Ambassador

Arvind Panagariya

Free Trade

competition

Premier Padmini

Vivek Kaul

How the car signifies so much of what went wrong with the Indian economy post-independenceMygrandfather used to own ancar. Alight green one. When he retired and moved to a different city, sometime in the late 1980s, the car passed on to my father. For the next 21years, my father drove the Ambassador, until he retired, sold the car and moved to a different city as well.People of my age, who have been driven around in an Ambassador, have very fond memories of the car. More than anything, they remember it for its sturdiness, the fact that it had ample leg-space and that you could squeeze in many more people into it than possibly any other car.My memories of the Ambassador are at best muddled. For a long time, I would tell anyone who was willing to listen that when I grow up and earn enough money, my first car would be an Ambassador. The trouble is, by the time Istarted making enough money, Ambassador wasn’t being made. Also, I wasn’t interested in driving. I still don’t have a driver’s license. But more than this, as my interest in economics grew over the years, I came to realise how the car signified so much of what went wrong with the Indian economy postindependence.India practiced a policy of import substitution in the years after independence. The idea was to produce goods domestically and not import them. In order to encourage import substitution, duties and tariffs were put in place. These made imports very expensive and, in the process, encouraged domestic production of goods.The countries of South-East Asia also started with import substitution (or producing only for the domestic market), but quickly shifted their focus towards exports. India continued to favour import substitution for much longer, and this has had its repercussions. When companies produce for the global market, they need to compete with the best in the world. This automatically leads to a situation wherein the products which a company produces need to be globally competitive.Aswrites in ‘and Prosperity’: “The common sense argument is that in the same way a country cannot produce large numbers of world-class cricket players without competing in test cricket, world class soccer players without playing World Cup soccer, and world-class academics without being subject toagainst the best in their fields, it cannot produce world-class manufacturers without competing against world-class entrepreneurs.”When import substitution is the norm and companies need to produce just for the internal market, almost anything goes. For a very long time, Indian consumers had access largely to two car brands – the Ambassador, manufactured by the Birlas at Uttarpara near Kolkata, and the(better known as the Fiat), by the Walchand group at Kurla in Mumbai. In fact, the story goes that the engine in the Ambassador car did not change for decades.As Panagariya writes: “The proverbial inefficiency of Indian manufacturers three decades ago had much to do with competition being limited to domestic entrepreneurs who were all quite inefficient relative to the best in the world in their respective fields.”The point being that import substitution kills competition and in the process encourages mediocrity in firms. Panagariya writes: “We have cost reductions and quality improvements that result from “rubbing shoulders” with the best in the world and from having to satisfy the most discriminating and demanding customers. It is simply inconceivable that China’s manufacturing industry and India’s information technology industry would have achieved the levels of efficiency they did without being subject against the best in the world in their respective fields.”In the last few years, India seems to be gradually going back to import substitution as a strategy. The Indian economy started to do well only after 1991when it was opened up and both imports and exports were encouraged. Other than benefitting the entire economy, it also gave the Indian consumer more choice. Also, with import substitution becoming the norm, domestic companies won’t rub shoulders with the best in the world and hence, not be world class. Over and above this, world over companies which export over a period of time see benefits of economies of scale.