Protectionism & impact on Indian Economy

The Centre’s move to progressively hike customs duties, especially the more recent offensive targeted at imports of Chinese components and inputs, needs to be reviewed, as it can threaten the domestic economy. 

• The blockade targeting Chinese imports gained traction across Central ministries and departments in the aftermath of the Galwan border clash since 2020.

Dimension 1: Impacts of such blockade

• Impact on important sectors: The blockade targeting Chinese imports is now seen to be impacting sectors such as electronics and pharmaceuticals.
• Loss in domestic output: The roadblocks to imports in these sectors is leading to a loss of domestic output.
• Restriction on necessary input material: To check cheap quality imports from China, India imposed Quality Control Orders (QCOs) that restrict MSMEs from getting necessary input material.
• Loss of competitive advantage: It is leading to a loss of competitive advantage for Indian manufacturing.
  • Uncompetitive atmosphere: The average tariffs in India have jumped to 18.1 per cent in 2022 from 13 per cent eight years ago in 2014, has made India uncompetitive vis-a-vis countries such as Vietnam, Thailand and Mexico.
• Threatened supply chain: India’s high tariffs pose a disincentive to de-risking supply chains beyond China. As a result, countries such as Vietnam, Thailand and Mexico are offering lower tariffs on components to grab the space vacated by China.

Dimension 2: Significance of India’s trade with China

• Top source of imports:India’s trade with China is important because, for the last 15 years, China has been India’s top source of imports.
• Double share:To put these numbers in perspective, in these two years, the second biggest source of imports for India was the UAE, with an import share of 6.7 per cent in 2020-21 and 7.31 per cent in 2021-22. These numbers indicate that China is not only India’s biggest source of imports, but its share in total Indian imports is also more than double that of the UAE.
• Dominance in non-oil merchandise imports:In total non-oil merchandise imports, China’s dominance is even more pronounced. As oil imports account for 25-30 per cent of India’s total imports, India’s dependence on China for non-oil imports can be as high as 25 per cent or more.
• Export Market: China is a big market for Indian exports, as well. China has been among the top four export markets for India in the last few years. After Covid, India’s exports to China have gone up.

Dimension 3:Pros & Cons Protectionism

• 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.
• Tools of Protectionism: Tariffs, Quotas, Subsidies, Anti-dumping duties