The Logic Of Swadeshi Economics

The Logic Of Swadeshi Economics

Bibek Debroy
December 20, 1997

Economic nationalism is in. Consider Mukesh Ambani's speech at Business India's "Businessman of the Year Award 1997". "We need not feel embarrassed in advocating economic nationalism... Our government functionaries must also not feel shy in working closely with business. Jointly they should ensure that India's economic interests are protected through trade, investment and foreign policy measures."

Government working with business is acceptable, protecting interests of domestic industry is not. As a consumer, I do feel embarrassed and indignant when interests of producers masquerade as India's economic interests. The speech also argues: "The US administration has no qualms in placing trade restrictions on textiles and high tariffs on agro-products. I understand their logic ...Policies are moulded to serve national interests." Several countries are protectionist.

Several countries protect domestic industry at the expense of domestic consumers. But this has no logic. Studies have documented losses to American consumers as a result of trade restrictions on textiles. The argument that if someone else is stupid, I need to be stupid, is untenable. Even if Americans are protectionist, welfare gains can accrue to India from unilateral liberalisation. On balance, gains to consumers outweigh losses to producers.

But the voice of the consumer is a voice in the wilderness. What happened to the voice in the wilderness? John the Baptist's head was eventually chopped off. Therefore, economic agendas of all parties will distinguish between potato chips and computer chips. Insurance, if opened up at all, will be opened up only for Indian companies. With the imminent shakeout in the corporate sector, regardless of who forms the government, there will be demands for protecting indigenous industry.

Tariff and quantitative restrictions (QRs) reform can wait. We have provisions for anti-dumping duties and for safeguard duties. Under the safeguards clause, we even have provisions for imposing QRs. The currency crisis demonstrates that we cannot encourage foreign institutional investments (FIIs). As for foreign direct investments (FDI), the 50th year of Independence is a good time to resurrect memories of the swadeshi movement, as a prominent industrialist has attempted.

International trade theory is nothing but a micro theory of resource allocation. Borders are irrelevant, but for artifices created by governments, and there is no difference between theories of inter-regional and international trade. Thus, there can be no economic argument in favour of being exploited by a domestic industrialist as opposed to being exploited by Pepsi.

There can be a moral or ethical argument, but an ethical argument in favour of such nationalism is logically difficult to establish. Therefore, I read Ajit Dasgupta on Gandhi's Economic Thought (Routledge, 1996). The quotes substantiating Gandhiji's arguments on swadeshi are revealing.

Swadeshi was based on a neighbourhood principle, as opposed to cross-border transactions. It is "a principle which is broken when one professes to serve those who are more remote in preference to those who are near". Therefore, "so long as the Godhar farmers and weavers could supply the wants of the Godhra citizens, the latter had no right to go outside Godhra and support (say) the Bombay farmers and weavers."

Alternatively, "Is it right that instead of getting stone from Ranavav, you should order your requirements from Italy? How can you afford to order your cloth or ghee from Calcutta in preference to the cloth woven in your own villages and the ghee made from the milk of your cows and buffaloes?" There is more.

It is preferable "to send money to Manchester and to use flimsy Manchester cloth than to multiply mills in India. By using Manchester cloth we only waste our money, but by reproducing Manchester in India we shall keep our money at the price of our blood, because our very moral being will be sapped, and I call in support of my statement the very mill-hands as witnesses."

This is a logical, ethical argument, even if one disagrees with its contentions. If we are going to invoke Gandhiji, and not Ranade, to justify self-reliance, we should get the notion of self-reliance right.

More importantly, the Gandhian paradigm never visualised state intervention to bring about ethical preferences in favour of the neighbourhood. If one is going to invoke Gandhiji's name, the last thing one should do is to lobby for support from the government.

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