Easing trade barriers helped India prosper

Subir Roy

Senior Economic Analyst

India seems on its way to raising and maintaining a protectionist barrier around itself in a reversal of the policies of economic liberalisation set in motion since the nineties. Coinciding with the globalisation phase of the world economy, the opening up to the outside world is considered to be one of the elements of policy that brought about rapid economic growth and reduction in poverty. The phase continued for a quarter of a century, until the past three years when the reversal got going.

Matters economic never stand in isolation and the recent direction has been deeply entwined in politics. The initial push came from the nationalist mindset of the RSS-BJP which sees India as powerful and self-reliant (atmanirbhar) and not as part of a global dynamic of economic cooperation among nations. In the current year, as relations with China have deteriorated, the need to free the country from dependence on Chinese imports, which has led to a large adverse trade balance, has been voiced repeatedly. This has added to the protectionist measures.

The counter-argument that it is beneficial to trade intensively and brings down national barriers more and more is put forward by both influential academics and senior industry voices. One person who otherwise vibes well with the present dispensation but has come out repeatedly against the switch in trade policy is Arvind Panagariya, long-term resident scholar in the US and a former vice-chairman of Niti Aayog.

“I am worried about rising tariffs,” he says which will hinder the growth of firms. There is a misconception that local production can substitute imports and aid growth whereas in a globally interdependent world with complex cross-border supply chains, imports and exports grow in tandem. Under conditions of protection, the idea of ‘comparative advantage’, a country focusing on producing what it is good at, is ignored.

If protectionism does not work, then what does? RC Bhargava, chairman of Maruti Suzuki and a long-term observer of the Indian economic scene, says what is needed is a combination of two elements. There has to be ease-of-doing business. Mountains of rules and regulations for which India has been historically famous, have to be removed. Plus, the focus has to be on keeping costs low.

Bhargava adds that right from 1950, India has been following wrong policies which have been raising production costs. On the fear over job loss from inducting automation to reduce cost, what needs focusing is what will make a manufacturer most competitive. So, each manufacturer has to see it in terms of quality and costs — what is the most appropriate manufacturing system and how much low-cost automation should be adopted. Where trade barriers become relevant is on the issue of costs.

Maruti itself does not import more than 3-4 per cent of the value of its cars. It is the vendors supplying components to Maruti who have to import. Their imports are dictated by the fact that what they require is either not available — the technology does not exist in India — or is not of the right quality. The bill for raising trade barriers will ultimately have to be picked up by the Indian consumer.

Where politics and economics directly confront each other is in the recent decision of the Defence Ministry is to stop the import of 101 items by 2024 to boost indigenous production. This will mean an additional demand of Rs 4 lakh crore for the domestic industry. What is significant is that the list includes many high-technology items like artillery guns, assault rifles, light combat helicopters, sonar systems and radars. The list has been prepared by the ministry after consultations with the armed forces and public and private industry.

But the reality is a little different. The Make-in-India slogan was given in 2014 but the targets set under it for the indigenous defence industry have not yet been met. Why? The Indian defence industry feels that there is no commitment on the part of the defence forces to buy what they produce.

As a result of the liberal economic policies, Dr Manmohan Singh has pointed out to the BBC that India’s real GDP is 10 times what it was in 1990 and 300 million people have been lifted out of poverty. The share of global trade in India’s GDP has gone up by nearly five times.

Is there a downside to this? India’s trade deficit has gone up from $1.5 billion in 1991-92 to $184 billion in 2018-19. With the trade deficit thus ballooning, the economy should have been in dire straits. But over the same period, foreign exchange reserves have gone up from $9.8 billion to $413 billion. Of course, services exports (software) and remittances played their role. But over the same period, the per capita income (in rupees) of the Indians has gone up around 18 times.

The upshot of the recent developments is a growing list of products being put behind trade barriers. This will take Indian manufacturing away from global competitiveness and the chances of Indian brands making it to the global league will go down. What’s more, the choice of items for protection through tariff or non-tariff barriers will be done through a process of administrative decision-making in which politicians and bureaucrats get involved. This signals the return of the licence-permit raj.

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