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A Libertarian Approach to India’s China Problem

Updated: Nov 13, 2020

During the Cold War, the Pentagon and the security establishment in Washington was obsessively focused on securing 4 principal forms of civilian infrastructure – gas, power, water and telecom. The obsession with these utilities exists because they form the backbone of our supply chains and during times of crises, ensuring a steady supply is critical for public morale and internal stability. To prevent them from sabotage, America invested heavily in developing domestic capacity in all nodes of this infrastructure – and where it had to import, it relied principally on trusted allies in Europe while also building critical stockpiles.

India today faces a similar conundrum. As she enters an increasingly bipolar world of a very different character, she does so with a significant handicap. A substantial chunk of India’s critical infrastructure capabilities – unlike those of America in 1960s – are sourced from its principal adversary – China. Particularly in telecom, China’s dominance is starkly apparent in both consumer grade hardware and the back-end infrastructure, and India is only just rising to it. Welcome as it may be, this paper argues that the ad-hoc “ban” approach to policymaking in this sector is a recipe for disaster, rather than a sound approach to national security. We present three principal reasons for this.

First, India’s understanding of domestic capacity building, until now, has been an infantile obsession with replicating developments that have already been accomplished elsewhere. In the name of self-reliance, India seems to focus too much on import substitution, even where it is possible to do so from reliable private sector players in the West. In order therefore to accomplish this substitution without flying foul of internationally recognized IP protections, duplication of research takes place. Even at the best of times, this is an enormous waste of critical resources at the opportunity cost of original research. Perilously, such research often fails completely – leading to the import anyway – or produces goods with inferior capabilities that are then deployed in a fit of patriotism. The latter forces industry to subsidize the cost of bad research – an overall destruction of wealth for the economy. We do this in all fields, Tejas, the light combat aircraft developed indigenously, has been years behind schedule and failed to meet the specifications set by the air force. Nonetheless, political authorities over the years have repeatedly prevailed upon the air force to ensure that the order book stands.

Second, India has long failed to recognize the fact that domicile of capital doesn’t necessarily determine its allegiances. Capital, by its very nature, has a singular allegiance – maximization of shareholder wealth. It is for this reason therefore that we struggle to provide a cohesive response when dealing with challenging economic transactions. For instance, we are extremely trigger happy in closing borders to companies principally domiciled in China, but struggle to provide a coherent response to VC inflows from China into companies originally conceived within India. This leads to decisions that are ad-hoc and, arbitrary, and therefore risk judicial scrutiny. From a strategic standpoint, these allow for the creation of blind spots. After all, a company developed in India which then sells most of its equity to a Chinese VC fund which may be backed by officials in the CCP is as much of a threat to national security as a company seeking to operate directly from Beijing.

Third, as a consequence of the above, where we do recognize problems in the operation of the private sector, India has chosen to rely on the government to provide the immediate solution. In some cases, this may be the only alternative, particularly when the solution required is immediate. However, most policy making in this domain must take a medium-term view at the minimum. From that horizon, involvement of public entities has historically proven to be an inefficient method of production and innovation. Instead, in the medium term, the Indian State needs to allocate resources towards the creation of capacity building instruments that facilitate research and development in this sphere. For instance, when the US committed itself to the space race and the ambition of a moon landing in early 1960, Congress passed a law that began a student loan program directed towards those training in aeronautics. This law presaged the student loan industry which, despite its recent problems, allowed the creation of a vibrant, well-funded, and self-sufficient university infrastructure we see today. It also created a sprawling scientific community in the US which has since been responsible for some of the most path-breaking research in the history of mankind. It is indeed a testament to this infrastructure that putting a man on the moon is only one of the accolades in the community’s list of achievements.

China today is competing with the US in these fields. It has succeeded in developing an “iron-curtain” of technology and as it gains more strategic heft, it will begin to pull a substantial share of the world on its side of the curtain. As the technology space will get divided as well, an open society like India will inevitably find itself in the Western fold. That by itself is not a bad thing, but India will find itself at a significant disadvantage. Its internal infrastructure that should organically guarantees basic capacity is lacking. In its absence, the country will find itself overly reliant either on imports from currently friendly Western nations, or on ad-hoc and poorly executed State sponsored technologies. It therefore needs to begin designing policies that create an enabling infrastructure for research in these 4 critical sectors, and then allow it to further spawn into other sectors on private initiative. Such policies include allowing universities to link fees with the market costs of infrastructure they provide, and then moving in to subsidize and assist those unable to afford it through a combination of loan and grant based assistance – both on merit and need. IP protections need to be strengthened to ensure that companies conducting original research are adequately protected in their commercial investments. Backend technologies that do not exist indigenously should be imported, unless there is a significant non-monetary benefit to their independent development, to avoid wasteful duplication. State assistance in education needs to dynamically shift to reflect national priorities, while guaranteeing academic freedom. Most importantly, trade and investment policy must define specific medium term goals and each individual policy initiative must be accompanied with an explanation detailing its connection to the stated goal.

This approach will also allow the State to save and allocate critical capital to other sectors of the economy that require its attention more critically, such as health and primary education. A smaller State doesn’t necessarily have to be incapacitated; it can accomplish a lot through directed, specific policy measures rather than vague exaltations of national pride.

A Libertarian Approach - Prashant Khuran
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