Open-ended tariff protection will affect competitiveness
The government has been increasing import tariffs and other barriers in recent years to protect Indian industry. The idea is that higher prices of imported goods would push Indian consumers to buy domestic products, which will increase output and employment. This would also incentivise foreign producers to shift production to India. However, this is not exactly how things work in the real world. Higher tariffs and other trade barriers tend to increase costs and affect the overall competitiveness of the economy. In this context, the government is reportedly planning to introduce a sunset date for tariff protection in various industries. This should be welcomed. The government would do well to implement it at the earliest. This would make it clear to all manufacturers that they will face more competition from a specific date, which hopefully would force them to become competitive. For instance, the government has introduced production-linked incentives for a limited period. It should follow a similar policy for tariff protection. Open-ended protection would affect competitiveness and potential growth in the medium to long run.
The government has also introduced non-tariff curbs to restrict imports of various items. This should have been avoided. India has tried the strategy of protecting domestic businesses from international competition in the past, which resulted in inefficiency and subpar growth. There is no reason why the outcome would be any different this time around. Thus, it is reassuring to see there is some re-evaluation of the tariff policy. It is also important to recognise that the drive for self-reliance should not take India down the wrong road, and make consumers hostage again to inefficient producers. Consumers are entitled to what an open economy offers: The best products at the lowest price. Besides, in terms of economic activity, India benefited from trade openness in recent decades and its weaknesses cannot be addressed by higher trade barriers. As former chief economic advisor Arvind Subramanian and Shoumitro Chatterjee of the Pennsylvania State University have shown in a recent research paper, India’s overall exports registered an average annual growth rate of 13.4 per cent between 1995 and 2018. This was the third best performance among the top 50 global exporters. During the same period, India’s manufacturing exports went up by over 12 per cent annually. Higher exports contributed to high growth.
However, one of the biggest policy failings of India is that it has not been able to take advantage of its labour force to increase exports. As Dr Subramanian and Dr Chatterjee have shown, India’s share in global low-skill exports is about 15 percentage points less compared to its share of labour force. Thus, India’s low-skill exports are about $60 billion less annually than they should be. It is also losing economic activity worth about $140 billion on this account per year. India has not been able to capitalise on labour-intensive production and exports over the decades because of a variety of domestic factors. Higher tariffs are unlikely to help. On the contrary, it would affect exports. With higher import restrictions, India will not be able to integrate into the global value chain in a big way, which requires seamless movements of goods across borders. India’s participation in the global value chain has declined in recent years. Increasing tariffs would only make things worse. Thus, policymakers must review the tariff policy. Putting an end date for tariff protection would be a good starting point.