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Is protectionism compatible with liberalization?

  • Category
    Economy
  • Published
    22nd Jul, 2022

Context

The government plans to liberalize the Indian economy. However, with policies like Atmanirbhar Bharat, the government seems to be protecting the domestic economy from foreign competition. This raises questions about whether the government's external protectionism is compatible with its promise to liberalize India's economy.

Background

  • In the last few years, India has seen an average 5% increase in average tariff rates.
  • Important economists have pointed out that India raised import duties on more than 3,200 goods from most favored nations, signalling a protectionist stance to protect domestic industries.
  • The central government claims to be liberalizing India's economy, but its external economic policy-making has been marked by growing protectionism.
  • With policies like Atmanirbhar Bharat, there seems to be a conscious effort to protect the domestic economy from foreign competition.
  • However, on the same side, the government has rightly come up with draft laws and policies that encourage exports of products from India (Foreign Trade Policy 2015-2020 and the recent re-establishment of the US-India Trade Policy Forum) and encourage the establishment of production and assembly lines (Production Linked Incentive Scheme or PLI) in the country itself.

Analysis

What is Protectionism?

Protectionist policies followed by India:

  • Aatmanirbhar Bharat
  • Increase in tariffs
  • Anti-Dumping duty
  • Food protectionism
  • Vaccine nationalization
  • Opting out from RCEP
  • Protectionism refers to government policies that limit international commerce in order to benefit home companies and stimulate domestic investment in a particular industry.
  • Protectionist policies are typically intended to boost domestic economic activity, but they can also be enacted to address safety or quality problems.

Why India needs Protectionism?

  • National Security: The argument concerns the risk of dependence on other countries for economic sustainability.
  • Infant Industry: It is argued that protectionist policies are required to protect industries in their initial stages. As if the market is kept open, global incumbents can capture it. This may lead to the end of domestic players in the new industry.
  • Dumping: Many countries dump their goods (sell them for less than their cost of production or their cost in the local market) in other countries.
  • Saving jobs: It is argued that more domestic purchases will lead to increased national output and that this increased output will in turn lead to a healthier domestic labor market.
  • Outsourcing: it is common practice for companies to identify countries that have cheaper labor and simpler management systems and outsource their work.
  • Intellectual property protection: Patents in the domestic system protect innovators. However, on a global scale, it is quite common for developing countries to copy new technologies through reverse engineering.
    • Tools of Proterctionism
    • Tarrifs
    • Quotas
    • Subsidiies                           
    • Srnadardid
    • Anti-dumping duties
    • Standardysation
                   

What are the consequences of protectionism?

Advantages

Disadvantages

  • More Growth Opportunities
  • Lower Imports
  • More Jobs
  • Higher GDP
  •  
  • Stagnation in technological advancement
  • Limited choices for consumers
  • Inflationary effect
  • Economic isolation
  • Uncompetitive domestic industries
  • Against WTO norms
  • Impact on trade agreements

What are the major issues related to present protectionist policies in India?

  • Focus on manufacturing in India rather than efficiency:
    • Atmanirbhar Bharat is steeped in protectionism and there is a long list of sectors in which the government has resorted to import substitution which encourages domestic production.
    • The concern is that efforts are not being made to improve efficiency to make these industries globally competitive.
    • The focus is on manufacturing in India rather than efficiency.
  • Policy of Protectionism by Policy Makers:
    • Policy makers intervene in deciding which sectors India will be good at, but in reality a market economy knows how to discover these things.
    • When tariffs are reduced, firms in India that are users of these goods become more competitive. Hence, exports from India are increasing due to cheapening of raw materials.
    • Here, one person's output is another person's input.
    • Politicians cannot say what they should support. That is why we must remove the obstacles to globalization.
  • The Centre's external protectionism is a reflection of its domestic economic policy:

Protectionist measures around the globe:

