SOCIO-ECONOMIC VOICES

"India's Pursuit of Self-Reliance and Economic Growth: Strategies to Strengthen Domestic Industries and Address Unemployment"
-Dr. Ashwani Mahajan,Policy Interventionist, Prof of Economics, University of Delhi
"Currency Challenges and Resilience: Decoding the Impacts of Rupee Depreciation on India's Economy"

Intro: This week on Socio-economic Voices, explore the nation's journey towards self-reliance, the implications of international trade settlements, and the delicate balance between innovation, entrepreneurship, and employment. This and more in an exclusive interaction between Dr Ashwani Mahajan, Policy Interventionist and senior journalist Mahima Sharma as the former sheds light on de-industrialization, currency depreciation, and the urgent need for job creation. Take a read…

MS: How can India strengthen its domestic industries and promote self-reliance in the face of globalization?

Dr. Mahajan: In the post-new economic policy period, our industrial base started eroding, due to the rising imports from different parts of the world, especially China. Chinese imports have been the biggest contributor to the decline of our industries, across the board. Industries which have been worst hit include textile, chemicals, electronics, machinery and equipment, electric and telecom equipment, paper and paper products, basic metals, refined products and many others. This has led to even closure of factories in many cases. This process of destruction of industries, which is also sometimes called as de-industrialization of the Indian economy, was accentuated after China became a member of WTO in 2001. The share of manufacturing in our overall GDP, which was 21.26 per cent in 1995-96 declined to 16.35 per cent in 2018-19.

In a country like India with a large army of the youth labour force, the manufacturing sector can provide vast opportunities for employment and livelihood. But unfortunately, not only three crucial decades were lost, during which we could have given a boost to our manufacturing, our policymakers remained insensitive to this loss. Instead, they argued in favour of the import of manufactured products, saying that cheaper imports will make it possible for our people to afford many of the goods, and therefore improve their lifestyle.

It is notable that prior to 2004, the government used to impose heavy tariffs on imported manufactured and agricultural goods. The average weighted tariff on imports was 56.36 per cent in 1990 (before WTO came into force). This was reduced to 27.01 per cent by 1992 when WTO negotiations were going on. This was further reduced to 23.72 per cent by 1996. It is important to note that WTO agreements came into force in the year 1995. The average weighted tariff was 22.96 per cent in 2004. Since 2004 there is no look back and tariffs continued to decline. In 2005 average weighted tariff was 13.9 per cent, in 2007 it was 11.99 per cent and by 2008 it declined to 5.99 per cent. The lowest average weightage tariff was in 2018 when it declined to 4.88 per cent. Since 2018 the government attempted to increase tariffs on some selected items of imports, which included electronic and telecom, mobile phone, textiles, apparel and non-essential commodities. Despite all this, the average weighted tariff remained low at 6.19 per cent in 2020.

During the Covid-19 pandemic, it was realized that the country cannot remain dependent on imported manufactured goods and the country needs to achieve some degree of self-reliance, what is popularly known as 'Aatmanirbhar Bharat'. The government prepared a list of sub-sectors/commodities which have been badly hit by unequal imports from China, whether due to dumping by China or due to other kinds of violations of trade rules by Chinese authorities or due to any other means. The government decided to offer a production linked incentive scheme for the revival of these industries. Apart from this, the government has been giving direct and indirect support for the revival of these industries.

Very encouraging results of these efforts are being seen in these sub-sectors in manufacturing. Many new API manufacturing capacities are being created and the country may once again become self-reliant in the production of APIs. Similar is the situation with other sub-sector of manufacturing. Unfortunately, though new capacities are being created for different products, imports from China are continuing unabated.

MS: What is your assessment of the current state of the Indian Rupee and its implications for the economy? What will be the impact of RBI’s decision to allow the settlement of international trade in the Rupee?

Dr. Mahajan: The Indian Rupee has been depreciating against the USD for some time now, and the Rupee has declined from Rs 74.5 per USD in February 2022 to almost Rs 82 per USD now.

In the past, the Rupee had been weakening not only against the USD but also against many important currencies including the Euro, Pound, Yen, and Yuan. For example, since 1991, the Rupee has depreciated 137 per cent against the Pound Sterling, 489 per cent against the Euro and 241 per cent against the Yen, while the depreciation against the USD has been 252 per cent. This means that in the long run, the Rupee has weakened against all the important currencies.

But there has been a change in the depreciation trend of the Rupee recently. From February 2022 till June 2023, the Rupee weakened by 10.23 per cent against the USD, but depreciated only by 2.47 per cent against British Pond and 5.1 per cent against Euro and appreciated against the Japanese Yen by nearly 9 per cent. Earlier it had gained 6.31 per cent against the Pound Sterling, 10.77 per cent against the Yen and 4.72 per cent against the Euro in five months prior to July 2022. Since the USD has strengthened against almost all major currencies around the world, it would be more beneficial for us to understand the reasons for the strength of the USD against various currencies rather than the weakness of the Rupee.

