After Liberalisation, Privatisation, Globalisation, is India headed towards Protectionism?

By Sunanda Natrajan

Ever since India opened up its economy in 1991, it has aspired to achieve the status of a developed nation. It has been more than 25 years since the then Finance Minister Manmohan Singh followed the ‘liberalisation, privatisation and globalisation (LPG)’ policy to rescue the country at its darkest moment with the help of a liberalised trade and investment regime. Post that, India became a member of the World Trade Organization (WTO) in 1995 and currently boasts the 3^rd rank after China and the USA in the GDP (Purchasing Power Parity) scale. With all these developments, the country is on its way to becoming a superpower by 2020.

Protectionism and import substitution

Arun Jaitley, in his 2018-19 budget speech, announced a few key measures to attain the fiscal targets this year and ultimately, accelerate the rate of growth of the Indian economy. One of those measures was the increase in import duties of around 45-50 items belonging to more than 10 sectors that will fetch the government a revenue of almost ?7000 crore. India imports parts and accessories of certain mobile phone brands, cars, diamonds, other gemstones, and even fruit juices and soyabean oil among other agricultural products. These account for a loss of approximately $75 billion dollars in imports for the nation after the hikes in their respective duties. Increases in customs duty range from 33-100% which has primarily been implemented to enhance the scope for value addition and eventually domesticise production of all the imported categories of goods in order to promote the Prime Minister’s beloved ‘Make in India’ campaign and subsequently, generate employment opportunities.

This kind of protectionism is expected to raise prices exorbitantly for domestic consumers in the short run. In order to substitute imports, the indigenous industries and manufacturers need to be well-equipped with the kind of technology and machinery that is necessary to carry out advanced production. Until that happens, the producers are expected to continue to import the items despite the high duties in order to satisfy the demand of the consumers in the country, transferring the burden of the additional costs on them. However, on the outset, this kind of barrier to trade may play out somewhat differently in the global scenario where India, as a member nation of United Nation’s World Trade Organization (WTO) as well as the General Agreement on Trade and Tariffs (GATT), is regarded as a significant supporter of the notion of free trade.

Review of India’s stance at the WTO

WTO is an organisation that stands for trade openness and dropping down trade and non-trade barriers to the movement of goods and services. The primary objective is to facilitate smooth and uninterrupted trade between nations, thereby providing impetus to growth for various economies. Since it became a member of the WTO, India has had 6 Trade Policy Reviews (TPR), the latest one being in 2015. As an important entity among the other nations, India’s proposals have mainly focused on putting forth demands for achieving food security and measures to develop the Indian agricultural system. Moreover, in the wake of globalisation, efforts have been devised to protect the Indian manufacturers from extreme competition worldwide.

However, India’s import tariff rates have always been a source of concern. The nation’s tariff regime has always functioned on a number of disparities between the WTO-sanctioned ‘bound rates’ and the Most Favoured Nation (MFN) ‘applied rates’ charged at the border. A 2017 report by the United States Department of Commerce stated how WTO data revealed that on an average, India’s bound rates have been around 48.5% while the MFN rate in 2015 was 13.4%. These discrepancies make it hard for many exporters in the US to operate. Furthermore, the WTO-bound tariff rates on agricultural products for India were 113.5% and bounded rates were not applied to non-agricultural products. Despite its goal of moving towards the ASEAN average of 5% import rate, India has not systematically reduced its basic customs duty in the last 6 years. Therefore, almost 60% duty is charged on flower imports, while imports of coffee, alcoholic beverages and automobiles face 100%, 150% and 75% duty respectively.

Despite this scenario, the country has progressed by leaps and bounds from what it was back in the 90’s and Indian exports and imports have crossed double-digit growth multiple times. As per the report of the 2015 Trade Policy Review for India, the other member nations have lauded our nation for its fast-paced advancement, especially in the services sector. The Chairperson’s concluding remarks, in fact, included suggestions for the Indian government to increase investment in basic areas such as infrastructure, education, healthcare, transportation, and supply. It even urged the country’s representative to pursue certain tax reforms to increase the government’s revenue. On that note, member nations at the WTO even welcomed the introduction of the Goods and Services Tax in the country.

Upshot of hiked duties

Recognising the fact that India has been playing an indispensable role in the global economy, every move has its consequences and so does this one. In the recent past, India has been recognised for its economic and policy reforms pertaining to business and investment in trade, particularly for its policy that provides duty-free and quota-free access for Least Developed Countries (LDC) exports. Therefore, increasing the import duties as part of the current budget has raised questions from nations around the world regarding its free trade agenda.

Imports and exports of commodities like mineral fuels, cereals, vehicle accessories, cotton, precious gemstones, sugar, other agricultural commodities, and even textiles account for a massive part of the GDP of India. Raising duties on these commodities has not been welcomed positively by nations and by the WTO, as a whole. US President Donald Trump has already attacked the nation with a ‘reciprocal tax’ in response to the 50% duty levied on the much sought-after Harley Davidson. On the other hand, German ambassador Robert Ney has also questioned India’s decision to raise duties, talking about how India had a trade surplus of nearly $5 billion with the European Union. It is instead suggesting the country’s PM to negotiate a free trade.

This entire backlash comes into the picture after PM Narendra Modi had derided trade protectionism in his recent inaugural address to the World Economic Forum at Davos, equating it with terrorism and calling for India to champion the progress towards globalisation. Having stated that, world leaders have displayed a very confused and a rather disapproving reaction to this sudden change in its stance.

What to expect?

Many international experts foresee a depressing picture for the economy post the news, predicting that increased duties might eventually lead to increased inefficiencies in the manufacturing sector as the sector does not have the imminent capabilities to undertake self-sustaining production. Instead of domestic value addition, India might be summoning macroeconomic variables to blow up in the wrong direction as the raised duties are anticipated to have a counter-productive impact and ultimately, produce an inflationary pressure. Moreover, on the international stage, this has sparked widespread dissent and India might lose out on a huge proportion of its GDP as its trading partners have confirmed their hesitation in doing any further trade with India.

Early warning signs were given at the WTO TPR in 2015 but it seems as if the inward-looking development strategy still holds true for the country. Its global repute as a cooperative trading partner, which advocates for free trade, is at stake and might engender a downward spiral from here on. On the micro level, Indian consumerism doesn’t seem to be a priority for the government as the common man will be forced to bear the burden of high prices, supply bottlenecks and removal of certain products from the market altogether. In a nutshell, India’s economic standing has been blotted with a huge question mark and it’s time for the country’s policymakers to provide answers.

Featured Image Source: Flickr