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Have a trade strategy

But government should keep the China angle in mind

Business Standard Editorial Comment  |  New Delhi 

It has been reported that Prime Minister Narendra Modi has asked Union ministries to prepare a status report every quarter on the action they are taking to discourage "inessential imports" and to ensure that the items in question are instead made in India. This was, reportedly, part of the prime minister's directive to all central ministries, including in particular those for steel, coal, agriculture, petroleum and telecommunications. This comes, of course, following a sudden increase in India's trade deficit in September, which was caused by less than three per cent exports growth, and a sharp rise in imports of gold, minerals and ores. The trade deficit for the first half of the current financial year at $70 billion is still around nine per cent lower than the gap in the same period last year, but the government's decision to have a close look at imports must have been prompted by the September performance.

The motivation behind the prime minister's directive has another aspect. India needs to beef up its manufacturing sector - the "Make in India" programme that the government has stressed of late. Too much of the low-cost manufactured goods that Indians consume are imports. This is a reflection, above all, of the constraints on India's domestic manufacturing sector, that have prevented it from steady growth. However, Mr Modi's directive does signal a shift that should be a matter of concern. Whatever the motivation, a policy of protectionism is not the answer. The reduction of imports should be the product of good policy, the consequence of good production-promoting decisions - not the target of policy. In other words, instead of asking ministries what they are doing to reduce imports, the prime minister should ask them what they are doing to make Indian producers more productive, efficient and competitive. This should be the primary focus of the "Make in India" campaign, not import substitution. The world's experiment with import substitution has not been positive - and India has had a particularly tough experience. Some recent action on the anti-dumping front underlines the nature of the problem. Last July, the government put a stiff anti-dumping duty on purified terephthalic acid, or PTA, a major raw material used in the production of polyester fibre. Essentially, this served as a transfer away from the labour-intensive final users of PTA towards domestic producers of PTA - who promptly put up their prices. This is the kind of distortion that can be created by thoughtless policy.

This is not to say that anti-dumping concerns are meaningless. In fact, with the slowdown in China, Indian authorities should be alert to Chinese companies seeking markets for intermediate products that the Chinese economy's slowing growth can no longer accommodate. China does not have a happy history in world trade - a high internal subsidy regime, government boosting of companies and a strategic focus on certain sectors have led to it being a trade partner that many countries have legitimate concerns about. The authorities should be on guard against concerted efforts from overseas to prey on Indian sectors through below-marginal-cost pricing. But this is a straightforward application of existing trade rules. A shift towards protectionism and import substitution is quite different. The attitude should continue to be a focus on competitiveness, and on the ease of doing business - something that has also found repeated mention in the prime minister's speeches. Once a protectionist attitude develops, it is too easy for it to become a permanent scaffolding in Indian commercial policy. It has happened before.

First Published: Mon, October 27 2014. 21:40 IST