12 - 04 - 2021

Protectionism and Atmanirbharta slogan

A grand slogan can delude many people, but in the end the country could be achieving entirely the opposite objective.Way back in 1970, we lived under the slogan of Garibi Hatao. Except for highlighting poverty, it did exactly the opposite. Handouts started, a band of intermediaries cropped up, government schemes were hijacked and the same assets were circulated. Meanwhile, deficit and debt were piling up. More than the financial implication, the paternalistic state established itself with questionable outcome.

 

Now we live under the slogan of Atmanirbhar Bharat, which is shorthand for protectionism. During the past five years, out of the 5,500 items under the six-digit tariff code, nearly 3600 have undergone upward revision of the customs tariff. In the 2020-21 Budget alone, more than 600 items have undergone upward tariff revision. It may be music to the ears of economic nationalists, but its intended and unintended consequences are not benign. We were revisiting protectionism and import substitution after a generation. This was one reason why competition was less; cartelisation was rampant, production inefficient and customers were worse off. With Atmanirbharta now, it is almost like fighting the future’s war with yesterday’s ammunition.

While countries newly liberated from colonial rule had a reason to be protectionist because of paucity of foreign exchange and lack of depth in economy, the present state capitalism-led approach confuses most. Earlier, it was the incipient state of development, so the menu of options was limited. In East Asian countries, protection was limited to those industries where the marginal cost of production was higher than the global cost of production until the time the cost started converging with the global one. In India, on the contrary, it resulted in price gouging, lack of innovation and high prices for the customer. The export market could not be exploited because the entrepreneurs were happy meeting the huge demand of the domestic economy. One can say it will be for a limited time. If the powerful interests could prevail to bring in this policy despite sensible advice from Jagdish Bhagwati and Arvind Panagariya, where is the guarantee that this protectionism will vanish after a limited period?

Even in the miracle nations, the government choosing the champion industry had huge problems. They took a bigger slice of state resources than the market forces would have allocated. Of the six areas for concentration initially in South Korea, not a single industry exists as a driver of export or growth after 30 years. We are most likely to see allocative inefficiency and rising cost levels, with firms shielded by tariff from global competition.

Increase in tariff, licence requirements and restrictions on imports introduced of late, are basically anti-trade. They render Indian firms uncompetitive and consumers worse off. The specialisation required for comparative advantage which propels trade just vanishes. The production possibility frontier shrinks to the consumption frontier and the possibility of expanding production shrinks. The dream of making India an export hub and the third largest economy will come crashing if such zero-sum policies are followed. Reducing competition and allowing domestic cost to rise is hardly the recipe for delivering economic growth. Right now, only a dozen entrepreneurs are talking about what a great future India has, though all variables point to the contrary. Perhaps they stand to gain disproportionately or they are driving policies and what we are hearing is the ‘pied piper’ version.

Indian government policies have mostly been pro-incumbent business than pro-market as economists Dani Rodrik and Arvind Subramanian found in their studies earlier. The same businesses and businessmen shifted their sourcing to China for price and profit advantage instead of specialising, innovating and driving down the cost. The government, in its turn, failed to join trade blocs like the European Union, Asia-Pacific Economic Cooperation (APEC) and the Regional Comprehensive Economic Partnership (RCEP) to have tariff advantage as a trading partner. Though the RCEP option is not closed yet and the questions raised by India are relevant, they have come at the last minute. If India stays clear of it, India will be loser as the member countries will shift to other member countries for sourcing. Most countries are trading partners here and loss of trade will be substantial. It will be like hurting the nose to spite the face. This protectionism stems from two fundamental flaws in the government’s understanding. First, the belief that state-led ‘champions’ can conquer the world. It has been proved wrong time and again. Economic Surveys of past years show that Indian exports are unusual as the largest firms show a much smaller share compared to other comparable countries. Are we whipping the wrong horse? The second one is conflating security with trade. The obsession with China has perhaps led the country to follow the Chinese path. The problem is that we are doing it after 40 years, when it is dead knowledge. India does not matter to China with 1% of its imports from this country. But India’s dependence is much more on electronic goods, parts of machinery and intermediate goods for the pharmaceutical industry.

We may see any dream, but we are not strong enough. We can build our strength by intelligent trading rather than by staying behind a newly raised ‘iron curtain’. Here it is instructive to follow new winners like Bangladesh, Vietnam and Cambodia, which have done it with pragmatism, prioritisation and well-considered pathways. The sooner we come out of backward-looking policy sets, the better off India will be. Otherwise, in 2030, instead of being the third largest economy, we would be laggards in the pack. Autarchy doesn’t take a country on the glide path to prosperity; it sinks the nation instead.

Satya Mohanty

Former Secretary to Govt of India