By Nisid Hajari, Clive Crook.
At Davos in January, Indian Prime Minister Narendra Modi said India was open for business and even likened protectionism to terrorism. This month his government raised tariffs on nearly 50 product groups, from clocks and kites to TV and auto components. The measures follow new duties imposed in December on electronic goods such as mobile phones and microwave ovens.
The idea is to give reeling local industries a respite from cheap Chinese imports. Temporary protection, says the government, will let local companies grow into viable competitors that can stand on their own. Plausible as this may sound, not least to the country’s voters, the policy is almost certain to fail — just as it will in the U.S., where the Trump administration is making similar protectionist arguments.
Granted, the new tariffs might make sense politically. Modi faces state elections in the next year, and a general election in 2019. There’s rising discontent among poorer Indians, many of them farmers. (The highest new duties — 50 percent — were imposed on fruit and vegetable juices.)
But India, of all countries, should need no reminding of the damage protectionism can do. Until the 1990s, its economy was virtually closed, highly planned — and stagnant. Growth surged thanks to bold market-opening reforms. Years later, much remains to be done, and the reforms are unfinished work. Far from carrying this modernization forward, raising tariffs is a backward step.
As part of its struggling “Make in India” campaign, the government hopes to convince multinationals to invest in India and integrate its producers in global supply chains. Good idea: Developing those connections would create employment for millions of workers struggling to make a living off the land. But manufacturing in India still isn’t as easy as it should be. Raising the cost of imported components will make it even less attractive.
Trade restrictions won’t promote competition, either. In the past they resulted in coddled, high-cost, unproductive companies better at gaming trade barriers than innovating. The idea that Indian manufacturers of candles and toys need a few more years of help before they can take on the world is absurd: These are hardly infant industries.
The new measures will prompt complaints at the World Trade Organization, and could lead to retaliation from the U.S., Germany, China and others. Meanwhile, Indian consumers will face higher prices (hence lower real wages), and Indian firms that rely on imported materials may end up shedding workers.
It’s sometimes argued that China succeeded partly by propping up fledgling companies — but tariffs there have been falling steadily for decades. Its manufacturing success has owed more to its investments in infrastructure, primary education and health, and to making it easier to do business, than to trade restrictions.
That’s the example India should follow. If the country wants world-beating manufacturing companies, it must make acquiring land, and hiring and firing workers, more straightforward. It should lower the costs of electricity and freight, and upgrade its physical and information-technology infrastructure. It should overhaul its state-dominated banking system to get investment flowing.
What Modi said at Davos was right: India must be open for business. Flirting with the failed economics of the past is not the answer.
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