One of the well-acknowledged policy mistakes in the initial decades after gaining independence was Indian policymakers’ fascination with protection of domestic industries via high import tariffs. Far from providing a fillip to either industrial growth or domestic employment or consumption, these policies resulted in India lagging behind its Asian counterparts. For the better part of the past three decades, economists have been pointing to the trade-led growth of China to explain how India missed the global growth bus. When the Bharatiya Janata Party (BJP) came to power after getting a majority on its own in the Lok Sabha — the first for any party since the start of economic reforms in 1991 — it was hoped that India would work towards retrieving lost ground and leverage trade to boost growth and employment. Prime Minister Narendra Modi also raised hopes when he reiterated his trust in the wisdom of engaging with the world. His boldest stance on this issue came in Davos while addressing the plenary session of the World Economic Forum (WEF) at the start of the year. Mr Modi spoke passionately against the rising tide of protectionism across the world, even as the erstwhile champion of free trade, the United States, was threatening to put up tariff and non-tariff barriers. In fact, Mr Modi described protectionism as one of the three main threats facing the world — the other two being climate change and terrorism.
However, the rhetoric hasn’t matched reality. There has been a steady slide in the Indian government’s actual support for globalisation and free trade. What started as an aberration in this year’s Budget in February (the finance minister had raised import duties on close to 50 items) is fast becoming the norm. On Tuesday, the government raised import duties on as many as 328 textile products by up to 20 per cent. This is the fourth such instance of higher tariffs on inbound goods this year. Last month, apart from announcing higher safeguard duties on solar cells imported from China and Malaysia, the government raised import tariffs on 76 textile products, including jackets, suits and carpets. More hikes are reportedly in the offing. For instance, India is considering raising import duties on 29 items (mainly agricultural) that are imported from the US as a retaliation to tariff hikes by that country on aluminium and steel. Moreover, the government has acknowledged that it has set up a panel, led by the Union Cabinet Secretary, to examine import duty hikes on consumer goods such as televisions, refrigerators and washing machines.
These protectionist steps are being justified on the ground that they will let domestic companies grow into viable competitors so that they can stand on their own. But if achieving that goal was as straightforward, every country would simply abolish all imports and achieve full employment. The fact is protectionism does not benefit the domestic economy and encourages inefficiency of domestic manufacturers. It is likely to hurt exports, make domestic goods costlier and reduce benefits to consumers from increased competition. In the long term, protectionism is likely to have a debilitating effect on industry’s ability to compete globally. Flirting with the failed economics of the past is hardly the answer.