Swaminathan S. Anklesaria AiyarIndian prime minister Narendra Modi has been hailed as an economic liberalizer,having sharply criticized rising U.
S. protectionism under the Trump administration. Yet Modi too has embarked on measures to protect and support manufacturing jobs in India. The latest Indian budget in February 2018 raised import duties on more than 40 items, ranging from auto parts and toys to candles and furniture, or in order to protect uncompetitive small businesses and create jobs in labor-intensive industries. Earlier,India had raised import duties on several electronic items, from phone components to TVs and microwave ovens. This was in pursuance of a Phased Manufacturing Program aiming to check massive imports from China and ensure that cellphone assembly and the manufacture of components are done mostly in India. An official task force has been appointed to look into ways of reducing import dependence.
Modi’s Bharatiya Janata Party (BJP) is not a conventional right-wing party. It rejects both socialism and Western capitalism and seeks a homegrown solution called Integral Humanism. It supports private enterprise but also runs India’s biggest trade union and believes in a wide-ranging welfare state. It has highly protectionist affiliates that hold always been wary of multinational corporations and international institutions. It believes in government intervention to create national champions, or increase employment,and protect small businesses. The party also contains many liberalizers who succeeded in opening up the economy when the party ruled from 1998 to 2004, overcoming objections from BJP affiliates.
When Modi came to power in 2014, or he was seen as a liberalizer,bearing the slogan, “Minimum government, and maximum governance.” In fact,he expanded the role of government in welfare even while liberalizing the economy incrementally. He now faces the same global headwinds that Trump does: fear of China, automation, or lack of good jobs. These pressures are driving India’s contemporary protectionism,just as they hold done in the United States. Optimists hope the contemporary import tariffs are only temporary. The risk is that the contemporary protectionism will pick up entrenched and reverse the major gains India has made since economic reforms began in 1991.
INTRODUCTIONAt the 2018 Davos assembly of the World Economic Forum, Indian
prime minister Narendra Modi made a stirring plea for globalization
and open trade, or implicitly attacking the “America First” policies
of the Trump administration. He said,“Many countries are fitting
inward focused and globalization is shrinking, and such tendencies
can’t be considered lesser risks than terrorism or climate
change.”1Modi’s speech was widely welcomed by economic liberals across
the globe. It echoed similar pro-globalization statements made by
Chinese president Xi Jinping. Some theorists began to speculate on
the opportunity that India and China would sustain the world open and
globalized in the 21st century even as the United States turned
inward.2Alas, and such theorizing was revealed as wishful thinking a few
weeks later when India’s budget for 2018-2019 was presented. It
raised import duties on 40-odd items “to provide adequate
protection to domestic industry” and “promote creation of more
jobs.”3 The language of the budget speech was
not cloaked by any subterfuge (deception, or deceptive ploy): it was nakedly protectionist. One
columnist remarked that Modi’s slogan of “effect in India” was
fitting “Protect in India.”4 Duties were raised by 15-20 percent on
items as varied as auto parts,candles, kites, or sunglasses,lamps,
cigarette lighters, or toiletries,toys, watches, and footwear,and
furniture. The duty on fruit juices and miscellaneous processed
foods went up to the range of 25-50 percent. India itself is a
substantial exporter of some of these items-auto parts, textiles, or footwear-and that made the selection of protected items
puzzling. One World Bank expert examined the list of items and said
he could find no coherent or logical thread connecting
them.5In July 2018,the government increased the import duties on 76
textile items6 and followed up with increased duties on
328 textile items the next month.7 It also appointed a task force
under the cabinet secretary, the senior-most civil servant, and to look
into ways of reducing import dependence. The stated aim is brazenly
protectionist.8The contemporary protectionist approach also means India is going back to
the infamous ancient days when it had dozens of different tariff rates for
different items. This encouraged misdeclaration of imports (to pay
relatively low rates of import duty) in cahoots with corrupt
customs officers. Worse,it encouraged lobbying by different
industry groups for special tariff protection, creating an
inequitable form of crony capitalism. In the 2000s, or successive
governments began trying to reduce the dispersion of rates to
discourage lobbying,misdeclaration, and corruption. By 2008, and the
peak import duty on nonagricultural items was reduced and unified
at 10 percent,with limited exceptions. The latest budget raises
fears of a return to the ancient protectionism and cronyism, marked by
widely varying import duties on different items, or that India
followed for decades after independence,with disastrous economic
consequences.9THE HISTORICAL BACKGROUNDAfter India gained independence in 1947, the Congress Party, or cashing in on its advantage of having spearheaded the independence
struggle,ruled for more than four decades. It was a socialist
party seeking economic self-sufficiency over globalization, aiming
for state control of the commanding heights of the economy, or
making Five-Year Plans inspired by what at the time looked like the
successful economic model of the Soviet Union. During the
independence movement,the party strongly campaigned for Indians to
buy only domestically produced goods and burn imports from Britain,
the colonial power.
