The protectionism path

Budget continues the backward slide on trade

The Union Budget for 2020-21 has been presented at a time when demand in India is depressed and exports growth was negative for months after August 2019. It is unfortunate, therefore, that trade and industrial policy in the Budget appeared particularly incoherent. In some sense, the headline developments tell the story: This Budget has continued the trend of the past few years in raising tariffs. The justifications for this move are just import substitution and protectionism. The rhetoric of the Budget was not pro-trade in the least; “cheap and low quality imports” were effectively blamed for problems in employment generation. Worse, there was a promise to review all customs duty exemptions by September this year — and the finance minister said that this review would be crowdsourced. Surely, the suggestions to this effect will come mainly from those corporate interest groups that benefit from protection; consumer advocates will not receive the same attention. If the process itself is flawed in this manner, there can be little hope for the outcome.

The minister also departed from her ministry’s Economic Survey to attack the performance of India’s free-trade agreements (FTAS). The Budget speech noted that “imports under free trade agreements are on the rise”, and that there were “undue claims of benefits” under FTAS, which “posed a threat” to domestic industry. “Stringent checks” were promised, which indicates that rather than making it easier to do business in India, imports will shortly be put through the sort of red tape rigmarole that Indian bureaucrats excel in producing. It is hard to see how this section of the Budget gels with an earlier section that promises India must become a centre for the assembly of “networked products”, essentially those that emerge from global value chains. This was a theme of the Economic Survey 2020 and duly found a mention in the Budget speech, but the effect of the Budget’s actual provisions works in the opposite direction. Government distortions are also inevitably linked to the notion of “one district, one product”, which, the Budget speech claimed, would boost exports.

Protectionism, intervention, and import substitution must not be allowed to become the new normal in India. This represents backward, muddled economic thinking and must continue to be called out as hurting both Indian consumers and producers. Protection merely creates a high-cost, uncompetitive domestic industrial base. If the only concern is protecting micro, small, and medium enterprises, for example, then the next logical step is surely to reintroduce small-scale reservations and licences — the last vestiges of which this government bravely did away with in its first term. Especially in the context of a domestic demand crunch, growth can revive only if its participation in global trade increases. This is not a one-way street. It needs clear and predictable tariffs alongside investment in logistics and deregulation. While the government has focused on the latter two, it has moved backward on tariffs and openness. The economic history of India till the 1990s reveals the dangers of allowing the belief to take hold that tariffs lead to job creation and a productive base. It did not work then, and it will not now.