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In India, nurturing the growth of local economic ecosystems – analysis

Scientists speculate that nature sends viruses to stop other things growing too fast that threaten the health of the whole system while caring only for their own health. Unbridled globalisation was threatening the well-being of societies and of the natural environment. Covid-19 has stopped this from spreading any further. Physical lockdowns to contain the spread of the virus have broken up global supply chains. Businesses, as well as humans, are being compelled to find resources locally. A “vocal for local” movement, which was growing even before Covid-19, was described as retrograde by the “vocal for global” lobby. Local has now become a necessity for business and human survival.

But even though there is clearer evidence now that the model of globalisation which was founded on more trade across borders is not sustainable, eminent economists continue to defend it. Economic history has disproved a foundational premise of the free trade theory. Nations have grown, through history, by learning to do what they could not do before, and doing it better than others — Japan after the war; China in the 21st century; and the United States (US) in the 19th and 20th centuries. Industrial nations, unlike natural resource-rich nations, are not born with competitive advantages; they develop them.

The simplistic free-trade theory must be supplemented with theories of how humans, businesses, and nations, learn new capabilities. And, since humans, businesses, and nations will compete, the only sustainable competitive advantage of businesses and nations is their ability to learn faster than any potential competition. Therefore, an industrial policy focused on increasing the capabilities of people and businesses within the nation is imperative for the survival of the nation and the well-being of its citizens. This is real atmanirbharta.

There is continuing conceptual confusion among some of India’s policymakers. While they are beginning to recognise the need to be atmanirbhar (self-reliant; which is more urgent because of the China threat), they continue to propound the necessity for Indian businesses to be connected with global supply chains. There is nothing wrong with taking advantage of global supply chains.

However, they will hardly provide India and its businesses large channels for growth in the next two decades. India must grow local supply webs, radiating outwards as far as geopolitical boundaries and trade barriers will allow them to spread. As a recent UNIDO paper says, a shift in business and national economic strategies is required away from cost-efficiency, which global sourcing enabled, to increases in market focus. “Europe for Europe, Asia for Asia”, they say. India for India, we may add.

India has the potential to be a large market. It will be a large market when more Indians earn higher incomes. For more people to earn higher incomes, they must produce something that someone else will buy. Markets will be more local, and production will also be more local. India needed an employment policy with an industrial policy ever since it embarked on its trade liberalisation path in the 1990s.

For nations to become competitive, it is not enough to develop a few, large, world-class companies. Industrial ecosystems within countries, comprising webs of small and large, and formal and informal enterprises, must compete with ecosystems in other countries. Indeed, large companies from a country cannot become competitive unless they are sustained by a competitive ecosystem. Therefore, large companies must nurture small domestic companies, and all of them must nurture the people who work in them. Human beings are the only “appreciating assets” any enterprise can have. Because they have the ability to learn new capabilities if they are given opportunities to do so. Fortunately, India is abundantly endowed with people. They will be India’s source of sustainable competitive advantage when India reorients its policies to nurture the growth of local economic ecosystems.

Arun Maira is former member of the Planning Commission and former chairman of BCG India

The views expressed are personal

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