Are we over-protecting India? Tariff hikes could do more harm than good

Govt believes higher import duties on 19 non-essential items will help control the current account deficit, but analysts point out they might only reduce imports by 0.1 per cent

The government has raised import duties on 19 products, including some electronic goods that it has declared “non-essential”. Tariffs on imported air conditioners, household refrigerators, and washing machines of less than 10 kg have doubled from 10 per cent to 20 per cent; the crucial input for these white goods and compressors will be charged a 10 per cent duty as compared to 7.5 per cent earlier. Speakers, suitcases and tyres will be tariffed at 15 per cent compared to 10 per cent; footwear at 25 per cent as compared to 20 per cent; and jewellery at 20 per cent as opposed to 15 per cent. The government believes this will help control the current account deficit (CAD), which appears to be heading towards 3 per cent of gross domestic product (GDP). Yet analysts point out that it is likely that tariff increases will only reduce imports by 0.1 per cent — which makes these increases a particularly ineffective instrument if controlling the CAD is indeed the aim. In fact, this claim should be taken with a pinch of salt. Since the Union Budget earlier this year, the government has in fact decisively moved India towards greater protectionism, and these tariff increases should be seen in that context.

Over the year, the government has raised tariffs on several different product lines, including textiles, edible oils, and electronics. Far from being a knee-jerk response to a falling rupee or a rising CAD, this is a planned and intentional attempt to return to the days of import substitution. The failure of “Make in India” is being blamed on India’s addiction to imports, and rural distress makes for an easy excuse for agricultural barriers. This counts as a shift away from the policies of increasing openness to the world that have been followed by every Union government since the epochal year of 1991. While other countries — notably the United States — have also begun singing the praises of protectionism, it is worth noting that rhetorically the government has done exactly the opposite. In fact, at the World Economic Forum in Davos this year, Prime Minister Narendra Modi condemned the rising tide of protectionism as being dangerous and equated it to climate change and terrorism. It is unfortunate, therefore, that the government’s actions are not in keeping with its words.

India’s long experience with import substitution prior to 1991 proves that such tariff increases are a counter-productive and self-harming form of policy. They hinder competitiveness, hurt consumers, and damage exports. Indians will pay more for goods that some bureaucrat determines are “non-essential” and, meanwhile, domestic manufacturing will not gain in efficiency or productivity. As a consequence, exports too will suffer — both from being in a low-productivity economy, from an appreciating rupee, and also because integrated supply chains cannot thrive in a high-tariff atmosphere. It is reported that yet more tariff increases are in the offing, perhaps on other lines of electronics that were not covered in this notification. The government’s decision to reverse a 25-year-old policy of openness deserves more discussion and a robust defence from officials — but even then will prove to hurt Indians more than it will help.