Critically examine the liberalization programme in India – Essay

1. Internal challenges:

Major domestic challenges to liberalization still remain. Trade and competitiveness depend on the quality of physical infrastructure in the form of roads, ports and power.

India is deficient in all these. Labor laws in India have negatively affected the manufacturing sector. India’s fiscal deficit and the consequent impact on interest rates can have a deleterious effect on investment in infrastructure and other areas. India’s states have become far more unequal in economic terms in the 1990s than they were in the 1980s.

Competitiveness in Manufacturing:

Markets need to be well connected in order to reap the benefits of greater market orientation. India’s roads, ports and airports are in dire need of expansion and up gradation. Second, the manufacturing sector suffers from the poor quality and quantity of electricity generation.

India needs to increase power generation to 1 million megawatts. Frustrated with the government’s electricity generation, India’s large industrial houses are generating their own needs. There is rampant theft and virtually free electricity, which is being paid for by the government out of the taxpayer’s pocket.

This adversely affects the quality and quantity of power generation for those that are willing to pay. The ease for reducing political intervention in power generation and distribution by enforcing a powerful and benevolent independent regulator is a strong one.

Third, India’s labour laws make it very tough to fire anyone in the organized sector. Trade unions in India represent approximately 8.5 per cent of India’s skilled workers. Over 90 per cent of the work force in the unorganized sector has no job security. Job security increases with a firm’s size.

The liberalization programme since 1991 has not been able to make a dent on job security of the privileged few. Low labour productivity in manufacturing sector due to the excessive job security for a minority of workers, has adversely affected domestic and foreign investment in export oriented manufacturing sector.

The combined fiscal deficit of the Centre and the states at about 10 to 11 states within the Indian union to seek developmental resources on their own.

The Centre’s role as the provider of resources to the states declined and states began competing for private investment. Better-governed states such as Karnataka, Andhra Pradesh, Tamil Nadu, Maharashtra and Gujarat could succeed in attracting more investment.

The ability of states to lure private capital has increased the disparity among the performing and non-performing states.

In the 1980s, the fastest growing state was growing about twice as fast as the slowest growing state. In the 1990s, the backward state of Bihar grew at 2.7 per cent per annum compared with Gujarat’s 9.6 per cent. If we consider per capita growth rates, the disparities are even more pronounced.

Among the backward states, Madhya Pradesh and Rajasthan were able to grow at a rate higher than 6 per cent per annum in the 1990s. The challenge for economic liberalization is to improve the lot of the worst governed states like Uttar Pradesh and Bihar, so that inequality does not breed enmity among states.

2. External challenges:

If India’s liberalization has to succeed it needs to access foreign markets. Industrialized countries are practicing protectionism, fearing the cheap labour advantage of exports from developing countries.

The World Trade Organisation (WTO) has assured the liberalisation of textile trade, but industrialized countries have not shown signs of liberalising market access. Second, labour and environmental standards are emerging as the new non- tariff barriers to trade.

If import liberalisation in India is not matched with access to the markets of foreign countries, this may be a setback for India’s trade and further liberalisation.

Textiles:

The Multifibre Agreement is one of the most blatant double standards in international trade. It discriminates between countries and quotas distort trade to a much greater extent than tariffs. Moreover, quotas are less transparent than tariffs in terms of the impact of distortions.

The US and the EU accounted for 73% of India’s total garment and textile exports. A study found that the US was more restrictive towards garment exports from India than the EU. For the US as a whole, the level of protection in 1999 was greater than 1993. The same was true for the EU as well.

Trade and Labour:

India’s objection that the International Labour Organisation rather than the World Trade Organisation should deal with labour standards a very strong case.

India worries that labour standards could become another non-tariff barrier to trade. Rich countries argue that poor countries have lower wages and work conditions. This hurts better-paid workers in rich countries. They also argue that workers have right to certain minimum standards of livelihood.

Professor Paul Krugman, has argued persuasively, that trade has a positive impact on incomes. Industrialised countries should lei rising incomes follow trade rather than force developing countries to ensure high incomes and work conditions before allowing developing countries to trade.

The logic of Krugman’s argument suggests that few wages can facilitate international competitiveness in a particular sector. When this comparative advantage generates exports and improves productivity, it will have a positive impact on the wage rate of the poor low wage country.

Poorer countries like India can build their comparative advantage through a low-wage rate. However, the phenomenon of a low-wage rate will be short lived, as export-promotion would lead to a rise in the wages of the poorer country.

This argument is supported by the success stories in East Asian countries like South Korea and Taiwan. Dictatorial regimes in these countries, which worked closely with industry arid repressed labour rights, could not stop the rise in wages, after these countries participated in export-oriented trade and enhanced their productivity. 7 sense economic ideas do have a place in the US policy set up.

However, if special interest groups like labour unions in the US and Europe hijack policy for the sake of protecting some job this will be to the detriment of both developed and developing countries. Labour rights, especially the rights of women and children demand greater investment in human capital formation through better health and education.

The glamour for trade restrictions in the name of labour rights will increase the cost of goods in the US and lead to unemployment in developing countries like India. Trade and Environment: India has objected that ecological standards may become a non-tariff barrier to trade.

The benefits from trade liberalisation may not be realized if special interests in the US try to hide behind turtle excluder devices in order to check shrimp exports from India into the US. Equipment used for catching shrimps in the Bay of Bengal was thought to be endangering turtles. Since, the life of turtles in the Bay of Bengal was dear to the US is citing ecological considerations only to protect its domestic shrimp industry.

If environmental considerations have to play their legitimate role in trade rather than just being a protectionist measure, it must be de-linked from the WTO. A Purely scientific Global Environmental Organisation could pursue the objective °f enlightening the world about the real environmental problems facing trade.