April 7, 2025 ☼ The Intersection ☼ geoeconomics
We should hope that a mindless trade war doesn't start or ends quickly. India, however, is a big country with a diverse geography and a large, young population. Our domestic economy is capable of weathering this storm.
This is from The Intersection column that appears every other Monday in Mint.
Imagine there was no other country. The subcontinent was all the landmass on the planet, with oceans all around. All 1.46 billion people in world were Indians. Indian national economy would be the global economy. There would be no such things as international trade, foreign investment and immigration. The Indian economy would be an autarchy. By definition, it would be self-sufficient.
Now think how such an economy can also be prosperous. The immediate order of business — as Bhishma teaches us in the Mahabharata’s Shanti Parva — would be to establish rule of law, protect property rights, govern justly and ensure people live peaceful lives where they can enjoy the fruits of their labour. The next task would be to ensure economic integration of the vast subcontinent, where goods, services, people, ideas and capital can move freely from one place to another.
Now that basic political and economic integration has been achieved, let us look at economic policy. What will we do for energy? There is very little oil we can pump out of the ground. There are no foreign countries that we can buy it from. So we will have to rely on solar, wind and hydro-electric sources. We will have to use the coal that we have and invest in nuclear power plants. This might not cover all our requirements so we will have to economise on the use of energy. Electricity cannot be provided free of cost to anyone, including farmers.
That brings us to food. Without petroleum imports we will have to figure out how to make fertiliser. In addition to chemical methods, closed loop biological methods that convert human and animal waste into manure will be an obvious choice. Farmers will have to change their cropping patterns and farming methods. Indeed, because electricity will not be free, it will no longer be possible to pump out ground water and use it to grow crops inappropriate to those soil conditions. Indian farmers will no longer grow water-intensive crops in water-deficient areas on the back of subsidised electricity. Many farmers will have to change their farming methods. Quite a number of them will have to stop farming and find other livelihoods. India will have to enable this transition.
The idea that people are better off doing what they can do more efficiently is called comparative advantage. It is the single biggest idea that can make our self-sufficient closed economy a prosperous one. When people, firms and regions do what they are most efficient at doing, they specialise and become more productive. They then trade with others who are better at other things. Some places specialise in software technology, some in manufacturing, some in agricultural products, some in tourism and so on. Indeed, comparative advantage is not an imposition: people specialise because they have the reasons and the freedom to do so.
By extension, we can see that prosperity requires the political system to be a federal one. States and regions should have the autonomy to engage in activities of their choice. The Union government can, through the Finance Commission, ensure that all citizens get enough resources for there to be a broad parity. However, it should not use fiscal policy to determine the pattern of economic activity. It shouldn’t be in the business of choosing who produces what, where and at what prices. Indeed, a self-sufficient India cannot be prosperous without political and fiscal federalism, up to the level of local governments.
There is nowhere to import technology from. So a lot of public investment will have to into scientific research & development and education. Again, comparative advantage suggests that the government finance firms and institutions that can do this efficiently, without insisting that those doing the research also be government employees.
The backbone of the economy will need a financial system that can gather savings and surplus capital and put it into the hands of those who can make best use of it.
I could go on, but the upshot is that if you want India to be self-sufficient and prosperous, the government’s economic role must shrink and change. It should abandon striving for “even development” and stop trying to redistribute money and economic activity.
Let’s bring this thought experiment to an end. Even as you worry about tariffs and trade wars, note that a lot of what we need to do to be prosperous is a matter of domestic policy. Of course, international trade is very desirable. It will make us more prosperous, faster and at lower cost. It will open up wider possibilities.
We should hope that a mindless trade war doesn’t start or ends quickly. India, however, is a big country with a diverse geography and a large, young population. Our domestic economy is capable of weathering this storm. It is a good time to break down the constraints we have imposed on ourselves and unleash the awesome energy of the national economy.
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