India’s economy needs to be opened up – completely. Over the past decade, various incremental steps have been taken to “reform” the Indian economy. The time has now come to open up and encourage free trade without restrictions. Of course, there will be howls of protest from many domestic companies and industries. The answer to them should be: become competitive or die.
Indian entrepreneurs are a smart breed. They will not die. They will compete. During the licence raj of the past, they found many ingenious ways to work around the system. There is every reason to believe that in an open economy, they will be innovative and thrive. The beneficiary will not be just them but the consumer.
One of the biggest differences between India and China (or for that matter other such countries) is in terms of productivity. So far, Indian industry has made improvements but slowly. Now, the combination of new technology and the threat of competition will ensure radical improvements. In the process, some will die, but the surviviors will be good enough to take on the best in the world.
India needs to focus on getting much larger foreign direct investment into the country. China has received USD 350 billion in FDI, and growing at USD 40-50 billion a year. India gets a fraction of that. This can make the big difference.
As a starting point, India needs to position itself as an alternative to China in terms of manufacturing in the Asian region. Global companies like to reduce country risk, so India can be that alternative (just as now there is talk of China being an alternative sourcing point for software services). This will help attract FDI.
Three components to attract investment into India are: privatisation or closure of loss-making public sector undertakings (PSUs), alteration of labour laws to ensure ease of hiring and firing, and creation Special Economic Zones (SEZs) to attract manufacturing. Among other enablers: removal of red tape, elimination of subsidies, improvements in the legal system to ensure faster resolution of cases and protection of intellectual property rights, and severe punishment for corruption.
Indian consumers need to be exposed to the best brands in the world. Conversely, the best Indian brands need to be encouraged to sell internationally. There is no room for inferior quality products in the free economy. If Indian companies cannot produce the best at the right price, some of them may chose to become traders. Let them. The marketplace needs to set the rules of the game.
A side-effect of the open economy, increased foreign investment and rising incomes will be the creation of a bigger and rapidly growing domestic market. This will then provide the base for Indian companies to achieve economies of scale to target global markets.
