Protectionism shifts attention from real issues

In recent weeks, the government has restricted imports of colour television sets, pneumatic tyres, and power tillers. These can now be imported only against import licences. More items may be brought under import licensing in the coming weeks. The idea is to protect the domestic manufacturers from competition and hope they will make these goods to meet domestic demand and thereby enhance economic activity in the country and create more jobs. 

The government suspects that many goods of Chinese origin find their way into the country through other countries in East Asia with which we have trade agreements. So, the government tightened the administration of Rules of Origin under trade agreements, this February. Using the new tools, the claims for lower duty rates for imports under trade agreements may be put to greater scrutiny. 

  

Through the Finance Act, 2020, the provisions to impose tariff rate quota and other safeguard measures to protect the domestic industry from injury due to significant surge in imports were incorporated in the Customs laws. Also, the government took the powers to prohibit import/export of ‘any goods’ through Section 11 of the Customs Act, 1962, to prevent injury to the economy of the country by their uncontrolled imports or exports. 

For the past few years, duty rates on many imported items have been raised with specific intent to protect domestic producers. Besides, barriers like pre-import registration requirements and imposition of anti-dumping duties, safeguard duties, anti-subsidy countervailing duties, cesses and surcharges have been used with specific intent to discourage imports and protect domestic producers. 

The government has also announced phased manufacturing programme in select sectors hoping that progressive increase of import duties on certain components will encourage domestic manufacturers to substitute their imports. Apparently, these measures have helped in a very limited way and so, the government has now started resorting to import licensing. 

When an economy is in a downturn, it is easy to turn pr­o­tectionist. Higher tariffs can benefit the manufacturers pro­tected by them as well as win political points and popular support. But these measures can lower the efficiency of ope­r­ations and do little to enhance the competitiveness of the protected manufacturers.

Arvind Panagariya, former vice-chairman of NITI Aayog, says producers of even the most labour-intensive products such as garments, foot­wear and furniture, and wholly traditional items such as kites and rakhis are unable to out-compete foreign suppliers on own soil. Unless India wo­rks on direct removal of dom­estic regulatory hurdles, it wo­uld keep hurting own co­n­su­mers through higher tariffs without preparing entrepreneurs to challenge the competitors in the global market, he says.

The government has introduced special schemes for large scale manufacture of drugs and pharmaceuticals, electronics, medical devices etc. and also introduced production linked incentive schemes for select sectors. 

The government says the schemes compensate for the manufacturing disabilities such as lack of adequate infrastructure, domestic supply chain and logistics, high cost of finance, inadequate availability of power, limited design capabilities and low focus on research and development (R&D) and skill development etc. Is it better to work on removing these disabilities or give subsidies to help the producers cope with these disabilities?

Protectionism and subsidies are counterproductive as they mask inefficiencies and divert attention from the real issues of reforming regulations and building better infrastructure. 

email: tncrajagopalan@gmail.com