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Increasing protectionism is hurting the economy

By DM Deshpande

Of late, there has been a tendency to increase the tariff wall in order to protect the home industry. Interpreted differently, this means that the Indian industry is not globally competitive enough and it still needs protection.

  Increasing duties goes against the tenet of economic reforms initiated in early years. In the nineties for the first time since independence, duties were slashed in a big way paving the way for achieving global competitiveness on the part of Indian industries.

  Exports started rising albeit slowly but surely. At the same time, the country bid good bye to the policy of ‘import substitution’ which it had followed religiously since independence. Exports to GDP ratio rose from a mere 6.4 per cent in 1991 to a huge 25.2 per cent in 2014. In fact, exports peaked in that year. Thereafter, the ratio has declined over the years. In 2019-20, it is expected to be 19.5 per cent (at constant prices, adjusted for inflation).

  While other factors like economic slowdown and turbulence in global economy should have contributed to the decline in total exports to GDP ratio, only a naive will believe that rising tariffs have not had a role in it. In 1990, the weighted average tariff rate was 56.4 per cent; by 2013, it had fallen to 6.1 per cent on the back of protracted reductions in duties over the period.

  It is argued that we need raise tariffs because we need to protect our markets from flooding by Chinese goods. China gives huge subsidies-implicit and explicit to it’s industries and hence their cost of production is one of the lowest. This argument is flawed for nothing prevents us from levying China specific levies. India has not recognized China as a market economy and therefore is under no obligation under WTO to accord the same status as given to other member countries.  

   Instead, the government has resorted to blanket hike in duties. Take for example, hike in customs duties on 37 items in order to give Indian players a level playing field. Duties in respect of another 10 items have been raised as a measure of shoring up revenues for the government.  

  Increase in customs duties in this year’s budget is on a whole range of products such as toys, footwear, fans, tables, kitchen ware and others. These are low cost, low technology areas; there is no justification in hiking the tariffs by a massive 200 per cent in case of toys. Consumers lose in terms of quality, choice and price. Though Indian industry may gain in the short run, it will result in no incentive for innovation, use of technology or enhancing productivity. And since governments are unpredictable, in case of a downward revision of duties after a year or more, it upsets all investment, production and logistics plans.

  Make in India has been the pet program of the present government. It is pointed out that the biggest success of this is in the manufacturing of mobile phones with in India which has registered a remarkable increase- from 60 million units (valued at Rs 18,900 crores) in 2013-14 to 290 million units (valued at Rs 1.7 trillion) in 2018-19. Consequently, imports dropped by a third to around 27 million sets in 2018-19. In the two years preceding, basic customs duty had been raised from 10 to 15 and 20 per cent.

   This, however, is not the full story. Imports of component parts (that go in to the making of a mobile set) have gone up, in fact, steeply. Between 2013 and 2017, imports of telecom parts went up steadily from US $1.34 billion to US $9.41 billion. This has been pointed out in this year’s Economic Survey. This is despite the hike in duties of 11 vital component parts that are used in manazufacturing a mobile phone.

  Raising tariffs is all too glaring to the world community. China, Japan, South Korea- have instead resorted in a big way to erect non tariff barriers. China in recent months is reported to have issued more than 1500 such notifications. Earlier the U.S and EU too have done the same. Several countries have increasingly become innovative to prevent ‘undesirable’ imports on grounds of quality, processes, environment and other technical aspects. India, so far, has not used these methods to ‘tame’ trade to it’s liking!

  Finally, doesn’t it make sense to back our strengths? We have proven expertise in chip design. China needs this and is presently dependent on the US. It will be more than willing to switch side. It has always been more comfortable dealing with India and its intellectual property regime. Several such areas could be identified and given a proper thrust would help the economy in a big way.   

The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.

The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.

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