Advantages of lowering import barriers and FDI

  • From the self-sufficiency objective of the pre-reform era, we have moved on to the phase of increasing liberalisation.
  • Falling import barriers have produced prosperity because this encourages specialisation in areas where India is competitive, and discourages wasteful investment in uncompetitive areas.
  • The self-sufficiency philosophy ignored the high cost of trying to produce everything-it deliberately shifted India’s energies from high-productivity areas to low-productivity ones.
  • Second, some inputs will always be imported, and high import duties converted India into a high-cost production centre, hitting consumers as well as the competitiveness of Indian producers.
  • High import duties on equipment ensured a permanently high-cost structure that made goods uncompetitive even when labour was dirt cheap.
  • Liberalisation in 1991 drastically reduced tariff and non-tariff barriers to imports. This enabled Indian companies to combine the best of imported inputs with the best of indigenous inputs.
  • Crux of the FDI argument: Foreign retail chains will devise ways for their suppliers to combine cheap imported inputs with domestic ones to produce world-class goods. And competing with them will enable Indian retailers to do something similar.

 

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