India’s first-ever prime minister Jawaharlal Nehru famously believed that manufacturing its own railway components, airplanes and guns was central to maintaining the country’s hard-fought political independence. Speaking shortly after independence, he summed up his country’s approach to trade and development with these words warning about relying on imports: “Whenever these countries wished, they could stop sending these things. We would thus remain slaves.”
To this end, Nehru instituted India’s policy of “self-reliance” which sought to discourage importation using bans and tariffs on the one hand and encourage local manufacturing and economic growth on the other hand by reserving certain sectors for the exclusive participation of “small scale industries” (Nigerian readers may understand this reference by substituting it with the term “cottage industries”). Subsequently, India also instituted the “license permit raj” which was a regulatory regime ostensibly created to ensure that all commercial activity in India was geared toward the goal of self-reliance and promoting grassroots economic growth. And the result?
India’s cautionary example
The great thing about history is that it provides clear and incontestable answers to questions that were once burning debates. In this case, the question was “Does state-driven, top-down import substitution work for a modern postcolonial state?” The answer was a resounding “not even close.” First of all, the License Permit Raj has the dubious distinction of being the most economically repressive regulatory policy ever formulated in a nominally democratic modern state. Rather than help India toward its dream of total self-reliance, it instead turned the Indian state into a lumbering behemoth that produced no value and consumed everything in its path.
Far from promoting grassroots economic participation and locally-driven industrialization according to the doctrine of Nehru, it turned out to be the most pointless and expensive set of bureaucratic hurdles ever erected in modern human history. For a foreign investor to invest in India, or for an Indian to set up a large scale manufacturing operation, there were an estimated 85 separate licenses and permits that needed to be processed under the raj, making any kind of large-scale capital importation or innovation functionally impossible.
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As it also turned out, even if a handful of investments and businesses did manage to scale through this bureaucratic hellscape, it did not mean that their operations would be effectively regulated or beneficial to the Indian people. This was underlined by Union Carbide’s 1984 factory disaster in Bhopal, India, which killed at least 3,700 – a tragedy caused by lax maintenance of a factory containing dangerous chemicals. And that was just the raj. The SSI reservations and import restrictions were an even bigger disaster for the Indian economy. Below is an image representing a tiny subset of the activities effectively walled off from large scale investment by India’s SSI reservation policy.
The SSI, which was supposed to ensure that poorer Indians had industrial sectors and activities reserved for them, turned out to be a miserable failure. It turned out that subjugating basic economics to emotions and political expediency did not work. Without access to the capital and infrastructure needed to make something of their manufacturing efforts, India’s SSIs stumbled along for decades, maintaining hundreds of millions in abject poverty. By 1991, with a population of nearly 900 million people, India’s GDP stood at a miserly $270 billion, making it over 6 times poorer than Nigeria currently is. Only after Narasimhao Rao came into power and swept away the entire “self-reliance” policy along with the license raj and most SSI reservations did India begin its growth phase.
“Self Reliance” is a flight of fancy
Apart from the economic failure of India’s self-reliance doctrine, it is important to point out that the only countries in the modern era that have ever attempted to become inward-facing island economies adrift from global trade, were countries that were trying to iterate into Marxist, Communist or anti-capitalist states. The USSR, North Korea, Chairman Mao’s China, Julius Nyerere’s Tanzania, Jomo Kenyatta’s “Harambee” (rural self-help) movement in Kenya, Fidel Castro’s Cuba – what all these countries had in common was a desire to define themselves in opposition to the perceived enemy of imperialist capitalism.
Of all these countries, only the USSR managed to organise itself effectively using these principles – and even then only for a few decades before decaying from the inside and falling apart around the same time as India’s experiment was falling apart. North Korea’s ‘juche’ philosophy yielded the caricature country we all know today. Mao’s China also ended up entirely reversing economing Maoism and becoming a capitalist country. Tanzania went through devastating famines and also let go of Nyerere’s ‘Ujamaa’ flight of fancy. Kenya too found its way to a broadly capitalist system after wasting many years experimenting with flavours and hues of Marxism. The less said about Cuba the better.
And the moral of the story is that global trade is a fact of the modern world. Any country that tries to define itself in opposition to global trade will only create poverty and dictatorship for itself. It is a waste of time. History tells us this very clearly.
