India always had an exasperating tie-in with quotas, low tariffs and restrictions. During 1960-85, it had sky-high tariffs but clearly the policies failed miserably. After it borrowed funds from the IMF in 1991 due to the economic crisis, it was compelled to follow the liberalisation policy and thus the regime of permit raj came to an end. The economic policy reforms remarkably upgraded India’s position in terms of GDP growth, quality of life and purchasing power parity. In recent years, it appears that the Indian economy is driving back to the protectionist policies which prevailed the pre-1991 period.
The Protectionism Hypocrisy
At the World Economic Forum meeting in 2018 in Davos, PM Narendra Modi, indirectly pointing towards Trump who have been propelling an “America First” Policy said that some nations were looking inwards and being protectionist. He appealed for more accessibility and free trade. Fast forward to 2019, India opted out of the Regional Comprehensive Economic Partnership (RCEP). The reasons are believed to be the fear of being swamped by imports especially from China, putting the domestic industries at risk. Given that India already suffers from a trade deficit from the members of RCEP of $105 billion and out of that $53.56 billion is from China alone, this decision seems very rational. But is it really?
Piyush Goyal (Commerce and Industry Minister) claimed that this decision will boost “Make in India” and that Free Trade Agreements (FTAs) with countries like Japan, South Korea and ASEAN provided them with duty-free access to Indian markets but domestic goods faced barriers in their territories. But this is not the entire picture. To test whether the FTAs were beneficial or not, the Economic Survey 2019-20 conducted research. For this, it took into account 14 trade agreements signed by India. Only the trade agreements with Korea, Japan and Sri Lanka had a negative impact which means that the percentage rise in imports was greater than the percentage rise in exports. Other trade agreements had either no impact or a positive impact.
Talking about the overall effect with the trading partners, the Indian economy actually gained. The impact on exports was 13.4% for manufactured products and 10.9% for the total merchandise. Whereas the impact on imports were found to be lower at 12.7% for manufactured products and 8.6% for total merchandise. Therefore, from the perspective of the trade balance, India has obviously gained in terms of 0.7% increase in trade surplus per year for manufactured products and a 2.3% increase in trade surplus per year for total merchandise. Although, all the views regarding the fallout of the decision to step back from the RCEP agreement are just speculations at this point and we will get to know about the actual effects in the years to come.
Back in January, when Jeff Bezos visited India, he got no reception from PM Narendra Modi. Piyush Goyal advocated that Bezos was only covering up losses from predatory pricing by investing $1 billion in India and also condemned his pledge to create a million jobs by 2025 arguing that it hardly made up for the millions of Indians put out of work by the e-commerce site. It is a popular opinion that the Chinese were able to build tech giants like Alibaba only because they shut out US-based firms like Google and Facebook. Therefore, it is believed that India should also block them and create its own local champions. But to aid its overall development, the Indian economy needs all the economic vigour it can assemble and that involves attracting foreign investors. With its frequent policy changes, India has already got an image as a troublesome and unpredictable place to invest. The government further signalled the investors about their protectionist intentions through this act and risked a dampening effect on investors globally.
Protectiveness Vitiates The Budget As Well
In the budget 2020, the government not only hiked custom duties on a wide range of goods like grocery items, shoes, dolls and toys, ceiling fans, wooden furniture, kitchenware appliances, hairdryers, shelled walnut but also intends to make changes in the Customs Act 1962 through the Finance Bill. It will be amended to give the government the power to impose safeguard duties and tariff-rate quotas on imports on the pretence of injury to the domestic industry. Since the 1991 liberalisation era, this power was restricted to trade of gold and silver. The procedure for claiming preferential tariff rates under trade pacts has also been made complicated with importers having to give declarations along with the certificate of origin.
These changes will surely increase the scope of corruption by bureaucrats as they get more power. Also, these arbitrary tax spikes will lead to economic distortions and worsen the rent-seeking activities by domestic industries as they will lobby for their preferred tariffs which would have been dampened in a world with uniform taxes. Thus, instead, it needs to adopt the strategy of simplified, uniform and predictable tariffs which will eliminate tariff Inversion (in which intermediate goods are taxed more heavily than the final goods) and distortion costs could be kept very low.
The current policy choice reflects a highly mistaken mindset that one can cut back on imports while boosting exports, not realising that a reduction in imports, induced by an increase in tariffs, is expected to lead to a decrease in exports of a corresponding value. This is known as the Lerner’s Symmetry Theorem, a result used in international trade theory stating that an ad valorem import tariff will have the same effects as an export tax and is based on the observation that the effect on relative prices is the same regardless of the policy.
