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Why does India need to shed its protectionist image?

Updated: Dec 18, 2020


By: Shivangi Gautam


As a newly independent nation in 1947, India tried to survive without much international trade. The post-independence development strategy was marked by export pessimism, added to which was the not-quite misplaced nationalistic approach of import substitution-led industrialization. To top it, there was public-sector control of the commanding heights of the economy. One of the consequences of this approach was excessive catering to the industry which was done by keeping wage goods cheap and import tariffs very high. The country ditched this model of local production for local consumption following a currency crisis in the early 1990s that forced policymakers to ask the International Monetary Fund (IMF) for help. The IMF cash came with conditions: India had to open up to foreign investment, cut red tape, and remove trade barriers. Many saw this as the start of India's reintegration into the global economy, and over the last 20 years, liberalization has connected its young, vibrant workforce with firms around the world.


India is still nowhere in dropping its age-old export pessimism policies and the Indian industry is still timid in its approach to free trade agreements. Indian producers do not eye the large overseas market that will be available duty-free for their products and services. A few reasons for this could be - the world turning protectionist, a sluggish global demand, far too many non-tariff barriers, and Indian firms facing tough regulatory qualification requirements to enter foreign markets. In a report on the global trade barriers, the US trade department singles out India as having the highest tariffs "of any major world economy" - averaging 13.8%. It describes Indian trade policy as opaque, unpredictable, and says it often leaves US firms drowning in paperwork. The above-mentioned reasons might be true but are not enough for India to not embrace the Regional Comprehensive Economic Partnership (RCEP). India’s share of global merchandise trade is less than 2% as against China’s 13%. Going from 2% to 4% is possible, even in a world driven by protectionist forces and a growth slowdown. It would call for a 100% jump in our exports, which is an important engine of domestic growth.


During the COVID - 19 pandemic, many of the measures, taken ostensibly to protect domestic manufacturing, could end up hurting exports that depend on global inputs. The Indian experience with protectionism has been bad. After Independence, the nation may have needed to follow protectionist policies to survive and let the domestic industry find its feet, but over the next four decades, excessive protectionism, quotas, and licensing crippled economic growth, kept out new technologies, and hobbled production capacities. India’s policymakers are prone to knee-jerk reactions instead of following a well-thought-out plan. This can be seen in the fact that no comprehensive and detailed industrial or manufacturing policy has been debated or announced despite catchy slogans like Atmanirbhar and Make in India.


Like many Western economists, Raghuram Rajan, the former governor of the Reserve Bank of India, and Arvind Subramanian, India’s chief economic adviser, a government policy think tank advocated privatizing state-run banks, cutting state subsidies, and easing rules for foreigners entering the retail sector. But most of these suggestions were not implemented. Arvind Panagariya, the vice-chairman of the Niti Aayog had favored allowing genetically modified (GM) crops into India, which has been strongly opposed by many lawmakers who said they were a risk to the environment and public health and also lead to exploitation of small farmers because of repeated payments to seed manufacturers. In Mr. Subramanian’s own words “Unless India’s exports grow at 15 percent, we won't get 8 percent growth. For that, we should reverse some of the protectionist measures taken. If we turn protectionist, I don't know how we can be an exporting power. Self-sufficient exporting powerhouse is an oxymoron”.


A reversal of export pessimism would entail a focus on trade facilitation, amending the anomalies that hinder the growth of export-oriented Special Economic Zones, and embracing global value chains. The objective, ultimately, is to encourage and not thwart, India’s export optimism. As a large economy, it is time India behaved like one, especially in international trade, and is unafraid of engaging with canny trade partners.


Sources:

- https://www.livemint.com/news/india/self-sufficient-exporting-power-is-an-oxymoron-arvind-subramanian-11591199254860.html

- https://www.business-standard.com/article/economic-revival/india-must-shed-its-protectionist-attitude-ex-cea-arvind-subramanian-120060400100_1.html (Picture)


*All arguments made and viewpoints expressed within Youth In Politics and its nominal entities do not necessarily reflect the views of the writers or the organization as a whole.

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