  • The rise of nationalist sentiment with America First and Brexit.
  • Vaccination nationalism displayed by developed countries during the pandemic.
  • Stopping WTO negotiations and undermining the importance of the WTO as a world trade organization.
  • Trade wars between global powers.
  • China and other Southeast Asian countries attract foreign investment due to their investor-friendly environment.
  • On the other hand, investors do not invest in India for the long term, even though it is said to have the most investor-friendly policies.
  • So ease of doing business is a major concern in India. External and domestic reforms must go hand in hand.
  • Discretionary Government Policy on behalf of Atmanirbhar Bharat:
    • This carries with it the risk of possible favoring of interest groups.
    • Industrial policy requires a high level of knowledge, forecasting ability and intellectual capacity in government.
    • Policy should be developed by government and industry through a process of dialogue. This has been the reason for the success of many Southeast Asian countries. They didn't just let the market do what it wanted. There has been serious involvement of industry or market forces along with government.
    • Government must play an important role as a facilitator.
  • Over reliance on market forces:
    • For most of the past 30 years, India has relied solely on market forces, leaving the most productive sectors behind.
    • At a time when the economy was exposed to foreign competition, a lack of depth was found in various sectors across all areas.
    • To overcome this, the government needs to hear what the players on the ground need and respond accordingly.
  • Lack of freedom of choice for consumers who want to buy products from abroad:
    • The Indian consumer should be able to buy foreign goods if they are cheaper and better.
    • The government should not stand in the middle and interfere with an Indian consumer's ability to buy something from abroad, or an Indian firm's ability to buy something from abroad, or an engineering firm's ability to raise capital from a cheaper source abroad. .
    • In a market economy there must be freedom of choice and ad hoc protectionism is not really the way forward.
  • Declining competitiveness of Indian industry:
    • Due to these protectionist policies, the Indian economy suffers from a lack of competitiveness.
    • If the situation continues, it will be difficult to keep macroeconomic fundamentals in check.

How protectionism Impact the liberalization process?

  • Restricting the trade flow: The protectionist measures restrict the trade flow between the nations.
  • Barrier to capital mobility: Restrictions on the trade flow creates a barrier to the movement of capital.
  • Technological stagnation: The capital movement ensures technological advancement in various developing nations in line with developed nations.
  • Reduces the comparative advantage: The trade between two nations takes place on the basis of the comparative advantage that nations enjoy subjected to the availability of the resource. Restrictions on trade flow reduce the optimal utilization of available resources.
  • Gains from trade: If the countries are not efficiently optimizing the available resources the gains from trade will be negatively impacted.
  • Trade agreements: Restrictive trade measures have a negative influence over the bilateral and multilateral agreements.
  • Economic isolation: Restrictive measures also prohibit the country to collaborate with the global economy and put the nation at isolated position.

Major challenges India faces to protect its domestic industries

What should be done?

 

  • Inefficient: The focus is on manufacturing in India rather than efficiency.
  • Failure to foresee the future:
  • Against ease of doing business: There is still high red-tapism in India. Moreover, India also lags behind its counterparts in most productive sectors. All this leads to a decline in the competitiveness of Indian industry.
  • Limit consumer benefits: The government stands in the middle and interferes with an Indian consumer's ability to buy something from abroad, or an Indian firm's ability to buy something from abroad, or an engineering firm's ability to raise capital from a cheaper source abroad, and so on. This raises the fundamental question of consumer freedom.
  • Industrial Licensing Era Policy: Policies such as the PLI provide incentives for certain capacities. In this case, the government determines the minimum economic scale and then directs the industry to produce along those lines.
  • Reducing the custom duty and protectionism.
  • External and domestic reforms should be on a same and parallel pace.
  • Government has to be a facilitator.
  • Ensuring and expanding the right to choice for consumers.
  • Participation and consulting the stakeholders in the trade related legislations.

 

Conclusion

We need to identify important bottlenecks that prevent India from participating in global supply chains and a world of globalized manufacturing. The industry needs to identify the pain points and the government should address these issues. A regulatory system in which Indian and foreign companies have equal political support is desirable. Therefore, a strong partnership between government and industry is necessary while removing all barriers to globalization.

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