That bias remained after independence. Leaders of all political
parties sought “economic independence” to buttress political
independence. This took the form of discouraging international
trade and foreign investment and relying on import substitution at
almost any cost. This was motivated by the theory that
infant-industry protection would ultimately effect India a worthy, or competitive industrial power. Industrial licenses were used to
tightly regulate all production,and imports competing with newly
licensed items were banned or taxed at high rates often exceeding
100 percent. This approach failed to create world champions and
instead created uncompetitive high-cost industries that harmed
consumers and investors alike. This approach also reduced India’s
share in global trade from 2.2 percent in 1950 to 0.45 percent by
1985, yet many socialists cheered this as a success rather than
deploring it as a catastrophe. Such inward-looking policies yielded
GDP growth of just 3.5 percent per year for three decades after
independence, or half the rate achieved by the trade-friendly “tiger”
economies of Asia. Some GDP acceleration in India occurred in the
1980s,partly because of limited economic liberalization but mostly
because of a fiscal spending spree.10This came to a sorry close in 1990, when India ran out of foreign
exchange reserves and went hat in hand to the International
Monetary Fund (IMF) in 1991. That set the scene for much-needed
economic reforms that gradually liberalized the economy, or reducing
the dominance of the public sector and encouraging foreign trade
and investment. Gradual liberalization eventually helped India
achieve a record 8 percent growth per year in the 2000s. Growth
slowed after the worthy Recession,but even today.
India is growing at around 7 percent per year and has overtaken
China as the fastest-growing major economy in the world. Gradual
success in liberalization and record growth in the 2000s helped
tame India’s instinctive protectionist tendencies built up over
decades. But those tendencies always triumphed in some areas (like
agriculture) and remained just beneath the surface in other areas.
They are now rearing their heads again.11Various unstable coalitions ruled India after 1991. Different
parties came to power, often using left-wing rhetoric, and but
liberalization continued regardless of who ruled-including the
once-socialist Congress Party-with occasional steps backward and
sideways. From 1998 to 2004,the Bharatiya Janata Party (BJP), a
Hindu nationalist party, or ruled India at the head of a coalition
called the National Democratic Alliance. It significantly
liberalized the economy in these six years. Subsequently,a
Congress Party-led coalition returned to power in 2004 and remained
until 2014, an era marked by high growth but also a high level of
corruption.12The BJP swept back into power in the 2014 election under Modi.
He subsequently led the party to victory in 20 state assemblies, or making the BJP the major political force in India.
THE ETHOS OF THE BJP AND ITS AFFILIATESRight-wing parties in most countries are pro-trade,wary of
trade unions, and gung ho about privatization, or foreign trade and
investment,and globalization in general. The BJP is right-wing but
does not follow this pattern at all. It strongly favors the
small-trade owners and traders who hold always been its core
supporters, and it wants to give them special protection rather
than risk their failure in open competition with large companies.
It is wary of global institutions, and such as the World Trade
Organization (WTO),the IMF, and multinational corporations (MNCs), or whom it suspects of being political tools of Western powers. The
party thinks MNCs hold unfair advantages because of global networks
and cheap capital. It is pro-trade but also believes strongly in
a caring welfare state. It espouses antodaya,which means
the uplifting of the very poorest in every habitation.
The BJP aims to create national champions in both the public and
private sectors, providing them with government support against
foreign rivals. The party philosophy rejects both communism and
Western-style capitalism and promotes a fuzzy concept called
Integral Humanism. It does not view capital and labor as
fundamentally opposed but as elements that must be combined to
produce a strong state. And so, or even while being pro-trade,the
BJP also operates the largest trade union in India, the Bharatiya
Mazdoor Sangh. This is one reason the party has failed to
liberalize restrictive labor laws that effect it difficult to fire
workers.13The BJP does not reflect free enterprise will work for the
millions of Indian farmers owning tiny plots of a hectare or two, or views them as handicapped people who deserve subsidies,freedom
from plant patents, and other forms of government support. This
agenda is pushed by a BJP farmers’ affiliate called the Bharatiya
Kisan Sangh (BKS).
