Government must protect domestic manufacturing from self-serving forces

The government recently announced anti-dumping investigations against a slew of products ranging from steel to mobile covers. Anti-dumping is a much used form of protection in India, alongside higher tariff rates, quantity restrictions, negative import lists, and more. Some of these comply with the World Trade Organization (WTO) rules, some can be made to comply, and for others, the WTO hardly matters. 

What matters, however, is the manufacturing environment India is building. If everything from steel to mobile covers to glass, PET, and solar panels needs protection, on top of the hundreds of other products already receiving some form of it, we need to ask ourselves a deeper question: What happened? And how can we change this? 

One answer, the most popular one, is that China has unleashed its highly subsidised and heavily protected industrial output on the world. These products can easily overwhelm domestic production and industry, affecting employment and long-term manufacturing growth. But these anti-dumping investigations will not target only Chinese products. From information reported, it appears that the Directorate General of Trade Remedies under the Ministry of Commerce will need to investigate producers from Thailand, Russia, Taiwan, South Korea, Vietnam, and Bangladesh, among other countries. Various protective mechanisms exist as outlined above, and producers from developed countries, including Japan and the European Union, not to mention the United States, have been included. 

In other words, Indian manufacturers and their associations believe that they need to be protected from products from across the world.  Sometimes it is argued that producers in other countries benefit from cheap Chinese inputs, which then lead to lower costs of final produce. And, therefore, India needs to protect itself from producers in all these countries that rely on Chinese imports. While the argument might have some validity, it is also true that India itself imports massively from China — upwards of $113 billion last year, growing at more than 11 per cent from the year before. These products span electronics, chemicals, machinery and equipment, and plastics. 

So now the government has a difficult problem at hand: How should it decide which products to protect and which it should not? Every self-serving producer will like to make a representation to the government against any competing product being imported.  And a responsive government will either immediately put up a protective barrier, or at least try to investigate whether the complaint is valid. 

But the problem gets more complex. How do you investigate Chinese production, especially since it is also said, with some validity, that we cannot trust Chinese data? Given this problem, the next best option for the government may be to investigate globally produced output on the basis of Indian data. Now if we do that, we are effectively judging a product on the basis of Indian costs. So, of course, the result will favour higher-cost Indian manufacturers and their call for protection. 

The question that needs to be asked is this: What criteria can help the government decide which products deserve some form of protection, and which ones should be allowed for import freely, perhaps with only minor tariffs? A free market-orientation will argue for the devaluation of the rupee, the removal of tariffs, and letting firms in India decide whether to use global or domestic inputs. A leftist-socialist orientation will call for banning imports altogether, managing the rupee exchange rate, and forcing all production to remain in India. Each of these, of course, is quite extreme. 

The government needs to find a workable middle path, which also enables the unleashing of greater competitive forces within the country while creating a fair economic environment. Consider the following elements.   

First, identify how the largest economies are dealing with items in each product segment. We should do that irrespective of whether they have free-trade agreements, are members of regional blocs or otherwise, whether it is China, Vietnam, or any other country. The point being, if for whatever reason a country’s producers are dumping in India, they will tend to do so in global markets as well. Red-flag those product segments for further investigation before any protective action is taken in India. 

Second, whenever a petition from industry for protection comes in, the government must first talk to the users of that product and continue doing so until the protective action is in place.  Users, or downstream buyers, are vital engines of employment, often generating more jobs than producers, and they also contribute substantially to government revenues and economic growth. In a sense, protection is a form of economic justice, and before passing judgment, the government needs to give due recognition to all, the producers and the users.   

Third, the government must safeguard users with the same spirit as it protects producers. Therefore, any protectionist measure must be accompanied by rigorous and continuous monitoring of its impact on both producers and users. The government must also commit to swift corrective actions if such measures result in inflated prices, profiteering, or any other adverse effects that undermine the interests of downstream users within the affected product segment. 

Fourth, a casual analysis of protective action will show that in many cases protection leads to persistent dependence on the government. This dependence is a drain, for it eats into the long-term growth of India, and must be eliminated. Therefore, whether it is a quality control order, a higher-than-usual tariff rate, or an anti-dumping measure, there must be a sunset clause on all such measures. Moreover, and this is critical, the sunset of one form of protection should not be replaced by another. And for this, the government must keep a close watch on who is petitioning for what form of protection and at what time. 

Overall, there are many ways to support and promote India’s manufacturing sector. One method is absorbing some costs, another is providing subsidies, yet another is smoothing the process of doing business, and still another is protectionism. Each has its pros and cons. 

Given high land costs in India, absorbing these costs through a rental or land-cost subsidy would directly correct an anomaly created by our flawed land laws, which are difficult to reform. The production-linked incentive is a form of subsidy that is aimed at correcting the scale-of-production problem, as greater scales enable lower costs. It’s a very specific solution to a specific problem.  The ease of doing business reforms were aimed at smoothing the process of doing business. Again, these are targeted solutions for specific problems. Protectionism, however, is not like that. It may appear to be targeted, but is not.  It benefits some at the cost of others, reduces competitive forces, creates dependence, encourages lobbying and politicking by industry. Therefore, protectionist measures should be used very carefully. The fear that Chinese products have the potential to flood India gives a great tool to those who want protection for their self-serving interests. The government must guard India against such domestic forces as much as it needs to guard against Chinese flooding. 

---

 

The author heads CSEP Research Foundation.  The views are personal