Relevance: GS-3: Effects of liberalisation on the economy, changes in industrial policy, and their effects on industrial growth.

Key Phrases: Rising Protectionism, Atmanirbhar Bharat, Import Substitution, Ease of Doing business, Tariff Barriers, Falling Competitiveness of Indian Industry, Macro Fundamentals, Nehruvian model of self-reliance.

Why in News?

• The economic policymaking of India on the external front has been marked by rising protectionism at a time when the Central government is liberalising India’s economy.
• With policies such as Atmanirbhar Bharat, there are efforts to protect the domestic economy from foreign competition.
• This raises questions on whether the government’s external protectionism is compatible with its promise of liberalising India’s economy.

What is Protectionism?

• Protectionism refers to government policies that restrict international trade to help domestic industries and encourage domestic investment in a specific industry. Protectionist policies are usually implemented with the goal to improve economic activity within a domestic economy but can also be implemented for safety or quality concerns.

Various protectionist measures include:

1. Tariffs:
   • A tariff is a tax imposed by one country on the goods and services imported from another country. Tariffs increase the price of imported goods in the domestic market, which, consequently, reduces the demand for them.
2. Quotas:
   • Quotas are restrictions on the volume of imports for a particular good or service over a period of time.
   • Quotas are known as a “non-tariff trade barrier.”
   • A constraint on the supply causes an increase in the prices of imported goods, reducing the demand in the domestic market.
3. Subsidies:
   • Subsidies are negative taxes or tax credits that are given to domestic producers by the government.
   • They create a discrepancy between the price faced by consumers and the price faced by producers.
4. Standardisation:
   • The government of a country may require all foreign products to adhere to certain guidelines.
   • Standardisation measures tend to reduce foreign products in the market.
5. Anti-dumping duties:
   • These are typically levied when a foreign company is selling an item significantly below the price at which it is being produced.
   • The intention of anti-dumping duties is to save domestic jobs, however, these tariffs can also lead to higher prices for domestic consumers.

Advantages of Protectionism:

• More growth opportunities: Protectionism provides local industries with growth opportunities until they can compete against more experienced firms in the international market
• Lower imports: Protectionist policies help reduce import levels and allow the country to increase its trade balance.
• More jobs: Higher employment rates result when domestic firms boost their workforce
• Higher GDP: Protectionist policies tend to boost the economy’s GDP due to a rise in domestic production

Disadvantages of Protectionism:

• Stagnation of technological advancements: As domestic producers don’t need to worry about foreign competition, they have no incentive to innovate or spend resources on research and development (R&D) of new products.
• Limited choices for consumers: Consumers have access to fewer goods in the market as a result of limitations on foreign goods.
• Increase in prices (due to lack of competition): Consumers will need to pay more without seeing any significant improvement in the product.
• Economic isolation: It often leads to political and cultural isolation, which, in turn, leads to even more economic isolation.

What are the issues with the current policies of the government?

1. Focus on production in India rather than efficiency:
   • Atmanirbhar Bharat is imbued with protectionism and there is a long list of sectors in which the government has embarked on import substitution that encourages domestic production.
   • The concern lies in that efforts are not being made towards improving efficiencies that will make these sectors globally competitive.
   • The emphasis is on producing in India rather than on efficiency.
2. Policy of Protectionism by Policymakers:
   • There is an interference of policymakers in deciding the sectors in which India will be good, but in reality, the market economy knows how to discover these things.
   • When the customs duties are cut, firms in India that are users of those goods become more competitive. Thus, exports from India are increased by making raw materials cheaper.
   • Here, one man’s output is another man’s input.
   • Policymakers cannot tell what they should be backing. Thus, we need to remove the barriers to globalisation.
3. Centre’s external protectionism is a reflection of its domestic economic policies:
   • China and other Southeast Asian countries have been attracting foreign investment on account of their investor-friendly environment.
   • On the other hand, investors are not investing for the long term in India though it is being said that it has the most investor-friendly policy.
   • Thus, ease of doing business is a major issue in India. External and domestic reforms need to go hand in hand.
4. Discretionary government policy in the name of Atmanirbhar Bharat:
   • This brings along with it the risk of possible favouritism towards special interest groups.
   • Industrial policy requires having a high level of knowledge, forecasting capability, and intellectual capacity in government.
   • Policy should be made by the government and industries through a dialogue process. This has been the reason behind the success story of many Southeast Asian countries. They have not just let the market do whatever it wanted to. There was serious participation by the industry, or the market forces, together with the government.
   • The government has to play the important role of a facilitator.
5. Over-reliance on Market Forces:
   • India relied just on market forces for the better part of the last 30 years and thus, the most productive sectors have been lagging behind.
   • The moment the economy was exposed to foreign competition, a lack of depth in different sectors across the board was found.
   • To overcome this, the government needs to hear what the players on the ground need, and respond adequately.
6. Lack of freedom to choose for consumers willing to buy products from abroad:
   • The Indian consumer should be allowed to buy foreign goods if they are cheaper and better.
   • The government should not stand in the middle and interferes with the ability of an Indian consumer to buy something from abroad or the ability of an Indian firm to buy something from abroad, or the ability of an engineering firm to raise capital from a cheaper source abroad.
   • In a market economy, there has to be the freedom to choose, and ad hoc protectionism is not really the way forward.
7. Falling competitiveness of Indian industry:
   • On account of these protectionist policies, the Indian economy is suffering due to the lack of competitiveness.
   • If the situation continues, it would be difficult to keep the macro fundamentals in check.

Protectionist policies followed around the world:

• Rise of Nationalist sentiments with the America First policy and Brexit.
• Vaccine Nationalism shown by Developed Countries during the pandemic.
• Halting of WTO talks and the undermining of the relevance of WTO as a world trade organisation.
• Trade wars between the global powers.

Protectionist policies followed by India:

• Atmanirbhar Bharat: Atmanirbhar Bharat and Make in India represent India’s adoption of trade protectionism and are a definitive symbosl of India’s complete embrace of inward-oriented policies.
• Increase in tariffs: The simple average of India’s tariffs rose by 25% from 8.9% in 2010-11 to 11.1% in 2020-21. India has raised import tariffs on over 3200 goods from most of the favoured nations, which signals a protectionist stance to shield domestic industries
• Anti-Dumping Duties: The growing use of India’s anti-dumping duties and inverted tariff structure.
• Food Protectionism: India has responded to rising global commodity prices by unexpectedly blocking exports of sugar and wheat.
• Ban on Vaccine Export: Ban on Vaccine export after the rise of Delta variant although making an announcement of supplying vaccines to the world.
• RCEP: India’s decision to walk out of the Regional Comprehensive Economic Partnership (RCEP) of Asian countries.

Are we getting closer to the pre-1991 era of trade protectionism?

• The trend shown by Atmanirbhar Bharat seems to be towards the Nehruvian model of self-reliance.
• Production-Linked Incentive (PLI) scheme is similar to a policy that was followed during the industrial licensing era which was called the minimum economic scale in which incentives are linked to certain capacities.
• If the same direction is followed, there is a danger of reaching the pre-1991 era, which is not fortunate for India.

Conclusion:

• We need to identify the important bottlenecks that are impeding India’s participation in global supply chains and in the world of globalised production.
• The industry needs to identify the pain points, and the government should address these issues.
• A regulatory system is desired in which the Indian and foreign Companies enjoy equal policy support. Thus, a strong government and industry partnership is required while removing all barriers to globalisation.

Source: The Hindu BL

Mains Question:

Q. The economic policymaking of India on the external front has been marked by rising protectionism at a time when the Central government is liberalising India’s economy. Discuss.