In July 2022, the Reserve Bank of India, through a circular allowed settlement for import and export of goods and services in Indian Rupee. This was a strategic decision in the background of the Ukraine and Russia war and US sanctions on the use of the USD for payments to Russia and Iran. Another reason was to support the weakening of the Indian Rupee by promoting Indian exports resulting in growth in foreign trade.

As a result of this decision, many countries of the world which were interested in importing from India and were not able to do so, due to paucity of the USD, can now pay in Indian Rupee for their imports. To facilitate the settlement of trade in the Indian Rupee, Indian banks have opened ‘Special Vostro Accounts' with 19 countries including the UK, New Zealand, Germany, Malaysia, Israel, Russia and the United Arab Emirates.

Like Russia, some other countries out of these 19 countries, export hugely to India and they shall be paid in Indian Rupees for their exports. It is reasonably believed that such countries are likely to use their Indian Rupee reserves for importing more and more products from India. It may give a substantial boost to exports from India subject to the quality and quantity of goods or services available in India required by them. The entire exercise will help in saving precious foreign exchange reserves amid rising global economic risks.

Corresponding changes have been made in Foreign Trade Policy to allow for International Trade Settlement in INR i.e., invoicing, payment, and settlement of exports/imports in Indian Rupees in sync with RBI’s Circular dated 11.07.2022. Further changes have been introduced in the Foreign Trade Policy for the grant of export benefits and fulfilment of Export Obligations for export realizations in INR as per RBI guidelines. These changes will ensure that exporters remain entitled to export incentives even when payments for their exports are realized in Indian Rupee.

This decision will reduce the requirement of the USD in international trade and may help strengthen Indian Rupee, therefore, it will have several benefits, including combating inflation and making Rupee an international currency.

MS: How will demonetization of the Rs 2000 notes impact the Indian economy - please list both pros and cons.

Dr. Mahajan: Issuance of Rs 2000 note in the name of demonetisation of big notes was against the very spirit of demonetisation itself. That's why the withdrawal of 2000 notes was started in March 2018. It is worth mentioning that the Rs 2000 notes amounting to Rs 6.73 lakh crore, which came into circulation initially, were reduced to only Rs 3.62 lakh crore by March 2023. It can be said that although the government had issued 2000 notes, its intention was to gradually reduce the circulation of these notes, and ultimately withdraw them altogether. The Reserve Bank says that 89 per cent of the total Rs 2000 notes, which were issued before March 2017, have already completed their life and were supposed to be withdrawn as per RBI's clean notes policy. The conclusion is that the withdrawal of Rs 2000 notes cannot be said to be a sudden decision.

The Reserve Bank says that the general public has very few Rs 2000 notes. This also means that the 2000 notes in circulation are mostly with those people who have kept their money (or say black money) in cash, so the Reserve Bank says that with this decision, there may be a huge increase in the deposits of banks. This will increase the revenue of the government and also transparency in the economy.

Demonetisation of 2018 had been beneficial for India, in terms of combating inflation, bringing greater transparency, digitalisation, controlling crime, terrorism, stone pelting and even naxalism, increasing government revenue etc.

Some holders of Rs 2000 notes may convert them into other currencies. But the majority of them will either deposit them in bank accounts and pay taxes or may increase conspicuous consumption and this will benefit the economy. Some economists feel that with this bank deposits may increase by minimum Rupees one lakh crores.

MS: How can India address the challenges of unemployment and job creation in the current economic scenario, when the population has become a major concern?

Dr. Mahajan: At the outset, we need to understand that at present, the concern in India is not the size of the population, but the deployment of our youth, especially in the age group of 15 to 30 years, which constitutes nearly 30 per cent of the population, which is considered to be a boon; and is also called demographic dividend.

Due to the obsession of policymakers towards globalization, in the last almost 3 decades, there has been a significant decline in manufacturing in India. Alongside, a psyche has also developed that India can never compete with the world in the field of manufacturing, so we only need to concentrate on the service sector. We can import items from abroad for our requirements. There was also an attempt to develop the mindset that imports are necessary to increase domestic production and also to increase exports.

Despite the widening of the trade deficit and the resulting increase in demand for foreign exchange and the depreciation of the Rupee, there has been no change in the thinking of our policymakers. But during the Corona period, when the international supply chain was disrupted and we had to depend on China for the supply of essential commodities, which was the main culprit, a new thinking of self-reliant India (Atmanirbhar Bharat) and 'vocal for local' started taking shape. In those difficult times, India not only manufactured essential medicines, vaccines, PPE kits, ventilators and other medical equipment but also started intensive efforts to make India self-reliant in various fields.

