Recent controversy over Laxmi Mittal's bid to take over Arcelor has once again raised the issue of economic patriotism. The issue is tangentially related to swadeshi ofcourse, because while Mittal is an Indian by birth, he and his company are currently based in Europe.
This post is an overview of Swadeshi and why it is a bad philosophy for economics.
From a "purely" economical point, Economics and nationalism don't mix well. However from a political or strategic point there may be a case for mixing the two. (Here I will not go into detail, considering I am not an expert in economics)
I say this as somone who blindly supported swadeshi in the younger days and wasted much breath decrying how western consumerism is ruining Indian culture.
First the concept of swadeshi, just like concept of Ahimsa was to applied for a context. This context was a foreign power ruthlessly suppressing Indian enterprise, by applying exorbitantly high rates of taxes and duties on imports, exports and even operation of industries. This was coupled with a highly biased policy towards British industries. This meant that Indian industries access to resources for production was severely restricted, as also their access to English and other colonial markets.
In contrast British industries had an unlimited access to resources as well as market. The prices of products that were bought from Indian artisans and farmers were not decided by market, the prices were suppressed by coercion either in form of draconian laws or by applying cruel force.
Similarly British products were protected from competition by laws or by brute force. What we had at that time is called legal monopoly in economic speak.
For reference Adams Smith Wealth of Nation is a good source (I never got to finish the book, boy! Economics can be boring)
Our entrepreneurs operated in these difficult circumstances, we often forget to give credit to our industrialist of pre-independent era, but I will say they also served as much as a Satyagrahi. It was in this situation that a decision to boycott all foreign products and promoting Indian industries was taken , in effect it was to counter neutralize legal monopoly that this movement aimed to. In effect it was similar to concept of Ahimsa. It can be confirmed from writings of Guru Aurobindo.
However this changed after Mahatma Gandhi assumed the leadership of freedom movement. While he was without doubt a inspiring man, he was a terrible economist. He, moved by the the toiling masses proposed going back to traditional way.The traditional way, according to him was a self dependent village, this however meant rejecting industrial revolution as well as any convenience resulting from it. And this Mahatma did, his ideal of a life was that of a poor in material wealth,but rich in spiritual wealth. This ideal of his was called Gandhian Socialism and it was different from Nehruvian socialism, which called for a industrialized but centralized economy.
What this meant that Swadeshi which was conceived against colonial oppression, became a instrument for protectionist capitalism, therefore it can be called a perversion of what was initially a noble idea.
And here I must stress that protectionist and crony capitalism pose a far serious challenge to notion of free market than communism. As examples from history show that oppression from unethical capitalism more often than not result in support of communism.
The net result is that by opposing competition we only benefit inefficient and uncompetitive industrialists harming a larger number of Indians, as consumers and as producers as well.
All the arguments in favour of protectionism are naive and ill conceived.
First the argument that the industrial policy should incentivize ,by subsidies or higher tariffs, import substitution. This policy while sounding noble just end up providing unjustified subsidy and easy profit to industrialists.
To take example a suppose a soap can be imported @ Rs 10 each. However in order to encourage Indian soap manufacturer who manufacture @ Rs 12 each, we impose heavy duty on import of the soap, so that the Indian soap is competitive. However this will mean that Indian consumer will lose at least Rs 2 for each soap, hence ultimately this policy will end up harming Indians.
Even if the argument that it will provide employment for people is considered, it still remain a bad policy for the simple that consumers will be paying more to keep people in employment
Second the notion which treats export as some sort of holy cow is ridiculous. If I am a producer, it is least of my concern who is consuming my products , what I am concerned with is getting maximum price possible. In fact when government incentivise exports by offering tax relieves etc., it is infact subsidizing the foreign buyers at expense of Indians. The argument that by making export cheaper at expense of Indians government is helping industries to gain an edge in international market is misleading, because any such advantage is temporary.
Third the rhetoric about "yes to computer chips, no to potato chips" or selective liberalization is idiocy at worst ,yet that infests Indian discourse,I can understand that fries are fattening (all good things in life are, either that or they are immoral), but as long as economics is concerned, what matters is that by depriving consumers of cheaper products, we are in effect subsidizing the industrialists.
Fourth the argument about allowing free access to foreign technologies but not to companies is a misleading one, because it supposes that competition only consists of technological advancement, competition also depends on management, organization, shop floor practices, labour costs, much of which is different from merely acquiring technical know how.in short, such arguments have same effect as the previous ones.
Also, by creating legal monopolies there is no initiative for innovation. Therefore far from benefiting India the protectionist lobby hurts Indian interest, by making Indians pay for inefficient industries.
Ofcourse it can be argued that it helps in achieving equality, but this again is incorret way as it works by redistributing wealth, in effect making everyone poorer. A better way will be to create employment in competitive sectors hence generating wealth, and removing poverty.
In short, Indian benefits not if Indians buy second rate products because it is from India, but by demanding, nay insisting on excellence.
