Learning from India’s Bad Experience with Protectionism



Prosenjit Dutta | The New Indian Express

Is the government reversing the liberalisation and globalisation path that it has followed since the economic reforms of 1991? Are we going back to the import quotas and the License Raj of the pre-reform era? Recent government measures such as the curbs on imports of colour television sets, air conditioners, varieties of pneumatic tyres and other products seem to suggest that.

The Union Budget of 2020-21 had already announced higher customs tariffs on a range of finished goods and raw materials. Tariff quotas and non-tariff barriers are being put in place. The clarion call for Atmanirbharta has only deepened the fears. More than one economist has pointed out that in its second term, the policy thinking of Prime Minister Narendra Modi’s government seems more in line with the governments of the 1970s than those of the post-liberalisation era.

The worry is that many of these measures, taken ostensibly to protect domestic manufacturing, could end up hurting exports that depend on global inputs. The Indian experience with protectionism has been bad. After Independence, the nation may have needed to follow protectionist policies to survive and let the domestic industry find its feet.

But over the next four decades, excessive protectionism, quotas and licensing crippled economic growth, kept out new technologies and hobbled production capacities. Consumers lived with chronic shortages, shoddy quality and high prices. And yet, there were countries in the neighbourhood that successfully used protectionist policies to become globally competitive export powerhouses.

After World War 2, Japan was the first to do so and became the second-biggest economy by 1968, a status it maintained till 2010 when China finally overtook it. It was followed by the Asian tigers—Hong Kong, Singapore, Taiwan and Korea—that grew rapidly till they reached their potential. China, now the world’s second-biggest economy, too kept much of its markets closed and continues to do so.

Why did these countries succeed while India stumbled? While each country’s rise and use of trade policies and protectionism was unique, there were certain things that were common and are worth examining. These also explain where India went wrong when it shut itself off from global markets. Four things particularly stand out: the attitude towards education; the adoption of cutting-edge technologies; the pursuit of scale; and finally, the sharp focus on product quality.

The most important thing, though, was that all these countries had a very coherent integrated trade and domestic industrialisation plan that was aligned to their goals. Each country had invested heavily in education in the decades preceding their rise and had a pool of well educated but comparatively low wage workers. This allowed them to take advantage of modern manufacturing technologies and processes. (In India, a similar phenomenon helped in the rise of the IT and ITES sectors, but their rise also ironically reduced the quality of manpower available for high-quality manufacturing).

Each country also placed great stress on adopting modern technologies. All the countries made a conscious effort to catch up with the West and then surpass them in terms of the latest technologies. Whether it was the MITI, which helped the Japanese companies get Western technology, or the R&D spending of South Korea or China’s attempts to get global high tech by any means, all of them had a high technology focus.

The realisation that scale was extremely important for any company to compete globally was also something that differentiated these countries from India. Each found its own specific answers—whether it involved Japan’s keiretsus, the support from the government in South Korea that aided the chaebols or China’s forced merger of some domestic companies in order to achieve scale. All of them saw the government working very closely with industry to help this happen.

Contrast this with India where the pursuit of scale was discouraged for long and even now happens largely because of private initiative, not any conscious policy effort. Finally, all of these countries focused very clearly on achieving globally competitive quality at a cheaper price. They followed the exact same path—first reverse engineering Western goods to hone their manufacturing prowess, and then using R&D and design and tech innovations to move ahead and gain a competitive advantage in global markets.

The long-term goal was always to become an export powerhouse and not just stick to producing for the domestic market. Indeed, except for China, none of these countries had a big enough domestic market that could have supported global scale. None of these things happened by accident, though global conditions were certainly favourable for their rise. All had a long-term vision and their trade as well
as domestic industrialisation policies were tailored to pursue that vision.

That has essentially been India’s problem—its policymakers are prone to knee-jerk reactions instead of following a well-thought-out plan. This can be seen in the fact that no comprehensive and detailed industrial or manufacturing policy has been debated or announced despite catchy slogans like Atmanirbhar and Make in India. This is also the reason that explains why economists worry that the protectionist policies this time will not yield any different results from earlier.

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Prosenjit Dutta is a Senior Business Journalist with The New Indian Express

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