success, and by contrast that of India's failure, combines in its own way three major elements, in that order:
the enhanced inducement to investment due to the EP (export promotion) strategy

the benefit from the surplus of domestic SMP (social marginal product) over international cost of importer newer-vintage capital equipment

the raising of this SMP by the presence of a literate workforce."

Add to this the factor that trade-barriers jumping foreign direct investments (FDI) can be limited in import substituting countries by the size of the domestic market. The foreign direct investment (FDI) that is attracted will also be less productive "because it would be going into economic regimes characterized by significant trade distortions that could even generate negative value added at socially relevant world prices".

While this is the diagnosis, what about reforms and the future? This is also familiar stuff. "The early harvest is not yet sumptuous, however, for these reforms need to be further deepened. The current account convertibility still goes hand in hand with wholly muddled thinking that permits nearly all consumer goods to be still subjected to strict import controls on the silly ground that we 'do not need such imports'! The FDI policy, while better, is still far from what is necessary to attract substantial inflows."

Meghnad Desai contrasts with the Mahalanobis revolution "provided by Calcutta" with "the alternative model of growth that was presented as such by the Bombay economists C. N. Vakil and P. R. Brahmanand." The counterfactual scenario does, however, raise trade questions. Had the Bombay Plan been adopted instead, there could have been considerable export possibilities via agriculture and the light industries route. "Highly capital intensive, excess capacity creating investment would certainly have been avoided and, indeed, India could have received foreign investments."

In a rare deviation ("I try not to write on international trade and usually succeed"), Amartya Sen also focuses on exports. Although the paper is on the theory and practice of development, barring some Dreze and Sen-type arguments towards the end, the paper is on Manmohan Singh's 1964 study, 'India's Export Trends and the Prospects for Self Contained Growth'.

"Surprise has sometimes been expressed at the fact that Manmohan Singh, as finance minister, could reject and denounce so firmly the economic policies that he himself had helped to implement, as a pre-eminent and leading civil servant... There is, of course, no mystery here. As a civil servant in a democracy, Manmohan could not but follow the policies of the elected government.

As a finance minister he could make his own policies... To see whether there is a break in Manmohan's own thinking, we have to compare his academic writings with the policy reforms that he initiated. That comparison indicates that there is nothing here to give the 'contradiction school' much comfort.... The art of shooting oneself in the foot, as practised in the export-import policies of the government of India, was laid bare by Manmohan's careful empirical studies."

Ashok Gulati's arguments on the anti-agriculture bias of policies are familiar ones. "Although there has not been any significant direct taxation of agriculture, yet it has proved to be a heavily 'taxed' sector... High protection to industry, for far too long and well past the stage of infancy, and an over-valued exchange rate, inflicted heavy implicit taxation on agriculture." Since 1991, trade policy reforms have removed some of the anti-agriculture bias.

But this is through reforms in manufacturing. Quantitative restrictions (QRs) on exports and imports of agricultural products remain. There is canalisation. And tariff levels have not been brought down to those recommended by the Chelliah Committee. Nor are there any great dangers in opening up. Apart from extremely high tariff bindings on agro products submitted by India at the Uruguay Round, Indian agriculture is generally price-competitive.

There are thus gains, including exports gains, which can be reaped by opening up agriculture. While there may be concerns about net purchasers of foodgrains (the poor) being adversely affected as domestic agricultural prices move closer to global prices, that is a case for targeting the public distribution system (PDS) better. Of course, there are constraints that hinder supply-side responses to agricultural liberalisation. These are not discussed comprehensively in the present paper.

In contrast to the other four papers, T. N. Srinivasan's essay is directly on India's export performance. But before that, there is a review of cross-country experiences and "the empirical evidence from a number of countries points to a strong and significant effect of openness to trade on growth performance, thus confirming the view expressed long ago by Dr Singh."

On India's exports, T. N. Srinivasan estimates some export functions. Although one has reservations about the econometrics, the findings mirror what other empirical studies have found. "Both real GDP (a proxy for the net effect of domestic policies on domestic production of and demand for exportables) and the real effective exchange rate (a proxy for the terms at which commodities are made available for export) were found to be statistically significant in explaining export performance....even the plethora of schemes for export promotion introduced since the early sixties were neither designed as mutually reinforcing and coherent parts of an export strategy underpinning an overall development strategy nor did they provide quantitatively significant incentives.

Although Indian exports grew relatively rapidly since the mid-eighties (barring the crisis years), in comparison with other countries, particularly China, India does not seem competitive in a number of commodities. India should have gained market share as the industrialized countries, old and new, were relinquishing their shares in these commodities with shifts in their comparative advantage."

Has the scenario changed since 1991? T. N. Srinivasan argues that lack of reforms in the domestic economy hinder export performance. Examples are infrastructure, transaction costs and a yet inadequate framework for attracting foreign direct investment inflows. One can also add import duties and quantitative restrictions on imports.

In any book on economic reforms, there ought to be three strands. Why were reforms necessary and what was wrong with the earlier system? What reforms have been introduced? What remains to be done? Taken collectively, the 15 papers in this volume present a cogent rationale for reforms.

As a sub-set, the five papers that deal with exports, also succeed in arguing the case for liberalisation and despite all that has happened since 1991, such arguments are still necessary. On the second track, documenting what has been done, there is reason for dissatisfaction. This is especially true of the trade sector.

For example, in 404 pages one still does not know what the average tariff rate (trade weighted) is today, or what has happened to QRs on imports, or what the Tarapore Committee has recommended on capital account convertibility. (The Vijay Kelkar and Bhanoji Rao volume does a better job.) Flowing from this, and restricting oneself to the external sector, there is little on the third track of what remains to be done, except at the level of generalisations.

This is not a complaint about the quality of individual papers, but about their collective coverage.

The introduction to the volume concludes. "The essays in this Festschrift make it clear that Manmohan Singh's tenure as finance minister was an event of critical importance in India's economic history." Precisely. There is a great deal on the Manmohan Singh who was the finance minister. One would have liked more on the agenda of the Manmohan Singh who might be the finance minister once again.

Back to the top