India’s Economic Nationalism Is Getting Ridiculous—And Indians Are Paying the Biggest Price

Ever since he took office in 2014, India’s prime minister Narendra Modi has relentlessly pursued a protectionist agenda. His administration has repeatedly increased tariffs, licence requirements and other restrictions on importing a wide variety of goods to promote domestic manufacturing. He wishes to build an “Atmanirbhar Bharat” (self-reliant India), which essentially involves import substitution. One of his ministers even suggested that India “end imports” entirely, and maximize exports. This kind of economic nationalism, however, is self-defeating.

Consider Modi's mission of Digital India. Its aim is to transform India into a knowledge economy and "digitally empower" citizens. What has the government done to achieve this? It has made smartphones and computers more expensive with tariffs. Writing in the Indian newspaper Mint, Vivek Kaul explains that tariffs have made mobile phones more expensive over the years.

Similarly, the government recently increased tariffs on laptops, among many other things. In a country where 800 million people cannot afford smartphones and an even greater majority cannot afford a laptop, it is morally and economically unjustifiable to raise their price further. How will people be “digitally empowered” when such tariffs are imposed?

Far from helping exports, import bans will render Indian firms uncompetitive in the international market.

Along similar lines, Modi tells Indian youth to continuously acquire new skills to be competitive in the global economy. In a modern economy, a lot of useful skills center around computers, which many can’t acquire thanks to tariffs. Consequently, many good jobs will be unavailable to them.

When schools shut down due to the pandemic, and education moved online, many poor students were left behind since their parents could not afford smartphones or laptops. Without tariffs, at least some of them could have avoided this outcome.

Tariffs on Imports Hurt Exports, Too

Modi also wants India to be a major exporter. To this end, he has re-introduced Licence Raj era rules to protect domestic manufacturers. In February, the government changed the rules to allow it to ban the import of any commodity entirely should it so desire. Importing television sets, tyres, air conditioners, toys, and leather footwear, among other things, now requires a licence from the government. The government plans to do this for at least 350 products.

Far from helping exports, such rules will render Indian firms uncompetitive in the international market. Why would they bother improving the manufacturing process and investing in better technology if the government is protecting them from competition?

This has been the result in many countries where such policies have been implemented, including India. Before 1991, a period known as Licence Raj, the Indian economy was virtually closed off from the rest of the world. Importing goods was an arduous task requiring licences and payment of steep tariffs. The result was that Indian firms were unable to compete in the international market. Imports were very low, but so were exports. Only after the economy was opened up in 1991 did Indian companies become globally competitive.

Consider the case of Tata Steel. Ratan Tata, former chairman of the Tata Group, himself admitted that his company operated in an extremely inefficient manner during the Licence Raj. They did not invest in new technology or try to reduce production cost. That changed when India opened up, and they were forced to compete. By 2007, Tata Steel had the lowest cost of steel production in the world. A similar transformation was observed across various firms and industries in India, which became globally competitive after free trade reforms were carried out in 1991.

A story in India Today points out that the new iPhone 12 pro is so expensive in India, that it would be cheaper to fly to Dubai, buy it there, and come back.

Modi and his ministers have all witnessed this transformation, yet they insist on repeating the same mistakes. Their protectionism even extends to the service sector. For example, foreign e-commerce firms such as Amazon and Flipkart face restrictions such as not being allowed to own inventory, sell their own products, or offer products exclusively or at large discounts; restrictions which do not apply to domestic firms such as Reliance.

As Mihir Sharma points out in a Bloomberg column, such policies deter foreign investment in India. Apart from hurting competition, it means fewer well paying jobs for Indians.

Protectionism also impoverishes Indians by making goods more expensive, thus reducing people’s purchasing power. The price difference is not trivial either. A story in India Today points out that the new iPhone 12 pro is so expensive in India, that it would be cheaper to fly to Dubai, buy it there, and come back. While this is an extreme example, it illustrates that Indian citizens are paying much higher prices for the same products than people in other countries.

Senseless Subsidies 

Adding insult to injury, the government also provides subsidies to export many of the same products. For example, in February it revealed a $6.3 billion subsidy plan for foreign electronics manufacturers such as Apple and Samsung to set up factories in India. These subsidies will be given only for exports, and not if the resulting products are sold in the local market. Similarly, imported cars are taxed heavily in India. Yet, until recently, massive subsidies were doled out for exporting cars.

Export subsidies have been reduced only because the WTO ruled against them, but the government can be expected to find some loophole and reintroduce them in a different manner. One alternative route of providing export subsidies, which has been employed frequently, is to intentionally devalue the Rupee against other currencies. This makes imports more expensive for Indians, while making Indian products cheaper for foreigners.

Modi prides himself on his nationalism, and claims that he is always “putting India first.” However, impoverishing Indian citizens and then taxing them again, so foreigners can enjoy cheaper products, is the most anti-national policy one can imagine.

Another goal Modi has is to make India the world’s third largest economy by 2030. India’s economy had been sluggish even before the pandemic, thanks in large part to protectionism. It turns out that impoverishing one’s own people and shielding domestic firms from competition is not a recipe for economic growth.

Protectionism does not have any strong economic arguments going for it. Therefore, protectionists often turn to the old, reliable national security argument.

India has had a long standing border dispute with China. Whenever there is a stand-off or skirmish at the border, the government immediately retaliates by restricting imports from China. Earlier this year, there was a clash along the border which left 20 Indian soldiers dead, and resulted in India losing 300 square kilometres of territory. The government responded by holding up shipments from China at ports; with customs officials refusing to clear them even after all procedures had been followed. The government usually also imposes a fresh round of tariffs on Chinese goods.

“China must be taught a lesson,” the argument invariably goes. But China does not bear the brunt of these measures. India accounts for only 3 percent of Chinese exports, and less than 1 percent of its imports. On the other hand, China supplies many essential commodities to India; finished goods such as electronics, but also intermediate goods such as active ingredients for pharmaceuticals, or parts and machinery used by Indian manufacturers. Thus Indian consumers and businesses bear the brunt of this “lesson” that is supposedly being taught to China.

A Better Way

To stand up to an increasingly belligerent and expansionist Chinese regime, free trade is again the best policy. If Indian citizens prosper, and Indian industries become more competitive, the economy will grow faster.

Modi’s stated goals are worthy, and even his harshest detractors won’t disagree. India should be a thriving knowledge economy. It should be a globally competitive economic powerhouse. And it certainly should be well defended from hostile neighbors.

To achieve these goals, Modi must promptly abandon his protectionist folly and embrace free trade.

* This article was originally published here

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