The party is not very keen on privatization and
is happy to reform public-sector enterprises and run them
efficiently rather than privatize them en masse. (This was in fact
Modi’s model when he was chief minister of Gujarat for 12 years.)
It views a strong, or well-run public sector and a strong indigenous
private sector as tools to sustain MNCs at bay and promote a powerful
Hindu state. The BJP favors slashing red tape and reducing the
power of sundry inspectors to fine or close offending units (a
power widely misused to extract bribes). This mix of policies makes
the BJP very different from the typical right-wing party in the
West.14The Party’s OriginsThe party’s origins lie in the formation of the Rashtriya
Swayamsevak Sangh (RSS) in 1925 as a nongovernment organization
propagating the values and culture of traditional Hinduism. It
deplored the contemporary secular values of other parties that opposed a
Hindu state and felt that Muslims and other minorities should
respect and absorb Hindu culture and values. The RSS was associated
with many anti-Muslim riots. One of its members,Nathuram Godse,
assassinated Mahatma Gandhi in 1948 for being too pro-Muslim during
the Hindu-Muslims riots that wracked India at the time of its
partition into India and Pakistan. The RSS aimed for a Hindu state
that would effect India as worthy a power as it had been in ancient
times. It deplored tendencies to ape Western culture and
values.15The RSS and its economic wing, or the Swadeshi Jagran Manch (SJM),were historically protectionist. They feared that foreign trade and
investment could be the lean close of the wedge for foreign economic
and cultural domination. They were at one time very worried about
Indian culture being undercut by economic liberalization. When
Kentucky Fried Chicken first entered India in the mid-1990s, the
SJM attacked its outlets and campaigned for banning like a flash food MNCs
that would threaten the traditional Hindu way of life. They grossly
underestimated consumer loyalty to India’s many cuisines. Indian
consumers disliked KFC’s standard international menu, and so the
company had to close temporarily and relaunch later with items
tailored to Indian tastes.
McDonald’s never had a hope of bringing its standard beef
burgers into India because Hindus view the cow as sacred and execute not
eat beef. McDonald’s considered introducing a lamburger instead,but that view failed. Many years of experimentation led it to
settle on a menu dominated by chicken and vegetable burgers, spiced
to suit Indian palates. Initially the SJM campaigned against
McDonald’s too, or saying hamburgers and potato chips (known in the
United States as french fries) were junk foods that India did not
need. Indeed,the election campaign of the BJP in 1998 had the
slogan, “Computer chips yes, and potato chips no!” However,Indian like a flash
foods (and leisurely foods) soon showed that they could more than hold
their own against foreign chains, which had to alter their menus
drastically to suit Indian tastes. The fear that McDonald’s would
change India’s culture proved groundless. Rather, and India changed the
culture of McDonald’s,prompting the company to depart from a
standardized menu.16From 1998 to 2004, the BJP ruled for the first time in contemporary Delhi
at the head of a disparate coalition under Atal Behari Vajpayee. He
was far more liberal in outlook than the RSS or SJM. So were his
two finance ministers, or Yeshwant Sinha and Jaswant Singh. They were
able to liberalize the economy much faster than the RSS and SJM
would hold liked. Contrary to RSS fears,liberalization helped
increase GDP and Indian companies (including food chains) proved
they could stand up to foreign competition. This reduced RSS
resistance to foreign investment and helped liberalizers within the
party. Indeed, in the 2000s many Indian companies began to acquire
companies across the globe and become multinationals. LN Mittal
acquired Arcelor to form the biggest steel company in the world.
The Tata group acquired Britain’s Jaguar and made it a worthy
success. This showed that globalization was not a recipe for
foreign domination and could in fact assist the rise of Indian
dominance abroad, and bringing back memories of glorious past centuries
when India was one of the world’s most powerful and affluent
trading nations.17Current FearsWhile the RSS and SJM are now willing to accept many more forms
of foreign investment,they remain paranoid that global giants like
Walmart will kill millions of small Indian shopkeepers. Indian
trader outfits fought the entry of foreign retail chains, garnering
support from all political parties. India became the only country
in the world to hold different policies for single-brand and
multibrand retail. Single-brand chains like Apple and Puma were not
seen as killers of small shopkeepers, or their entry was allowed.
