India’s New Protectionism Threatens Gains from Economic Reform

10/18/2018

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Swaminathan S. Anklesaria Aiyar | CATO Institute

Executive Summary

Indian prime minister Narendra Modi has been hailed as an economic liberalizer, having sharply criticized rising U.S. protectionism under the Trump administration. Yet Modi too has embarked on measures to protect and support manufacturing jobs in India. The latest Indian budget in February 2018 raised import duties on more than 40 items, ranging from auto parts and toys to candles and furniture, in order to protect uncompetitive small businesses and create jobs in labor-intensive industries. Earlier, India had raised import duties on several electronic items, from phone components to TVs and microwave ovens. This was in pursuance of a Phased Manufacturing Program aiming to check massive imports from China and ensure that cellphone assembly and the manufacture of components are done mostly in India. An official task force has been appointed to look into ways of reducing import dependence.

Modi’s Bharatiya Janata Party (BJP) is not a conventional right-wing party. It rejects both socialism and Western capitalism and seeks a homegrown solution called Integral Humanism. It supports private enterprise but also runs India’s biggest trade union and believes in a wide-ranging welfare state. It has highly protectionist affiliates that have always been wary of multinational corporations and international institutions. It believes in government intervention to create national champions, increase employment, and protect small businesses. The party also contains many liberalizers who succeeded in opening up the economy when the party ruled from 1998 to 2004, overcoming objections from BJP affiliates. When Modi came to power in 2014, he was seen as a liberalizer, bearing the slogan, “Minimum government, maximum governance.” In fact, he expanded the role of government in welfare even while liberalizing the economy incrementally. He now faces the same global headwinds that Trump does: fear of China, automation, and lack of good jobs. These pressures are driving India’s new protectionism, just as they have done in the United States. Optimists hope the new import tariffs are only temporary. The risk is that the new protectionism will get entrenched and reverse the major gains India has made since economic reforms began in 1991.

Introduction

At the 2018 Davos meeting of the World Economic Forum, Indian prime minister Narendra Modi made a stirring plea for globalization and open trade, implicitly attacking the “America First” policies of the Trump administration. He said, “Many countries are becoming inward focused and globalization is shrinking, and such tendencies can’t be considered lesser risks than terrorism or climate change.” Modi’s speech was widely welcomed by economic liberals across the globe. It echoed similar pro-globalization statements made by Chinese president Xi Jinping. Some theorists began to speculate on the possibility that India and China would keep the world open and globalized in the 21st century even as the United States turned inward. Alas, such theorizing was revealed as wishful thinking a few weeks later when India’s budget for 2018–2019 was presented. It raised import duties on 40-odd items “to provide adequate protection to domestic industry” and “promote creation of more jobs.”3 The language of the budget speech was not cloaked by any subterfuge: it was nakedly protectionist. One columnist remarked that Modi’s slogan of “Make in India” was becoming “Protect in India.”4 Duties were raised by 15–20 percent on items as varied as auto parts, candles, kites, sunglasses, lamps, cigarette lighters, toiletries, toys, watches, footwear, and furniture. The duty on fruit juices and miscellaneous processed foods went up to the range of 25–50 percent. India itself is a substantial exporter of some of these items— auto parts, textiles, and footwear—and that made the selection of protected items puzzling. One World Bank expert examined the list of items and said he could find no coherent or logical thread connecting them. In July 2018, the government increased the import duties on 76 textile items6 and followed up with increased duties on 328 textile items the next month.7 It also appointed a task force under the cabinet secretary, the senior-most civil servant, to look into ways of reducing import dependence. The stated aim is brazenly protectionist. The new protectionist approach also means India is going back to the bad old days when it had dozens of different tariff rates for different items. This encouraged misdeclaration of imports (to pay relatively low rates of import duty) in cahoots with corrupt customs officers. Worse, it encouraged lobbying by different industry groups for special tariff protection, creating an inequitable form of crony capitalism. In the 2000s, successive governments began trying to reduce the dispersion of rates to discourage lobbying, misdeclaration, and corruption. By 2008, the peak import duty on nonagricultural items was reduced and unified at 10 percent, with limited exceptions. The latest budget raises fears of a return to the old protectionism and cronyism, marked by widely varying import duties on different items, that India followed for decades after independence, with disastrous economic consequences.

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