Photo: Bloomberg
Photo: Bloomberg

Opinion | Trade liberalization folly: From high road to low road

The Modi government has thus far failed to match the economic growth record of its Congress-led predecessor, and a foolish pursuit of protectionism will make that even harder to achieve

Shortly after the Union budget, economist Pravin Krishna and I had warned in these pages of the protectionist folly of reversing a quarter-century of trade liberalisation and embarking on the path of renewed trade protection (https://goo.gl/GfH36U). Relatively few voices were calling this out at that time amid general praise for the budget. Then, on 25 July, Arvind Panagariya—one of the world’s leading trade policy economists, and until last year vice-chairperson of NITI Aayog —joined the battle, arguing in a sharply worded column in the Times of India of the damaging effects of the government’s protectionist turn. The article’s title summarised his argument well: “India’s trade policy folly: Current turn to import substitution will take economy down from turnpike to dirt road".

Panagariya’s column followed hot on the heels of the departure of Arvind Subramanian as chief economic adviser, marking the departure of the last of a trio of American-trained and -based economists from senior positions in the current government. The other two were Panagariya himself and, earlier, Raghuram Rajan, who left when his contract as Reserve Bank of India governor was not renewed in 2016.

These departures were welcomed by nationalist outfits with ties to the ruling Bharatiya Janata Party (BJP) and its ideological parent, the Rashtriya Swayamsevak Sangh (RSS)—in particular, the Swadeshi Jagran Manch (SJM), which has staunchly opposed economic reforms, of labour law in particular. The SJM’s chief, Ashwani Mahajan, was quoted by Reuters on 12 July as saying that the country would not lose if these “foreign economists" were to leave, and that India’s problems could only be solved by those “connected to the soil". These views chime with the Swadeshi bent of sections of the RSS and BJP, who seem to believe that India is somehow immune from the laws of conventional economics.

Whether cause or effect, it is not surprising that following the departures of Rajan, Panagariya, and finally Subramanian, inward-looking and protectionist thinking has taken root in the Narendra Modi government. That was on view last week, when the government was apparently mulling plans to curb steel imports by raising the applicable tariffs, according to a Reuters report. This is part of the larger plan to reduce “non-necessary" imports through increased trade protection, the ostensible reason being to reduce the large current account deficit (CAD). Crucially, though, the second rationale is to boost Make in India through old-fashioned import substitution.

While one may debate the efficacy of temporary trade barriers in reducing the CAD—in my judgement, they have little effect, and the increase in protectionism makes the economy worse, not better, off—there is no sensible rationale for a return to import-substituting industrialisation (ISI) as a plank in the development policies of the nation.

Indeed, ISI was a key component of the policies of the license-permit-quota raj, which was jettisoned during the economic reforms of 1991 and thereafter. It was jettisoned simply because it did not work, in India or elsewhere, and caused provable economic harm to workers and consumers without providing any aggregate economic benefits in the form of efficiency and productivity gains in manufacturing or other sectors of the economy. Indeed, the only gainers from such a policy, at the national expense, were the businesses shielded from international competition by trade barriers. They could grow lazy and inefficient under the cover of a captive domestic market.

That is why the protectionist turn of the Modi government is so worrying. If pursued and amplified further during the remainder of its current term—and in the subsequent five years if re-elected next year—this important policy reversal threatens to undermine one of the key foundations of India’s post-1991 liberalisation and of our attendant economic success since then. The Modi government has thus far failed to match the economic growth record of its Congress-led predecessor, and a foolish pursuit of protectionism will make that even harder to achieve. We can certainly bid farewell to aspirations of double digit economic growth in a policy context in which the tenets of economic liberalisation are further eroded, and we may even give up the coveted crown of being the world’s fastest growing major economy.

The stakes could not be higher. Contrary to some of the dyed-in-the-wool naysayers and haters, as well as those who fatuously saw in Modi another Margaret Thatcher or Ronald Reagan and are now experiencing acute buyer’s regret, the truth is that the Modi government has accomplished a number of important if unglamorous economic reforms, with the googly of demonetisation thrown in for good measure. But this mostly good work threatens to be nullified and overshadowed by the putatively protectionist turn of late term Modi.

Without the sensible advice of a Panagariya or a Subramanian, who were a telephone call away from South Block while in public service, economic policy now appears to be set by a bevy of bureaucrats none of whom ever saw a rule or regulation they didn’t like. Such economic policy advice as the government now receives is from the economic advisory council to the prime minister, which says little publicly, while the likes of SJM and its ilk continue to beat the swadeshi drum. It doesn’t make for a pretty picture.

Vivek Dehejia is a Mint columnist and resident senior fellow at the IDFC Institute, Mumbai. Read Vivek’s Mint columns at livemint.com/vivekdehejia.

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