Dr Ashwani Mahajan
Free trade protagonists, especially former Vice Chairman of NITI Aayog, Prof Arvind Panagariya was very much disappointed when Finance Minister Arun Jaitely announced in his budget speech 2018 that automobile spares, cameras, television, electricity meters and smart phones will attract higher import duties. Their disappointment had increased when the Revenue Secretary of Government of India announced that this increase in import duties is aimed at protection of domestic industries. Interestingly, there could be two objectives of increase in import duty, namely, increase in the revenue of the Government and/or to provide protection to the domestic industry.
Later Government of India increased import duty on 328 textile items from 10 percent to 20 percent, again to provide protection to the domestic industry. On September 26, 2018 import tariff on 19 items including air conditioners, refrigerator, shoes, and washing machine, with an objective to reduce non-essential imports to the tune of nearly rupees 86 thousand crores. This means once again government has made its intentions clear to discourage imports and encourage domestic production, that is protection of domestic industry. Adoption of import substitution policy consistently, has sparked a new debate amongst economists in India and abroad, whether the present regime has turned protectionist and if yes, is this a good policy?
Some economists think that it is not a prudent policy. They argue that if tariff is imposed on imports, goods will become expensive for consumers and domestic industry will turn inefficient due to lack of competition. For them, the only way to achieve the objective of cheaper goods and efficient production is to adopt free trade. But many economists also think that since India is facing the problem of heavy trade deficit, and that is causing rupee to get weaken day by day, employment in the country is also suffering due to huge imports, we need to make efforts to overcome this problem. They also argue that when other countries in the world are turning protectionist, there is no need to remain wedded with free trade.
Before independence, due to intense pressure from nationalist leaders British Government had to impose tariffs on imports to protect domestic industry from foreign competition. As a result of increase in tariff, textile, paper, sugar and cement industry got the protection from unequal competition from imports and this helped the growth of these industries in India in 1930s. After independence the policy makers continued with the same philosophy and the general trend was imposing tariffs and non-tariffs barriers on imports to somehow protect the domestic industry.
This protectionist economic policy continued till 1980s. In the latter half of 1980s, controls on imports were relaxed partially and this led to fast increase in our imports. Due to not so competitive exports, the country started facing unfavourable balance of trade (BoT) and balance of payment (BoP). This resulted in depletion of foreign exchange reserve and increase in foreign debt. Situation became worse by 1990 and we reached a situation when country didn’t have foreign exchange to pay for even one week’s imports. To somehow avoid default in repayment of sovereign loan we had to mortgage nation’s gold. In 1991 there was a change in economic thinking and, which resulted in lifting of all tariff and non-tariff barriers. In the meanwhile new trade agreements were made in General Agreement on Trade and Tariff (GATT) and WTO came into existence, resulting in free import of commodities across nations, by gradually lifting of barriers. As a result of WTO agreement tariff and non-tariff barriers, which were also known as quantitative restrictions became a things of the past.
Constantly growing trade war in the past few years, especially initiated by United States after Donald Trump taking over as President of US. US is fast giving up on free trade and has started with the slogan of ‘buy American- hire American’ sending a clear message that foreign goods and foreign workers are no longer welcome in US. Argument being given by US administration is that due to free import of cheap foreign/ Chinese goods, American Industry has got ruined and therefore, by raising tariffs they are actually protecting their industry. It started with imposition of tariff on steel and aluminum, and the same was extended to more goods coming from China. Latest announcement of tariff hikes ultimately take it to nearly $500 billion imports coming from China. Meanwhile, China has also retaliated by enhancing tariff on goods coming from US. These steps aimed at curbing free trade, simply mean beginning of trade war in the world. Though US actions of curbing free imports are more against China; however, almost all trade partners of China are facing the heat of this trade war launched by US.
This action of US is legitimising protectionism, which had become a thing of the past in the post WTO era. With this the future of free trade is also seemingly very gloomy. India, which has been facing the problem of huge deficit in its balance of trade, especially from China, which accounted for nearly ….percent of its trade deficit, has been suffering not only from payment problems and constantly depreciating currency, but has also seen its manufacturing and employment thereof getting destroyed. This has been happening due to cheap Chinese imports, generally subsidised by Chinese Government. Despite, people boycotting Chinese products, imports from China are not coming down due to changing composition of Chinese imports, as Chinese imports now comprising of nuclear reactors, project goods, power houses, telecom equipments, chemicals and most importantly electronic goods and spare parts. Government of India last year imposed anti dumping duties on over 100 items coming from China. On many other items standards were imposed to curb sub standard Chinese imports. We must understand that free trade is good only in theory; that too only if all trading countries follow the rules of the game and keep their tariffs low and do not give trade distorting export subsidies. If these conditions are not fulfilled then free trade will hurt those who reduce tariffs, as there will be import surge, while exports suffer.
Given the situation that other countries continue to raise tariffs and are even subsidising exports, adopting free trade doctrine may ultimately be harmful for India.
We should realise that opening up of trade and reducing our tariffs to less than bound rates as agreed in WTO agreements has led to import surge in the country, with exports growing at much lower rate as compared to imports, resulting in worst trade deficit and payment problems. Manufacturing in the country has been the worst victim and so was the employment. Therefore, when other countries of the world are engaging in trade war, divorcing free trade, it gives us an opportunity to dump free import policy, by raising tariffs and safeguard the interests of our economy in general and manufacturing sector in particular. When President Trump can argue for protecting US industry, nothing stops us to protect our industry. We can revive our telecom, electronics, chemical, machinery and pharma especially our API (Active Pharmaceutical Ingredient) Industry.
(The author is Associate Professor, PGDAV College, University of Delhi)
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