India's trade policies have slowly veered towards being protectionist, which may not bode well with trade partners.
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Does protectionism help - the Indian case
- The story: In the G-20 ministerial meeting in Italy, Commerce Minister Piyush Goyal made a pitch for deepening India’s trade ties with several countries. India is negotiating free trade agreements (FTAs) with several countries. But rising trade protectionism at home can be a problem. It is surprising that while India took the free trade route since 1991, it recent years it has slowly changed direction.
- Tariffs went up steadily: Data shows that the simple average of India’s tariffs that stood at 8.9 per cent in 2010-11 has increased by almost 25 per cent to 11.1 per cent in 2020-21. The proportion of tariff lines with rates above 15 per cent in 2020-21 stood at 25.4 per cent, up from 13.6 per cent in 2014-15. These increases in tariff rates have reversed the political consensus on tariff liberalisation that India followed since 1991. The government has accepted it publicly too, as former finance minister Arun Jaitley in his 2018 budget speech declared that he was making a “calibrated departure” from the policy of cutting tariff rates.
- Anti dumping: India is the highest initiator of anti-dumping measures aimed at shielding domestic industry from import competition. According to the WTO, from 2015 to 2019, India initiated 233 anti-dumping investigations, which is a sharp increase from 82 initiations between 2011 and 2014 (June). The anti-dumping initiations by India from 1995 (when the WTO was established) till 2020 stand at 1,071. This is higher than the anti-dumping initiations by the US (817), the EU (533), and China (292), despite India’s share in the global merchandise exports being far less than these countries.
- Import restrictions: India has amended Section 11(2)(f) of the Customs Act of 1962, giving the government the power to ban the import or export of any good (not just gold and silver, as this provision applied earlier) if it is necessary to prevent injury to the economy. The power to ban the import or export of gold and silver is consistent with Article XX(c) of the General Agreements on Tariffs and Trade (GATT), provided the ban is not applied in an arbitrary or discriminatory manner and does not constitute a disguised restriction on international trade.
- Expanding the scope of Article 11(2)(f) to cover any good is inconsistent with India’s WTO obligations. WTO allows countries to impose restrictions on imports in case of injury to domestic industry, not to the “economy”.
- But these trade remedial measures can be imposed only if certain conditions are satisfied and after an investigation — for example, if there is a sudden, significant and sharp increase in imports that is causing serious injury to the domestic industry.
- India already has laws to impose these trade remedial measures. Additionally, countries can also impose restrictions on trade on account of balance of payment difficulties and national security purposes. However, section 11(2)(f) of the Customs Act does not talk of any of these grounds to restrict trade, thus is unnecessary.
- Rules of origin: Finance Minister Sitharaman in 2020 said that undue claims of FTA benefits pose a threat to the domestic industry. Such imports required stringent checks. Later, India amended the rules of origin requirement under the Customs Act. Rules of origin determine the national source of a product. This helps in deciding whether to apply a preferential tariff rate (if the product originates from India’s FTA partner country) or to apply the most favoured nation rate (if the product originates from a non-FTA country).
- India has imposed onerous burdens on importers to ensure compliance with the rules of origin requirement.
- The intent appears to be to dissuade importers from importing goods from India’s FTA partners.
- Imports are bad: The call given by PM to be “vocal for local” (preference to domestically made goods) is creating an environment where people have begun looking at imports with disdain, upsetting trading partners.
- Summary: International trade is not a zero-sum game. India can’t maximise its interests at the expense of others. Its experiment with trade protectionism in the decades before 1991 was disastrous. Import substitution had turned India into a protectionist, low-quality economy where firms were not globally competitive. From 1991, a lot changed, and India genuinely plugged itself into the global economy. Those gains should not be reversed.
- EXAM QUESTIONS: (1) Explain the idea of "competitive advantage" and "absolute advantage". (2) Is India turning protectionist, in its trade policies? Present the arguments for and against. (3) What is wrong with "vocal for local"? Explain technically the pros and cons.
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