TalkPoint: With higher import duties, is Narendra Modi turning protectionist?

Illustration by Siddhant Gupta
Illustration by Siddhant Gupta

The Narendra Modi government has hiked the import tariffs across sectors to a 30-year high. Importing automobile parts, cameras, televisions, electricity meters and smartphones will become expensive, and risks of trade disputes are likely to rise.

ThePrint asks: With higher import duties, is Narendra Modi turning protectionist?

The custom duty hike could lead to retaliatory moves by trading partners and frustrate trade openness

Radhika Pandey 
Consultant at the National Institute of Public Finance and Policy (NIPFP)

Throughout the tenure of this government, we have mostly seen efforts towards liberalisation of foreign capital flows. The FDI policy regime has been liberalised, particularly the local sourcing norms. And other seemingly protectionist restrictions associated with FDI inflows have been largely eased. The approval-granting body for FDI- the FIPB has been dismantled.

The announcement of hiking custom duties came in as a surprise to many. On international platforms India has been critical of the protectionist policies advocated by advanced economies.

While the hike in custom duties is a popular tool of intervention in international trade policy, and many countries including advanced economies resort to it, its impact on promoting domestic manufacturing is uncertain unless the domestic infrastructure for manufacturing is improved.

Further, the hike could lead to retaliatory moves by India’s trading partners, and frustrate efforts towards greater trade openness.

The move is intended to give a fillip to the government’s flagship Make in India program. However, without concomitant improvement in investment climate, its desired impact is questionable. This could add to inflationary concerns via transmission through imported inflation. The move seems to be inconsistent with the government’s policy impetus towards globalisation and openness.

Addressing existing bottlenecks, providing new avenues for credit to facilitate infrastructure for manufacturing, and creating a more conducive environment for private investment are more viable measures towards promoting domestic manufacturing without the potential deleterious impact on international trade.

The limited policy intervention required in the custom duty landscape is to address the duty inversion seen in some sectors (high custom duties in raw materials and low custom duties on final products). A more calibrated study of sectors facing distortion in the form of duty inversion would help. A more rationalised custom duty set up should be the way forward.

Higher levels of protection will also encourage a return to the inefficiencies of the pre-reform era

Narendar Pani
Professor, National Institute of Advanced Studies

The Narendra Modi government’s decision to raise import duties has brought to the fore a common fallacy in judging the economic direction of a culturally right wing government.

It is typically assumed that those at the right wing of the cultural spectrum will tend to lean towards the right in economic policy as well. The rise of the Swadeshi Jagran Manch has made it amply clear that it was perfectly possible for a right wing cultural movement to adopt statist economic policies, but it was still assumed that this would not extend to the Modi government.

In the initial years of his government Prime Minister Narendra Modi played along with this assumption. He strengthened his free market image by appointing a right wing economist from Columbia University as the Vice Chairman of NITI Aayog. But insiders in that body have always had to defend their free market options against members of the Swadeshi Jagran Manch. Modi did not seem to mind these internal battles as it allowed him to claim a free market image abroad, even as the Manch kept statist options open at home.

Managing this dualism was bound to become more difficult over time. Prof Arvind Panagariya’s resignation as the Vice Chairman of NITI Aayog may have been prompted by emerging statist economic forces. And with quite substantial increases in import duties in the recent budget, it has become much more difficult to talk free market economics and practice statist policies. Indeed, the retaliatory measures the Trump administration has promised threatens to remove the free market façade completely.

The loss of a free market image is more than just a matter of optics. The image of commitment to open market economic policies helps India attract much needed foreign capital. Abandoning this image would have its costs.

Higher levels of protection would also encourage a return to the inefficiencies of the pre-reform era. While it may be too early to panic, the idea of a return to the bad old ways of the seventies and eighties does call for some introspection.

It is good if the custom duty hike is aimed at protecting domestic business, and not just raising revenue

Ashwani Mahajan
National Co- convenor Swadeshi Jagran Manch

It is a welcome step, and should be appreciated by everyone who loves this country and wants the local industries to develop. We are living in the WTO regime and under multilateral agreements, there are bound tariffs, which have already been committed. Therefore, in essence no country can turn suddenly protectionist. Just by increasing import tariffs for some commodities, a country doesn’t become protectionist. Every country has the right to decide tariffs, according to its needs. Our actual tariffs are still lower than bound rates. We have a lot more scope to increase the import tariffs. We should use our flexibility to protect select industries.

