A number of Indian analysts obviously think not, and have offered a variety of arguments suggesting that liberalisation of consumer goods imports, sooner rather than later, will be a positive step. One important reason is that India signed the WTO agreement knowing fully well that to stay out would be much more costly than to abide by its conditions, however unpalatable. Indian industry has been given a decade or more to anticipate the impact of full trade liberalisation and to implement strategies to deal with it. The foot-dragging is ultimately a reflection of the inability or unwillingness of industrial interests (both capital and labour) to make the necessary adjustments in a still secure environment. Why should the government jeopardise a broader national interest, which it has acknowledged by joining the WTO, to pander to this narrow coalition of interests?
A second argument is basically a completely justifiable consumer gut-reaction to the typical Indian consumer product. Why should Indian consumers be denied access to world-class products and associated services in order to protect the bottomlines of producers who have been ripping them off for years, fully sanctioned by the prevailing ideology? A third argument, made in response to certain recent macroeconomic developments, is that the country is finding it hard to manage macroeconomic stability with the large inflow of foreign portfolio investment. Liberalising consumer goods imports will be one effective way of easing the monetary pressure generated by rapidly accumulating forex reserves, because it will create a channel of demand for forex which does not now exist.
All these arguments are quite valid, but they are, in a sense, peripheral. The core issue here is to identify what impact free (or more realistically, only tariff-influenced) trade is going to have on the economy, and how this impact is going to be distributed over various groups. A large part of the international trade literature has been concerned for many decades with this precise question. Ironically, if there is any one proposition on which a majority of economists agree (as reflected in several surveys of professional opinions), it is that free trade is beneficial to a country in the aggregate. The obvious reason why countries have, in a variety of circumstances, imposed restrictions on trade is because its impact is not uniformly distributed; some groups e.g. workers in a relatively high-wage economy, are hurt when their home countrys markets are opened up to exports from low-wage economies. A political economy perspective on trade policy suggests that it is the ability of such groups to influence policy that leads to restrictions, consequently denying the economy as a whole the potential benefits from free trade.
The extent of the adverse impact on various groups within the economy depends crucially on the mobility of its members across sectors. Workers with a narrowly defined skill, such as weaving, are obviously much more vulnerable to competition from imports than are people with easily transferable skills, such as machine tool operators or software developers. Keeping these considerations in mind, trade theory postulates the following general proposition, which is valid for an economy of any size and independent of what policies its trading partners follow: a country will always be better off with free trade if it is able to devise a compensation mechanism which ensures that no individual is worse off in the post-free trade scenario relative to his position in the pre-free trade situation.
From the preceding arguments, it is clear that two factors are at work in determining whether a country in Indias situation will actually realise the benefits from free trade. One, the extent or mobility or transferable skill resources of the labour and other resources employed in the affected sectors (and, here I am basically focusing on consumer goods, although the implications are surely more general). Two, the ability of the system to devise a workable compensation mechanism. Obviously, the more mobile the resource base of the economy, the less important the compensation mechanism becomes, because mobility itself goes some way in neutralising the adverse impact of free trade.
Going by our rather unsuccessful experience with the setting up of the National Renewal Fund, we should perhaps not expect anything concrete by way of a compensation mechanism. So the answer to our fundamental question really revolves round how mobile, in every sense of the term, the resources of the Indian economy are. Obviously, our labour force is extremely mobile geographically, with significant numbers migrating seasonally or permanently across regions in search of employment. The picture of inter-occupational mobility is somewhat mixed, but not entirely pessimistic. Caste-defined boundaries are still a factor in many areas, but casual observation would support an argument that these weaken when people emigrate to remote locations. In short, our labour resources have historically shown a high degree of mobility which should be reflective of a capacity to deal with the post-free trade outcomes.
What about other resources? At the smaller end of the business spectrum, the law of the jungle prevails in any case, and the intensity of competition in that sector is unlikely to increase with the advent of free trade. It is the medium and large-sized establishments that cause concern. There is a terrible problem with organisational flexibility in this segment, most of which is attributable to the balls-and-chains of obsolete and yet immutable government regulations, if not in letter, then certainly in spirit. We have moved some distance on the issue of corporate restructuring through amendments in the takeover regulations and so on, but we have made no progress at all on the issues of labour redeployment and redundancy.
Given the inevitability of free trade, we can react in two ways. We can anticipate the event with dread, and then very likely suffer its several adverse impacts. The governments pleading for a few years more is indicative of such a reaction. Or, we can put some basic insights of trade theory to use, and use the few years we have to do everything we can to increase the mobility of our productive resources. Only then can we realise the virtues out of this necessity.