Sectors which have been affected due to the influx of imports in the last few years, such as API, Electronics, Textile & Apparel, Telecom, Chemicals etc. and other industries which India needs like Semiconductors, Solar Panel, Electric Vehicles, efforts started to revive them using production linked incentives (PLIs), imposition of Anti Dumping Duties, raising of tariffs etc. The government plans to spend around Rs 3 lakh crore on all these PLIs in the next few years. The implementation of the Atmanirbhar Bharat scheme by the Prime Minister and the slogan of 'Vocal for Local' is indeed infusing new energy into these sectors.

To make these historic efforts successful, no stone should be left unturned. Taking the government to the entrepreneurs and youth, society's efforts would be needed. There are nearly 700 industrial clusters in the country, many of which are facing the threat of extinction due to an onslaught of imports and a non-conducive business atmosphere. One district and one product scheme in some states can also help revive many of our industries facing the danger of extinction.

MS: How can India effectively manage inflationary pressures while ensuring sustainable economic growth?

Dr. Mahajan: Though inflation has been impacting the common man and businesses, the rate of inflation has been significantly lower than in other major economies of the world. Be it manufacturing or the service sector, all are pointing towards rapid growth. The figures of receipts of GST corroborate this. The Rupee has weakened slightly against the Dollar, but it is not the same as in the past because whenever the Indian currency was weakening, it was weakening against all the major currencies of the world.

But in the last 5 months, the Rupee has strengthened against Pound, Euro and Yen. The strength of the Dollar against the Rupee and all major currencies is due to the rise in interest rates in the US and global turmoil, therefore, this strength is believed to be short-lived. But the main concern of India's policy-makers is inflation. Inflation in India remained at a very low level in the range of 3 to 4 per cent for a very long time. But for some time it peaked at 7 per cent, before declining recently.

Due to high inflation, the Reserve Bank had to increase policy interest rates, which also had an impact on growth. In the event of a high rate of inflation, the government will have to make concerted efforts to curb inflation. There have been many commendable efforts to combat inflation, including the purchase of crude oil from Russia and Iran at cheap prices, increasing agricultural production in the country, and reduction in tax on petrol and diesel by the government. Due to all these efforts, the rate of inflation in India is much lower than that of the US and UK.

Globally, countries are facing food inflation, rising fuel prices and rising prices of essential raw materials. India is also being affected by the same, maybe to a lesser extent. But efforts are on to contain inflation by increasing tax revenues and consequently controlling the fiscal deficit. There is no doubt that if India is able to control inflation, then we will be able to increase both our GDP and employment by promoting manufacturing in various sectors of the country, supported by the efforts of self-reliant India.

MS: What role should the government play in promoting innovation and entrepreneurship in India via AI? And how must it ensure minimal job loss?

Dr. Mahajan: The challenge before India today is not only to make up for its unsatisfactory performance in the first, second and third industrial revolutions but also to participate actively in the fourth industrial revolution. It is true that there can be some reduction in employment generation due to robotics, artificial intelligence, drones etc., but the same can be made up by creating jobs through the same by being pioneers in these technologies in the world. However, we must not forget that due to new technology, cost also comes down.

For example, companies that use artificial intelligence, robots, drones, etc., reduce their cost. Those industries become more competitive in the market as costs come down, but the indiscriminate loss of employment in the name of new technology also cannot be justified. In such a situation, policymakers have to show utmost sensitivity and serious consideration to the selection of technology.

About Dr. Ashwani Mahajan

Dr Ashwani Mahajan teaches Economics at the University of Delhi and is an Author, Columnist and Policy Interventionist. He is also the National Co-Convenor of Swadeshi Jagran Manch

He is visiting professor at Pacific University, Udaipur and Mewar University, Rajasthan. He has attended five Ministerial Conferences held at Geneva, Bali, Nairobi, Buenos Aires and Geneva.

His policy interventions include the withdrawal of a controversial ordinance on land acquisition, the FDI policy of the government especially retail trade and e-commerce, withdrawal of India from the Regional Comprehensive Economic Partnership (RCEP) deal. He believes in a development model, which cares about the last man in the queue and favours integrating growth with employment generation.

About the Interviewer

Mahima Sharma is a Senior Journalist based in Delhi NCR. She has been in the field of TV, Print & Online Journalism since 2005 and previously an additional three years in the allied media. In her span of work she has been associated with CNN-News18, ANI - Asian News International (A collaboration with Reuters), Voice of India, Hindustan Times and various other top media brands of their times. In recent times, she has diversified her work as a Digital Media Marketing Consultant & Content Strategist as well. Since March 2022, she is also an Entrepreneurship Education Mentor at Women Will - An Entrepreneurship Program by Google in Collaboration with SHEROES. Mahima can be reached at media@indiastat.com

Disclaimer : The opinions expressed within this interview are the personal opinions of the interviewed protagonist. The facts & statistics, the work profile details of the protagonist and the opinions appearing in the answers do not reflect the views of Indiastat or the Journalist. Indiastat or the Journalist do not hold any responsibility or liability for the same.

indiastat.comJune, 2023
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