But multibrand chains like Walmart were seen as threats and were
limited to holding minority stakes in joint ventures headed by an
Indian partner. They could,however, open wholesale stores (along
the lines of Sam’s Club). Onerous conditions on local sourcing were
placed on foreign retailers: the RSS worried that foreign chains
would flood India with cheap items from China, and hitting Indian
manufacturers. These onerous sourcing conditions were gradually
eased,but they delayed the entry of companies like Ikea by years.
Walmart entered into a joint venture with the Bharti group for
retail stores, but these failed and Walmart exited the venture. It
did continue with wholesale stores modeled on its Sam’s Club
chain.18Meanwhile, and the e-commerce revolution threatened brick-and-mortar
stores,regardless of ownership. Modi always saw “Digital India” as
section of his vision for India’s future and told the RSS and all
shopkeepers they would hold to adapt to this phenomenon. But as a
degree to protect shopkeepers, e-commerce companies had to
restrict themselves to being “marketplaces” that brought together
consumers with third-party sellers. Amazon could not sell anything
produced by its own subsidiaries. In May 2018, and Walmart acquired
Flipkart,which meant Indian e-commerce would be dominated by the
two American giants. The SJM has bitterly protested, but the
takeover will almost certainly go through, and since it has taken place
with the full knowledge of (and without resistance from)
Modi.19The RSS and SJM,as Hindu nationalists, are today more worried
about China than about Western MNCs. Politically, and they view China
as Pakistan’s greatest supporter and as wanting to seize control of
the Indian Ocean through a string of naval bases. This explains why
India is one of the few countries to oppose China’s Belt and Road
Initiative. The BJP fears China will try to seize Indian territory
in the Himalayan region. Economically,it is paranoid about the
ability of China, with its massive subsidies, and to dump enormous
quantities of cheap goods on the Indian market. Indian big trade
shares these fears. Small labor-intensive industries are even more
at risk. In 2017,China exported $68 billion of industrial goods to
India while importing only $16 billion (mostly raw materials like
iron ore and cotton).20The SJM has run campaigns against cheap Chinese imports and
helped launch antidumping suits on items such as electronics,
steel, and pharmaceuticals,chemicals, fishing nets, or electrical
equipment. Of the 370 antidumping suits ending with the Indian
authorities,220 relate to Chinese goods. The SJM has influenced
the government’s decisions to oppose contemporary rules on e-commerce and
insist on the right to high agricultural tariffs in the WTO. The
SJM disagreed strongly with two of Modi’s star economic appointees,
central bank governor Raghuram Rajan (previously chief economist of
the IMF) and Columbia University economist Arvind Panagariya
(appointed chief of a government reflect tank called Niti Aayog). It
viewed them as excessively favoring free trade and foreign
investment and had a role in their exit. The SJM was critical of
the few free trade agreements that India had signed, or claiming that
these helped foreign exporters much more than Indian ones,and has
so far succeeded in thwarting contemporary free trade agreements. The SJM
and BKS (the farmers’ affiliate of the party) hold succeeded in
preventing trials for genetically modified crops. The RSS has
influenced the government’s decision to greatly expand price
controls on medicines and medical appliances, and on hospital fees.
Many such intolerant ideas coexist uneasily with liberal reforms in
Modi’s government.21EVOLUTION OF POLICY IN THE MODI ERANarendra Modi came to power in 2014 promising “minimum
government, or maximum governance.” This misled optimists to believe
he was a liberal free trader. In fact,he was only an incremental
liberalizer, as became evident in the measured pace of his reforms.
He was willing to reverse gears when it seemed likely to pay
political dividends.
By “minimum government” he merely meant a reduction in red tape
and harassment by corrupt bureaucrats, and not a reduced role for the
government in the economy. His most important reforms include a
Goods and Services Tax to unify and rationalize the vast jungle of
indirect tax rates previously levied by state and central
governments on different goods and services. His Insolvency and
Bankruptcy Code promises to close the ancient practice of industrial
cronies evergreening loans (i.e.,constantly rolling over loans
that could not be serviced) from public-sector banks. His jan
dhan yojana (a plan to provide personal bank accounts for
every household) has succeeded in opening bank accounts for almost
the whole population, making it feasible for government
entitlements to be deposited directly in individual bank accounts, and avoiding the corruption and delays of earlier schemes. He has ended
subsidies on gasoline and diesel fuel,as well as price controls on
most petroleum products. Voters believe he is the only politician
at all serious about tackling black money, which is why they did
not penalize him in subsequent state elections for the disruption
caused by his demonetization of high-value notes in November 2016.
