Let us abandon protectionism and embrace free trade
4 min read 23 Nov 2020, 09:14 PM ISTOur official goals would be better met if the government did not go down an old policy path that failed us
PremiumIndia is not a part of the Regional Comprehensive Economic Partnership (RCEP) trade agreement. This not surprising. Since 2014, the Narendra Modi government has pursued a protectionist agenda. His administration has repeatedly increased tariffs, licence requirements and other restrictions on imports. The Atmanirbhar Bharat agenda entails import substitution. Union minister Nitin Gadkari even suggested that India “end imports" entirely. Such protectionism, however, is self-defeating.
Consider the Digital India mission. This seeks to transform India into a knowledge economy and “digitally empower" citizens. Counter-productively, the Centre has made smartphones and laptops more expensive with tariffs. In a country where 800 million people could not afford such devices even before the price hikes, how will they be digitally empowered? Similarly, Indian youth are constantly urged to acquire new skills to be competitive in the global economy. A lot of skills these days involve the use of computers, which many can’t afford, thanks to tariffs. Consequently, many good jobs would be unavailable to them.
The government wants India to be a major export hub. To this end, it has re-introduced Licence Raj-era rules to protect domestic manufacturers. In February, the government gave itself the authority to ban the import of any commodity. Additionally, importing TV sets, tyres, air-conditioners, toys and leather footwear, among other things, now requires a licence from the government. This may be extended to cover at least 350 more products.
Far from helping exports, such rules are likely to render Indian firms uncompetitive in the international market. Why would they bother improving manufacturing processes and investing in better technology if they are shielded from foreign competition? This has been observed in the past. Before 1991, the Indian economy was virtually closed off from the rest of the world. Importing goods was an arduous task, requiring licences and steep tariff payments. As a result, Indian firms couldn’t compete internationally.
Only after India’s economy was opened up in 1991 did some Indian companies become globally competitive. Consider the case of Tata Steel. Former group chairman Ratan Tata himself admitted that this company was inefficient during the Licence Raj. It did not invest in new technology or try to reduce production costs. That changed once India opened up and it was forced to compete. By 2007, Tata Steel was among the world’s lowest cost steel-makers. A similar transformation was observed across various Indian firms and industries.
Today, India seems to be repeating its past mistakes. Protectionism also punishes Indians by making goods more expensive, thus reducing people’s purchasing power. For instance, the new iPhone 12 Pro is so expensive in India that it would be cheaper to fly to Dubai, buy it there, and return. This is an extreme example, but it illustrates how much more Indians must pay for the same products than people living elsewhere.
Adding insult to injury, the government provides subsidies to export many of those products. For example, imported cars are taxed heavily in India. Yet, until recently, huge subsidies were doled out for cars exports. Export subsidies have been reduced only because the World Trade Organization ruled against them, but the government has ways to exploit loopholes for their reintroduction. One alternative method employed frequently is to devalue the rupee against other currencies. This makes imports more expensive for Indians, while making Indian products cheaper for foreigners.
Another ambition of the administration is to make India the world’s third largest economy by 2030. But the Indian economy had been sluggish even before the pandemic, thanks partly to a protectionist turn. Shielding domestic firms from competition and letting domestic costs rise is unlikely to deliver economic growth.
Protectionism does not have any strong economic justification, and so national self-sufficiency and security form the argument for it. Earlier this year, there was a clash along the border with China, which left 20 Indian soldiers dead and may even have resulted in a loss of territory. The government responded by arbitrarily holding up shipments from China at Indian ports.
“China must be taught a lesson" goes the argument. But China does not bear the brunt of these measures. India accounts for only 3% of China’s exports and less than 1% of its imports. On the other hand, China supplies many essential commodities to India: goods such as electronics, but also intermediate goods like active ingredients for pharmaceuticals, or parts and machinery used by Indian manufacturers. Thus, Indian businesses and consumers bear the brunt of any “lesson" supposedly being taught to China.
To stand up to an increasingly belligerent and expansionist Chinese regime, free trade is India’s best policy option. If Indian citizens prosper and Indian firms become more competitive, the economy will grow faster. This in turn would mean more tax revenues for the government, some of which can be invested in strengthening the armed forces.
The Modi administration’s stated goals are indisputably worthy. India should be a thriving knowledge economy. It should be a globally competitive economic powerhouse. And it should be well defended against hostile neighbours. To achieve these goals, India must abandon its protectionist folly and embrace free trade.
Jairaj Devadiga is an economist specialising in public policy and economic history. He tweets @JairajDevadiga.
