July 2, 2021public policyeconomicshistory

Swadeshi in a free society

In the Indian Public Policy Review, I present the very interesting economic history of Swadeshi and self-reliance and uncover some very unexpected facts. This post is an excerpt from the concluding part of the paper.

You can download the entire paper from IPPR in PDF.

Swadeshi’s greatest success has been in its ability to mobilise public opinion towards a political objective. It can be argued that swadeshi sentiment resulted in the promotion of Indian crafts and industries in the late 19th century and independent India’s pursuit of self-reliance created a modern industrial core. Now as in the past, the sentiment has sparked a spirit of entrepreneurship and spurred investment in manufacturing. Counterfactual arguments are impossible to prove. It is difficult to prove whether swadeshi and self-reliance created new investment or merely shifted it to import substitution.

IPPR Indian Public Policy Review is an independent open journal of economics, politics and strategy.

It is important, however, to ask what the opportunity cost of swadeshi was — and is — before arriving at a definitive judgement. Nationalists must be concerned with economic outcomes, rather than be wedded dogmatic policy prescriptions. Strengthening a nation requires the rapid acquisition of widespread material prosperity, and swadeshi and self-reliance must be subject to critical examination. India’s economic trajectory clearly shows that Ranade was right. Self-reliance is best achieved in an open economy.

The burden of boycotts and import restrictions falls disproportionately on those with lower incomes, subtracting a bigger share of their disposable incomes and savings. Neither nationalism nor patriotism can condone hurting the most vulnerable members of one’s own population in the expectation that doing so will coerce a foreign government. The imperative against import controls is categorical even if the distributional effects are ignored. If the latter are included in our analysis, import restrictions amount to coercive transfers from consumers to domestic capitalists. If the latter are relatively better off than the former — as is the case in India — then such transfers are regressive in nature.

My story of the Swadeshi narrative was first published in Live History India in April 2021.

India’s experience over the past century offers the strongest argument against protectionism, even of infant industries” in the interest of self-reliance. Import controls are sought to buy time for domestic firms to gain scale and competitiveness. However the right time” for opening up never arrives because the world moves ahead in the meantime. As Bhagwati and Desai showed as far back as in 1971, sheltering domestic firms from international competition only imposes higher costs on consumers, reduces savings and investible surplus and coddles the holders of licenses to diversify into other protected industries. The relative fate of the automobile industry before and after the liberalisation of 1992 offers stark evidence of the relative performance of protectionist and open economy policies. A new form of the protectionist argument projects ambition to create national champions along the lines of South Korean chaebols. Unfortunately, scale doesn’t change the fundamentally flawed logic, only exacerbates it. If protectionism increases rent-seeking and corruption, promoting national champions risks policy capture. As Shenoy warned, the risk is to liberal democracy itself. It is possible to end up in the unintended Korea. After all, juche, or self-reliance, is the state philosophy of North Korea.

Geopolitically too, it is an open-economy that offers the pathway to greater power and influence. A protected economy holds little interest for other countries and thus loses the ability to promote its interests. Its foreign relations are characterised by economic disputes and conflicts, and before long, its elites become caught up in a siege mentality. India’s experience before and in the years following the 1992 reforms is instructive. Until the 1980s, India was considered a Third World developing country’. By the late 1990s, it became an emerging economy and a rising power.

If swadeshi does not do too well in the economics test, is there — as Gandhi asserted — a moral case for it? Individuals are entitled to live by their own values, but if swadeshi is to be a public virtue the case for it must be made on non-arbitrary grounds, employing reason. Utilitarianism indicates that there is no special morality in preferring local products. On the contrary, intentionally subjecting others to avoidable suffering is little moral justification. If there is a moral argument, it is in favour of rapid economic growth that raises incomes, living standards and life expectations of the people of India. Guha highlights a letter to Gandhi by a Kantilal Amratlal accusing the great leader of hypocrisy and chauvinism. Rejecting the notion that it was sinful to use imported goods, the correspondent stated that national pride is not the ultimate sentiment” and Gandhi’s vision was narrow for country and life are transient, not eternal.” (Guha, Gandhi: The Years That Changed the Worl 2018)[1]

Swadeshi, like satyagraha — the other famous instrument of the Gandhian toolkit — needs to be reviewed in the context of a liberal democracy. Ambedkar described protests and civil disobedience as a grammar of anarchy” in a free republic, where constitutional methods are available. Similarly, the political case for swadeshi is weak in an independent liberal democracy where there is no colonial power to resist, where foreign companies do not enjoy special privileges and where trade policy is in the hands of a popularly elected government.

Furthermore, few proponents of swadeshi are clear about exactly how local it should be. India is a subcontinent and each region has its own cultural consciousness and identity. Should the swadeshi principle operate at the sub-national level? Only Gandhi is intellectually honest in answering this question in the affirmative, and his answer undermines national unity. If states, districts and villages enact laws or socially determine to prevent trade across their boundaries, India will turn into a mere geographic entity. Not only does protectionism, nativism and localism result in inefficient, sub-optimal and unsustainable firms and polities, but as Tagore feared, leads to the shrinking and the closing of the mind.

Does swadeshi have a place at all in the future life of a liberal democratic republic? Yes, as a form of social consciousness, freely held, promoted and acted upon by individuals to who it appeals to. Consumers and private investors have the economic freedom to exercise their choices and preferences. Recall that National” Nabagopal and his patrons did not need the permission or the support of the Bengal government to produce, promote and consume swadeshi goods. Market economies have numerous ways of changing consumer behaviour and driving consumer preferences towards desired causes. As with, say, organic products, voluntary swadeshi also allows the discovery of the premium people are willing to pay for their preference. However, other than in strategic areas, there is no case for promoting self-reliance through tariffs and import controls.

Two centuries on, the compass of economic nationalism is better pointed to samarthya (capability) rather than swadeshi. Capability does not mean everything must be produced within the borders of one’s own country, even if it can be. Rather, it suggests the power to access whatever is desired regardless of where it is produced. Samarthya is more than self-reliance. It is achieved through rapid economic growth and free trade. We must think, therefore, in terms of the world.”

[1] Guha, Ramachandra. 2018. Gandhi: The Years That Changed the World Peguin Allen Lane.

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