WHY PROTECTIONISM IS A RETURN TO BAD ECONOMICS
Four years on, is Narendra Modi’s famous maxim “Minimum government, maximum governance” turning out to be just another catchy campaign slogan, quickly discarded once elected?
Signs suggest a continuing reversion of the government away from its theoretical commitment to this maxim and back toward command and control methods that we supposedly discarded from 1991 and beyond.
To begin, price controls are back, something we thought we had left behind. Last year, after imposing price controls amounting to 85% of the original price on coronary stents, exactly as economics would predict, the result has been a hike in prices by hospitals for the overall surgical procedure, shortage of stents in the market, a big drop of foreign direct investment in this sector, with no actual gain for the supposed beneficiaries, the patients.
What is most puzzling is that according to regulator National Pharmaceutical Pricing Authority’s own data, Indian manufacturers already had almost a 60% market share, which begs the question, why did they need to be protected?
Recently the Union Budget’s explicit turn back towards import substitution with across the board tariffs on everything from kites and candles to electronic equipment, ended a 20-year trend of liberalising trade, which had given Indian consumers greater variety at much lower cost. Open ended protection never accomplishes its goals, and only leaves a perpetually inefficient domestic industry, large losses to consumers and to other sectors that use the now costlier products as inputs, and a permanently distorted economy.
Back in 2016, the government raised tariffs on imported steel in a bid to boost the domestic import competing sector and provide protection against cheaper Chinese imports. The result: small and medium sized manufacturing firms using steel as a key input cried foul, saying they were losing their export market and had to lay off workers as one of their main inputs had shot up in price. Once you go down the road of rolling out sector specific tariffs, a whole raft of rent seeking activities will occur, with industrialists trying to persuade bureaucrats and politicians that they too need a helping hand.
It is hard to resist the notion that we’re creeping back toward the days of the rightly much maligned Bombay Club, a group of powerful industrialists who made the case for protectionism. The rationale in those days was the dogma of socialism inherited from Nehru and Indira Gandhi but today the latter day members of the Bombay Club can make common cause ironically with the right wing Swadeshi movement which is suspicious of everything foreign and is highly receptive to protectionist arguments.
Another worrying trend in Modi’s late term economics is an apparent abandonment of his very worthy goal of generating large scale labour intensive manufacturing. The Make In India scheme has failed thus far to turn India into a global or even regional manufacturing hub but Modi seems to have shifted the terms of the debate and embraced the Swadeshi notion that any occupation, even a poorly paying and unproductive one, constitutes a FEB 26: To the playing of soft shehnai music, the chanting of Sanskrit shlokas and sprinkling of rose water, about a hundred guests, mostly relations, saw Rajiv and Sonia sign the marriage register at the Prime Minister's house on Sunday evening (Feb 25)
NEWS OF THE WEEK