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Economic Liberalization and its faults
Context: Private sector led economic growth and its impact on countries
With Economic Liberalization in India in 1991, foreign manufactured goods start entering the country. The concept of Self-Reliance was compromised and domestic manufacturing was not promoted and India relied heavily on imports. This has exposed India to the negative impacts of private sector led economic growth when country is fighting a deadly disease.
This brings us to the question of faults that were created by Economic Liberalization. In this article, we will explain the following:
- What is Economic Liberalization in India?
- How development of global supply chains impacted the world?
- How COVID-19 has exposed issues of private sector led economic growth?
- How Economic liberalization has impacted the government and manufacturing capacity in India?
What is Economic Liberalization in India?
- New Economic Strategy of 1991 give rise to LPG (Liberalization, Privatization and Globalization) reforms in India.
- Liberalization of the Indian industry has taken place with respect to abolishing license requirements in most of the industries across the country. Today, only 5 industries require a license (Distillation and brewing of alcoholic drinks; Cigars and cigarettes of tobacco and manufactured tobacco substitutes; Electronic aerospace and Defense equipment: all types; Industrial explosives including detonating fuses, Safety Fuses, gun powder, nitrocellulose and matches; and Hazardous chemicals).
- Removal of restrictions on the movement of goods and services across the country, freedom in fixing the prices of goods and services, reduction in tax rates, simplification of procedures for imports and exports and easier paths to attract foreign capital and technology in India.
How development of global supply chains impacted the world?
- With globalization, developed countries attracted by the cheap labour and raw materials started shifting their production plants to developing countries.
- Today, a single finished product often results from manufacturing and assembly in multiple countries, with each step in the process adding value to the end product.
- The value addition was done by a few developing countries, the major one being China.
- China became the global manufacturing hub due to abundance of cheap Chinese labour that brings down the production costs, strong business ecosystem, lack of regulatory compliance, low taxes and duties, and competitive currency practices.
- In health sector, China became global supplier of active pharmaceutical ingredients (API), personal protective equipment (PPE), and medical devices diagnostics.
How COVID-19 has exposed issues of private sector led economic growth?
- Loss of manufacturing base at home country has compromised the effective response against COVID-19 due to shortage of life-saving equipment.
- Countries are now asking their domestic manufacturers to produce medical devices and equipment to fight the pandemic as imports are restricted due to lock downs all over the world.
- UK Prime Minister has called for National efforts for ventilator production. Car makers Ford, Honda, Rolls Royce have been asked to make health equipment like ventilators.
- USA has invoked Defense Production Act, 1950. Under the act, The White House has asked companies to ramp up production of protective gear needed by health professionals on the front lines of the crisis as there is huge shortage. Companies like General Electric, General Motors, 3M have been asked to ramp up their production.
- Spain has nationalized all its private hospitals and has declared state of national emergency due to wide spread of the COVID-19.
- On the other hand, Chinese billionaire Jack Ma sent 5.4 million face masks, 1.08 million detection tests kits, 40,000 sets of protective clothing and 60,000 protective face shields to the U.S. He also donated supplies to Japan, South Korea, Italy, Spain and Iran.
- This has exposed over dependence of countries on imports of essential goods.
- Shifting of production facilities in other countries may lead to gain in private company’s profits but it compromises requirements of a nation in situations like this disease outbreak.
How Economic liberalization has impacted the government and manufacturing capacity in India?
- With LPG reforms of 1990-91, License Raj came to an end in India. Through License Raj system government used to plan everything and allocate the proper resources but instead it increased corruption rate and frauds that lead to decrease in growth rate.
- With removal of License Raj, government now do not ask manufacturers any information regarding their production which is crucial to make some policy decisions.
- Due to this government took weeks and several meetings to gather information about stocks and the production capacity of pharmaceutical companies in the wake of COVID-19.
- Similarly, it became difficult to gather data on India’s production capacity of PPE, medical devices and diagnostics. The only government data available in the public domain is with regard to the production of vaccines.
- Private sector with the aim of enhancing profits goes for imports of cheap raw materials. According to a report of the Confederation of Indian Industry (CII), nearly 70% of India’s API (Active Pharmaceutical Ingredients) import is from China, though India is key supplier of generic medicines to the world market.
- The Union government announced the constitution of a committee under the chairmanship of Eshwara Reddy, Joint Drugs Controller, Central Drugs Standard Control Organization (CDSCO) in March to address the issue of drug security in the country. It also announced a package to revive the API industry in the country.
- Dependency on imports of chemical components like Reagent which is used in COVID-19 testing has led to expensive test costing Rs 4,500 per test. With huge population of 1.33 billion, affordable testing is what we want.
- Pune-based Mylab has recently got commercial approval by the Indian FDA/Central Drugs Standard Control Organization(CDSCO) for an affordable corona virus testing kit. These kits are expected to be priced approximately at Rs 1,200.
- Domestic manufacturing of chemicals and other medical devices will give advantages of low cost of manufacturing, the companies would be able to save on the freight charges, import duties and other incentives offered by the government like exemption from central sales tax and excise duty. It will help the researchers to enjoy cost effectiveness at cheaper prices thus giving them value for money.
Global production chains have many positive impacts on an economy but it erodes the domestic manufacturing capabilities of many countries. In order to fight global crisis like COVID-19, countries must be self-sufficient in at least health sector.
While India’s pro-active, preemptive, and a ‘whole government’ approach to fighting the COVID-19 pandemic is happening on one side, the slowdown in trade between India and the rest of the world works as counter-productive on the other side. This slowdown in trade is disrupting the supply chains of many essential commodities needed for the fight. The list of such essential commodities includes COVID-19 testing kits, masks, alcohol-based sanitizers, personal protective equipment (PPEs), dress materials for front line health workers, ventilators (breathing devices) for patients, etc. India has a comparative advantage with the human resource to produce this health infrastructure.
The challenge is to produce these as quickly as possible and in bulk. This situation prompted the Government of India to vigorously activate the ‘Make in India’ Programme, and involved various Research & Development (R&D) institutions of the country. Domestic manufacturing of essential medical devices can not only overcome trade barriers, but also ensure product quality and market stability. During the pandemic, counterfeiting and price gouging of imported goods happen frequently with surging demand.