“To stand on one’s own feet” is how 10th-grade economics teachers sum up the concept of self-reliance. The thinking behind India’s advocacy for this concept is premised upon the scars of colonialism. However, with the liberalisation of the Indian economy by the Narasimha Rao-led government, the concept had practically faded away from Indian public policy discourse. 29 years later, with Indian Prime Minister Narendra Modi calling upon Indians to ‘be vocal for local’ and emphasising self-reliance, it seems to be taking the centre-stage once again.

Self-reliance can be defined as “dependence on one’s own natural resources to produce goods and services to satisfy the demand”. One of the many problems with this is that every economy faces a dearth of resources, which are inputs required to produce goods (and services). One rather famous quip in economics goes like this: ‘resources are limited, while [human] wants are unlimited’. Every nation cannot produce everything on a scale sufficient to meet its domestic demand. Even if we suppose, for argument’s sake, that we could achieve the impossible, it is important to realise that self-reliance is a dynamic concept. If you look at it, achieving self-reliance is to successfully meet the aggregate demand of all the people in an economy; that is, conforming production along the lines of consumers’ tastes and preferences. There is no guarantee that these tastes will remain constant (unless, of course, if states ‘determine’ tastes!). So, if one were to adhere to the definition of self-reliance, one ought to change production constantly, keeping pace with the change in tastes and demands of the people.

Often, the scarcity of resources prompts states to resort to protectionist measures so as to encourage local producers. There is no ruling-out of a misallocation of resources in such circumstances, due to lack of economies of scale (a resultant of protectionist policies). This leads to a drastic loss in the productivity of a country and results in a deadweight loss for society. To put this in perspective, let us look at the total factor productivity of India. Total Factor Production may be defined as the increase in the growth of output that can be attributed to factors other than capital and labour. This can be the result of many reasons including a change in the quality of inputs, new techniques of production, better management of resources, and so on. One study finds that the average total factor productivity growth was negative for the 1970’s, when protectionism was at its heyday. In fact, there were frequent instances of negative growth in total factor production (where total factor production fell below zero) before 1991. Only after reforms, did the metric pick up pace, remaining positive throughout. From 2001-2008, total factor production grew at an average of 3.36%.

The second impact of protectionist measures is that the cost of production is (relatively) high and results in higher prices for the consumers. Why should a government, in the name of self-sufficiency, let its consumers pay a higher price for a good that would be available for a cheaper price when imported? This certainly is not how a rational entity would (or should) behave.

The definition of self-reliance also begs the question of who is to determine the scale and intensity of production to achieve this self-reliance and how is this to be determined. If history is any guide, this is often determined by the state. And this means curtailing of choices on the part of the consumer and a massive involvement of the government in the supply side or the production side. It implies that the allocation of resources is controlled by the government and every producer (or entrepreneur) relies heavily on the government to take any decision. This control is exercised by the way of issuing licenses. The infamously dubbed practice of ‘license raj’ is exactly this. This can also discourage potential entrepreneurs from coming forward to start a business. Accepting this excessive government control would mean that bureaucrats, with no experience in business management whatsoever, would run the businesses rather than people competent to do so.

Evidently, this is not the type of self-reliance a country should be aiming for. A country should be aiming at self-reliance in terms of human capital. In today’s global world, ideas and innovation are what sets a country apart. As renowned economist and Nobel laureate Paul Romer said, “Growth springs from better recipes, not just from better cooking”. His view was that ideas of non-rival character, generated by profit-maximising entrepreneurs will lead to economic growth. This emphasises the role of human capital in the course of economic growth.

However, for many reasons, there has been a constant outflow of human capital from our country to advanced nations like the US and the UK. It is crucial for India to recognise that every emigrant is productivity lost and innovation foregone. So, when I say self-reliance on human capital, I mean the creation of institutions of the highest excellence to truly harness human capital. However, the disappointing budget allocation for education by the Indian government (4.6% of the GDP in 2019-2020) shows that it has no plans to improve in this specific sector. India ought to increase education spending and allocate (and disburse) more funds toward PhD research, which are now sparse and available mainly for technology courses. Only self-reliance in terms of human capital is sustaining and yields increasing returns and hence should be a priority for the government. This is important to arrest the outflow of human capital out of the country whether for studies or permanent migration.