People like Prof Arvind Panagariya, who are obsessed with the idea of free trade, must see that there is world beyond free trade of his type, with very little consideration for domestic, especially small scale industry. Small scale industries, which used to be the growth engines of manufacturing in our economy, have turned into ancillaries of big industries. We have become become an excessively importing country, which is evident from the figures quoted by Prof Panagariya himself.

There is criticism that import duties will lead to higher prices for customers, but I would say that Prof Panagariya is taking very narrow and short-sighted view. If we allow the mobile phones to be imported at this rate, it will lead to a huge trade deficit. That will further affect the value of the rupee and lead to inflation.

Today, we are a country of more than 100 crore mobile connections. We are going to require more than 100 crore smartphones. There is nothing wrong if we are trying to promote and protect our domestic industry against the low cost mobile phones from neighbouring countries like China.

it is an open secret that they generally dump their mobile phones on us. It may take us time to decide on anti-dumping duties.

We support this decision if the government wants protection for our domestic businesses, not if they want to just raise revenue.

This year’s budget is a departure from the earlier approaches of governments. Though every budget tended to talk about agriculture, the poor and farmers, but the general approach was to promote corporations. The red carpet was rolled out for them. There was little concrete about small scale industries.

By imposing high import tariffs, Modi is trying to protect manufacturing activity, not manufacturers

Karan Bhasin
Young Scholar at the Institute of New Economic Thinking, New York

The recent budget is a reminder of the old budget days when India largely relied upon an import substitution regime, whereby duties were kept high to protect the Indian industries, and build industries that could substitute imported goods.

An important aspect to consider here is that though the import duties have been kept high, there’s a big difference between the capital regime back then and today.

Unlike earlier, capital restrictions in terms of foreign direct investments are largely gone. This means that the question that needs to be asked is this: who is the government trying to protect by imposing high import tariffs? The answer is apparent: it is manufacturing activity and not manufacturers, in general.

This distinction is important as India’s growing population and demographic dividend requires manufacturing sector to create jobs to absorb the semi-skilled and unskilled workers, and reduce unemployment. In that sense, by allowing capital to be mobile, while goods to be immobile, the government is trying to ensure that manufacturing activity can grow and expand enough to absorb workers.

The import duty hike marks the rise of influence of groups like Swadeshi Jagran Manch in Modi’s economic policy

Talha Ashraf
Journalist, ThePrint

“The forces of protectionism are raising their heads against globalization,” Prime Minister Narendra Modi said at Davos last month. Almost three weeks later, the government announced an increase in import tariff in certain sectors.

It is shocking, especially because it has come from the Modi government.

This decision should be seen in the context of the upcoming 2019 general elections. Arun Jaitley’s budget speech focused on the rural economy and farmers. Now, the focus shifts to the Medium and Small Enterprises (MSME) sector. This is a sector, which employs a major chunk of Indian workforce. It is unaccounted because most of it is in the informal sector.

This can mean two things: either a change of heart of the government or just a short-term measure to raise revenue.

The Modi government has often been castigated as pro-corporate, suit-boot ki sarkar by the opposition.

But it is likely to do more harm if it is just a short-term measure. Since trade takes time to adjust to new tariffs, the revenue that the government manages to raise will not be adequate. It will also end up dampening investor sentiment. But this cannot be regarded as blanket protectionism, because the emphasis is only on specific sectors like mobile phones, high-end TVs, fruit juices, leather and furniture. The selective applicaions suggests that revenue is not the main consideration here.

The measure has been packaged as an effort to promote domestic manufacturing and the government’s flagship scheme Make in India. It is a politically astute move and it also boosts the small scale sector. It can yield good results for the domestic industry if it is backed by improved infrastructure and easing of red tape.

This also marks the rise in prominence of groups like Swadeshi Jagran Manch in the economic policy making in the government. Until now they have been insider-critics of Modi’s policies.

But it is somewhat alarmist to compare this decision to socialist India of the License Permit raj. The world today is more connected and the policy making has become more dynamic and less dogmatic.

Compiled by Talha Ashraf.



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