Why is India Turning Inward When it Stands to Gain from Opening up its Economy

Can we become a $5 Trillion Economy without Reforms?

India benefited immensely from opening up its economy in the 1990s. Indeed, its embrace of globalisation and liberalisation along with free trade resulted in nearly 140 Million of Indians being lifted from poverty.

Moreover, successive governments since the time India liberalised its economy in 1991, have more or less, followed the same path that it adopted at that time.

Given this background, it is surprising that the present government is dillydallying on economic reforms and worse, it is actively deglobalizing and turning inward and protectionist as well as erecting walls to free trade.

What is even more baffling is that the Prime Minister, Narendra Modi, came to power riding on the back of his track record in his native state of Gujarat as reformer and a believer in free market capitalism.

In addition, while the ostensible aim of the Modi 2.0 government is to make India a $5 Trillion Economy, the reality on the ground is that it is doing the very opposite of what it would take to reach that goal.

Apart from that, the economy is in the throes of an excruciating slowdown, that needs more reform and not protectionist measures.

Understanding the Logic and Ideology of Pro Business and Anti Globalisation

So, why is the Modi Sarkar suddenly appearing unfriendly to markets and reforms?

What explains its snubbing of Jeff Bezos, the founder of Amazon, when he was in India recently?

Moreover, what is it that caused the government to back away from the RCEP (Regional Comprehensive Economic Partnership), which is a Free Trade Agreement, between Asian countries that would have created a single market rivalling that of the European Union?

The answers to these questions can be arrived at after a careful analysis of the Political Economy under the present government.

As it is, the ideologues behind the government were never great fans of what is commonly known as Western led Free Market Capitalism.

While they are mostly for the business community, the ideology is more towards the Swadeshi variety rather than what they perceive as Neo-colonial attempts at conquering India.

Moreover, the promotion of domestically spawned variations and alternatives to the Western model and at the same time, being pro business and trading communities is not contradictory when one studies the thought processes of the people shaping the economic agenda of the present government.

This is the reason for the animosity that is reserved for anyone who has studied and worked abroad as an economist such as Raghuram Rajan.

What Made the Modi 2.0 Government Shift from its Previous Reform Friendly Avatar?

Having said that, it can also be argued that the Modi 1.0 Government was very pro reforms as can be seen in the various reforms that were undertaken and the numerous bills passed as well as the laws that were made. Right from the push to the Infrastructure to the GST (Goods and Services Tax), and the attempts at reforming land and labour laws, the previous Avatar of the government was indeed more market friendly than its predecessors.

Of course, Demonetisation was certainly baffling. On the other hand, the current state of the Economy means that India stands to gain from more reforms such as the Bankruptcy Laws that are now speeding up and disposing of the Deadweight Bad Loans and Moribund businesses.

We need more of such laws and at the same time, more reforms.

However, it is also a fact that a few Indian Mega-rich business houses are doing extremely well which again proves our earlier argument that the Modi Government is not averse to markets and business, as long as they are of the Swadeshi variety.

The Global Rise of Protectionism and Economic Nationalism and Direction of Modi 2.0

Another point or argument about the direction of the government lies in the global currents of populism and protectionism wherein most countries the world over are actively turning inward just like what India is doing.

Right from the United States under President Trump, with his Make America Great Again to the Brexit champions who want the United Kingdom to be independent from centralised economic control, there has been an upsurge of protectionism around the world.

This explains the direction that the Modi Government is now taking mostly because the economic nationalism ideology that it shares with the aforementioned countries and their rulers means that it wants to be pro business but not, pro globalisation.

However, it needs to be mentioned that globalisation isn’t dead yet and the Indian government would well do to reap the benefits of the present global currents.

For instance, it can embrace those firms that are affected by the ongoing Trade War between the US and China and ensure that its Flagship Make in India policy gets a boost.

Moreover, India has always traded with the external world and hence, it is in our DNA and so, it does not make sense to turn our backs to the world.


Last, whether we want to open up or turn inward, the larger point about following standard economic principles and not giving into nutty ideas and other schools of thought that are neither here nor there in terms of their orientation would benefit India.

Indeed, if not anything, it needs to be remembered that all economies under the capitalist model have the same underlying foundations and hence, tearing down the structure without considering whether the alternatives are solidly founded would do the country irreparable harm in the future.

To conclude, India is at a crossroads and the decisions we take now would impact the coming generations.

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