Editorial Notes

[Editorial Notes] Economic liberalisation and its faults

With exporters hit hard and imports from many countries including China and Italy being halted, the manufacturing sector in India is one of the sector that is being worst affected amid COVID-19. 
By IASToppers
April 15, 2020

Contents

  • Introduction
  • Impact of losing manufacturing base amid COVID-19 across world
  • Implications of economic liberalization on COVID-19 outbreak
  • The dangers of dependency
  • Conclusion

Economic liberalisation and its faults

For IASToppers’ Editorial Simplified Archive, click here

Introduction

  • India’s 1991-92 Budget marked the beginning of the end of the ‘Licence Raj’ in India. The Budget also announced the reduction of import duties and paved the way for foreign-manufactured goods to flow into India.
  • Though many developing countries participated in the global production, the substantial value addition in developing countries happened in a few production hubs, of which China emerged to be a major one.
  • China even carried out backward integration (company purchases or internally produces segments or parts of its supply chain/raw material).
  • In the case of health products, China became the global supplier of active pharmaceutical ingredients (API), personal protective equipment (PPE), and medical devices diagnostics.

Impact of losing manufacturing base amid COVID-19 across world

  • The U.K. Prime Minister asked the country’s manufacturers to produce ventilators in order to provide care for critical COVID-19 patients.
  • U.S. President invoked the Defense Production Act of 1950 to ramp up N95 mask production. Under this legislation, the U.S. President can direct U.S. manufacturers to shift from their normal manufacturing activities to produce goods according to the directions of the government.
  • France stated that the country may nationalise vaccine companies if necessary.
  • Spain nationalised all its private hospitals. Israel and Chile issued compulsory licences to ensure that medicines are affordable.

This exposes the poor state of preparedness and dependence on imports for essential goods required to meet the challenge of any major disease outbreak.

Implications of economic liberalization on COVID-19 outbreak

In India, economic liberalisation has damaged the government’s capacity in two ways.

First, it incapacitated the government to respond to emergencies based on credible information.

  • The dismantling of the ‘Licence Raj’ resulted in the elimination of channels of information for the government, which is crucial to make informed policy choices. 
  • For instance, as part of the removal of ‘Licence Raj’, the government stopped asking for information from the manufacturer to file the quantity of production of various medicines.
  • As a result, it has taken weeks now and a series of meetings for the government to gather information about stocks and the production capacity of pharmaceutical companies.
  • The only government data available in the public domain is with regard to the production of vaccines.

Second, the logic and policies of economic liberalisation seriously undermined the manufacturing capabilities of health products in India.

  • The short-sighted policy measures, for enhancing profitability of the private sector, allowed the import of raw materials from the cheapest sources.
  • According to a report of the Confederation of Indian Industry (CII), nearly 70% of India’s API (Active Pharmaceutical Ingredient) import is from China. The CII report lists nearly 58 API where the dependence is 90% to 100%.
  • As a cost-effective producer of medicines, the world is looking to India for supply, but it cannot deliver due to its dependence on China, which has also forced India to impose export restrictions on select medicines.

The dangers of dependency

  • Similar dependence exists with regard to PPE (Personal protective equipment), medical devices and diagnostic kits.
  • The 100% dependence on Reagents, an important chemical component for testing, is limiting the capacity of the government from expanding testing because the cost of each test is ₹4,500.
  • Developing countries were asked to ease their labour protection laws to facilitate global production and supply chains popularly known as global value chains. 
  • As a result, people were forced to work in precarious working conditions without any social security net. This created an unorganised army of labourers and is preventing many developing country governments from effectively offering relief.

Conclusion

A virus has made us rethink our obsession with the economic efficiency theory. It implores us to put in place an industrial policy to maintain core capacity in health products so that we can face the next crisis more decisively.

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