A Call To Escalate Exports
According to the World Trade Statistical Review, 2019 by World Trade Organisation (WTO), India’s average annual growth rate in merchandise exports was 5.3% between 2008 and 2018 which is well below Vietnam, Bangladesh and China. The growth rate of India in commercial services export was 8.6% per year on average from 2008 to 2018. This is below many of the developing countries namely China, Philippines, Vietnam, Singapore, Thailand, Qatar and Myanmar. There has been a substantial increase in exports of transport equipment, chemicals and food products which contributed to moving up India to the 19th position in world rankings of top exporting countries.
Although India has achieved many milestones in the last decade, it can do much better given its potential and unexplored territories. In fact, the government should try to increase its exports than constantly trying to decrease the imports if it wants to be a $5 trillion economy. Some scholars argue that the huge trade deficit of India is not because of increasing imports but of decreasing exports.
“Unless India’s exports grow at 15%, we won’t get 8% growth. For that, we should reverse some of the protectionist measures taken. If we turn protectionist, I don’t know how can we be an exporting power. Self-sufficient exporting powerhouse is an oxymoron” – Arvind Subramanian said while speaking at a webcast organized by EY India.
In the Economic Survey, while discussing India’s performance on Ease of Doing Business (EoDB), a series of case studies shows the inefficiency in the Indian system of Trading across Borders. As Italy topped the EoDB ranking in Trading across Borders, they compared India’s performance with that of Italy. India takes 60-68 hours in border compliance for exports while Italy took only one hour. Moreover, the cost of compliance is zero in Italy compared to $260-281 in India for export. Almost 70% of the delays occur due to procedural complexities, multiple documentations and involvement of multiple agencies for approvals and clearances. These inefficiencies, in turn, lead to time delay and end up pushing the cost to trade. Progressing digitalisation and combining various companies in a single digital platform could possibly decrease these inefficiencies and enhance users experience considerably.
Also, a study found that an apparels consignment going from Delhi to Maine (USA) takes roughly 41 days, but 19 of these are spent within India due to delays in transportation, customs clearance and loading at sea-ports. Apparently, the process flow for imports is more efficient than that for exports. In contrast, however, the imports and exports of electronics through Bengaluru airport were found to be top-notch. It thus recommended that the processes of Indian airports should be replicated in sea-ports as well.
It also suggested adopting policies aimed at strengthening its involvement in the export market for Network Products (NP) in order to get linked with the Global Value Chain (GVC). Through observations, it has been found that countries who substantially increased their exports and managed to maintain it did it through linking up with the GVCs. Given our vast labour force with relatively low skill-set, India’s strength lies in the assembly of NP. While the short-term objective is the expansion of assembly activities on a large scale by making use of imported parts & components, giving a boost to domestic production of parts & components should be the long-term objective. Assembly is a highly labour-intensive area that can provide jobs for the huge population of our country, while domestic production of parts & components can create high skill jobs. But for a country like India to transform into a preferred location for manufacturing enterprises, it is imperative that import tariff rates for standard goods are zero or negligible.Thus, India needs to control itself on the tariffs and restrictions. India needs accessibility, it needs foreign investment, it needs the competition to be a world-leader.
Conclusion
There are different kinds of restrictions when it comes to protectionism. We can certainly have the set of duties which seeks to create a level playing field for the MSMEs but it becomes harmful when we instead try to protect the industries which are already in a good position in terms of opportunities in the hope to flourish them. There is just a slight difference between these two kinds and policymakers need to incorporate this idea when drafting policies. For instance, India refused to allow permanent tariff liberalisation on health and farm products at the WTO Council Meeting as an answer to trade disruptions caused by COVID-19 is not harmful protectionism. Every country will bear the brunt of COVID-19, the difference being the level of disruptions faced by each one of them. But we should also keep in mind that the least developed and developing countries need to be guarded given the lack of resources available to defend themselves from the crisis.
India acknowledges the disruptions caused in the flow of medical supplies, food and other goods and services across borders and has been playing a proactive role in combating it but doing so at the cost of its own industries is something India (or for that matter none of the countries) would like to do given the economic crisis they are going to face. At the same time blindly putting up restrictions will only lead to increased prices for competitively produced imports and the customers will end up footing the bill. India committed the same mistake back in the 1970s. In order to be self-sufficient, a country needs to make its industries capable through the competition so that the users do not pay the price by buying some cheap quality or inefficiently produced product. Protectionism is not the ideal approach if we want to grow. We should have an equally or even more efficiently produced substitute ready if we want to raise the tariffs. Thus, India should instead focus on the production inside the country and work on infrastructure, logistics, productivity and lifting the standards of products if it wants to reduce the trade deficit.
