BackLet us fortify competitiveness and shun protectionism
India should review tariffs and adopt a strategy aimed at an economy that’s globally competitive
PremiumIndia needs to prevent any protectionist backsliding in its trade policy. In the past few years, there has been a tendency to match reforms in trade and economic policy with measures which effectively aim at reducing imports and insulating domestic producers from foreign competition. Such an approach is ill-advised and will prove detrimental to India’s economic interests in the longer term. The better approach towards strengthening the foundations of Indian industry, particularly the manufacturing sector, is through enhancing its domestic and global competitiveness, rather than through protectionist measures.
Reflecting the mood of the 1950s, Prime Minister Nehru said, “I believe, as a practical proposition, that it is better to have a second-rate thing made in our own country than to rely on the first-rate thing which we have to import." Over 65 years have passed since, and over 30 since India wisely discarded that myopic thinking for economic liberalization.
In contrast, Prime Minister Narendra Modi made headlines in 2018 when, delivering a speech at the World Economic Forum in Davos, he reprimanded those taking the world back to an era of protectionism. “Contrary to globalization, the forces of protectionism have emerged. Their intent is to not only avoid globalization but also to turn the trend of the natural flow of globalization. As a result, new types of tariffs and non-tariff barriers are seen. Bilateral and multilateral trade agreements and negotiations have been stalled," he said. While India’s messaging seems to have changed, have mindsets changed in equal measure?
Paradoxically, India continues to maintain high import tariff levels relative to rival developing economies, particularly in Southeast Asia. India’s Trade Policy Review at the World Trade Organisation (WTO) in 2021 noted that the country’s simple average applied Most Favoured Nation tariff (normal non-discriminatory charge on imports from other WTO members) increased from 13% in 2014-15 to 14.3% in 2020-21 (15.4% if considering ad valorem equivalents). The proportion of tariff lines with rates higher than 30% rose from 2.8% in 2014-15 to 4% in 2020-21.
While India has recently shown a renewed interest in signing bilateral Free Trade Agreements (FTAs), it is not a member of important mega-regional trading arrangements, most notably the Regional Comprehensive Economic Partnership.
Trade policy doyen Jagdish Bhagwati lamented two decades ago about “the popular protectionist misconception" that ‘‘trade is good but imports are bad.’’ His words are equally valid today, and India must not let itself get caught in that trap. We must realize that achieving a positive trade balance by exporting more and importing less cannot be the objective of our trade policy. If anything, we may need to import more to export more.
We also need to rid ourselves of the mindset that Indian industry cannot compete with foreign producers, that a trade deficit is inherently injurious to our economy, and that trade liberalization will displace and destroy jobs in sensitive sectors of our economy. Indian entrepreneurs can work wonders if given a chance. So a change in mindset must be accompanied by a fresh focus on improving our competitiveness.
The 2019 Report of the High-Level Advisory Group (HLAG) on India’s trade, headed by Surjit S. Bhalla, correctly emphasized that in a world where trade is dominated by value chains, it is both exports and imports that build competitiveness or reflect competitiveness. Similarly, in a recent NITI Aayog paper on India’s dairy sector, agricultural expert Ramesh Chand cautions that no country can be export competitive if it is unwilling or unable to compete with imports. These prescriptions need to be taken seriously.
On tariffs, the need of the hour is to institutionalize a periodic review of bound and applied tariffs through a dedicated independent task force, followed by tariff rationalization and reduction. Greater collaboration between the ministries of finance and commerce will also help India’s tariff policy pursue a more coherent approach. These were also part of a series of recommendations on the trade policy that India needs submitted by CUTS International to the government’s department of commerce recently. A periodic review of tariffs will also contribute to better modalities around market access offers in the country’s ongoing FTA talks. Notably, negotiations on the scope, depth and timelines of tariff reductions on goods of interest to India’s trading partners will be among the crucial issues which could determine the outcome of discussions with partners like the UK.
India also needs to ensure that negotiated tariff concessions, which can enable cheaper sourcing of imported inputs by Indian producers and boost domestic competitiveness, are not nullified through the indiscriminate imposition of non-tariff and trade remedial measures such as anti-dumping and countervailing duties.
A competitive domestic economy has a foundational role in making headway globally. The HLAG report and others like the CUTS/ISID/IFC white paper on improving India’s competitiveness contain several strategies which could contribute to enhancing the competitiveness of Indian industry. The writing on the wall could not be clearer: Bolster competitiveness, shun protectionism.
Advaiyot Sharma of CUTS contributed to this article.
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