Chinese goods are cheaper because of the enormous economies of scale that are being achieved by Chinese manufacturers. These firms achieve it as a result of their close collaboration with government agencies

President-elect Barack Obama must have known that the US economy had declined by 0.5 per cent when he introduced his economic team to the press. The writing on the wall is clear. The US economy is in recession and this will perhaps extend well into 2009. It is, therefore, rather puzzling and, in fact, dismaying that none of our senior economic policy makers cared to mention the likely impact of a synchronised downturn in the US, Japan and the EU on Indian economic prospects even once in their meetings with economic editors.
In my view this state of denial in refusing to face up to the seriousness of the crisis we are now faced with can cost us dear. To continue to talk of achieving 8 per cent growth, as the prime minister did at the Hindustan Times summit, and for the Planning Commission not to revise its Eleventh Plan growth targets downward, leave me perplexed. I just hope that the task force set up by the prime minister is seized of the severity of the situation and is preparing a credible and effective plan to prevent the downturn from becoming longer and deeper than it already threatens to be.
There will be a tendency, when external demand is set to shrink, to try and protect the domestic market for our indigenous industry by raising tariffs and even bringing back some of non-tariff barriers to restrict imports. In industries, such as steel and edible oils, where import duties were brought down to compensate for the extraordinarily high international prices, it is justified to take them back to their original levels. This has been done already. It will, however, be a mistake to now extend such duty cuts to other segments even if industry associations are lobbying for it. This has to be resisted at all costs if the Indian industry has to achieve the much-needed higher productivity and lower cost levels, only on the basis of which can it achieve higher growth rates.
An immediate issue, quite expectedly, is with manufactured imports from China, which are apparently available at unbelievably low prices. These imports are gaining market share even in industry segments that are relatively technology and design-intensive, and in which Indian firms were hitherto seen as being more competitive, as demonstrated by their net export earnings. The reason for the surge in Chinese imports is not always that these exports are hugely subsidised by the Chinese government, as is often claimed by our industry representatives. In cases in which this can be established, anti-dumping measures must be taken and with far greater alacrity. The entire system needs a thorough revamp through coordinated action between the departments of commerce and industry, both of which are under the same minister.
But, for the great majority of imports from China, we must face the reality that they are cheaper because of the enormous economies of scale that are being achieved by Chinese manufacturers. As our recent study on Chinese manufacturers (by Rajeev Anantaram), done as part of an Asian Development Bank project, shows, Chinese firms are able to achieve these scales as a direct result of close collaboration between the firms and government agencies at all levels, including the central, provincial, local, and often with help from the People’s Liberation Army, in providing large orders to sustain production at higher levels. These huge capacities in Chinese firms created to support their sizzling growth are now relatively underutilised. Hence, it is natural for them to look at fresh large markets to which these can be exported, often at marginal variable costs. Can we stand up to this competition or should we simply accept that the Chinese have now made it impossible for India to retain its manufacturing base?
Some will argue that it does not matter if jobs come from manufacturing or services or agriculture sector, as long as enough of them are being generated. The same group of people also tends to argue, despite all recent evidence to the contrary, that markets and private entrepreneurs, left to themselves, will find a way forward to achieving full employment. This is simply balderdash. Markets need to be effectively regulated and private entrepreneurs need the fullest support of the government if they are to become globally competitive and even retain their share in domestic markets. But this support, unlike what my friends in our industry associations may say, is neither effective, and certainly not efficient, if given in the form of higher tariffs and non-tariff barriers.
Instead, all attention must now be focused on identifying the constraints across the ‘full value chain’ that add to costs and make a specific industry segment uncompetitive. Public policy has to be directed at all those constraints. These are often but not always in the nature of government procedure, red tape, unnecessary laws and regulations, which can never be complied with despite best efforts, and better access to formal credit at rates that are internationally comparable.
A detailed industry-specific inquiry is required. Such a review is urgently needed and could start with sectors where India’s relative comparative advantage is clearly established. Coordinated action by the three ministries of industry, commerce and finance and their related agencies will be key to successfully taking this forward. I suppose this could be a useful mandate of the prime minister’s task force on tackling the economic downturn.