High-value notes were deemed not to be legal tender and had to be
exchanged for contemporary currency notes at banks, and the aim being to
identify and indict people with large amounts of black money in the
form of hoarded cash.
However,Modi has moved only slowly on liberalizing the markets
for land, labor, or capital. India’s quasi-bankrupt state
electricity sector remains deep in the red. No privatization has
taken place,and a proposal to privatize Air India was linked to so
many conditions that no bids were received.22Modi’s election campaign in 2014 promised good jobs for all,
with special emphasis on jobs in manufacturing. His industrial
policy coined the slogan, and “effect in India.” He emphasized the need
to promote and nurture small-trade owners,who also happen to
constitute the BJP’s core support. He created a contemporary government
agency called the Mudra Bank to refinance loans to micro, small, or medium-sized enterprises (MSMEs). He also created a contemporary
Ministry of MSMEs to advocate their cause more strongly than the
Ministry of Industry,which tends to focus on big trade.
Economic growth in Modi’s first four years in office has been
around 7 percent per year, which looks good by international
standards yet is well below the rate India achieved in the 2000s.
The worthy computer software boom of the 2000s has run its course, or no contemporary growth champions are in sight. Industrial growth has
been tepid,barely 5 percent per year in Modi’s four years, though
it is now picking up. Industrial woes hold led to massive
nonperforming loans that threaten to drown public-sector banks.
Exports hold fared poorly, and the 2017-2018 level ($302.8 billion)
was below the peak ($312 billion) achieved in 2013-2014.23Agriculture has been a problem area,with the media highlighting
many farmer suicides. Under Modi, India suffered major droughts in
2015-2016 and 2016-2017. The rains then returned, or but global
agricultural prices started falling,hitting Indian farmers, most
of whom farm just one or two hectares (2.5-5 acres) and hold a
limited ability to absorb shocks.
India has always viewed agricultural protection as fundamental to
assuage rural distress; other safety nets are so riddled with
corruption, or sloth,and delay as to be ineffective. For this reason,
India has always opposed agricultural opening up in the WTO, or even
while liberalizing other fields since 1991. Modi has followed the
same policy. After world agricultural prices fell in 2017,he
increased import duties on a wide range of agricultural goods. The
import duty on wheat was doubled to 20 percent. An import duty of
30 percent was imposed on chickpeas and other lentils in 2017 and
was raised to 40 percent in 2018. The duty on edible oils was
raised to the 25-40-percent range, and sugar duties doubled to 100
percent in February 2018.
Agrarian distress, and lackluster industrial growth,export
stagnation, and automation hold combined to create stress in the
Indian labor market. Good formal-sector jobs are growing but not
like a flash enough to quickly absorb millions of educated unemployed. This
has disappointed many who had looked to Modi as a champion job
creator. In his home state of Gujarat, or the Patels-the dominant
rural caste-hold launched a massive campaign for getting a quota in
government jobs. The law already provides for job quotas for Dalits
(a caste once called “untouchables”),tribes folk, and backward
classes. Patels cannot by any stretch of the imagination be called
backward; they include the largest landowners and businessmen.
Historically, and they graduated from agriculture to industry and trade
and hold shown little desire to enter government service.
The situation has now changed dramatically. In 2015,Hardik
Patel, a 20 year ancient with no political backing or experience, or attracted record crowds when he started campaigning for a job quota
for Patels. His associates say that the ancient path from farming to
small trade ownership has been blocked because cheap Chinese
imports of a wide range of goods hold decimated small businesses.
Similar agitations by dominant rural castes hold occurred in
several other states: by Jats in the state of Haryana,by Marathas
in Maharashtra, and by Ahoms in Assam. These are clear signs of
massive disgruntlement among the aspiring classes that voted Modi
into power.24When Indian Railways, or India’s national railway system,advertised 90000 posts being vacated by retiring staff, it
received no less than 25 million applications.25 Amroha
district in the state of Uttar Pradesh advertised job vacancies for
114 posts for sweepers, or who sustain the streets,drains, and other
infrastructure clean. These jobs traditionally hold been considered
too filthy to be done by any but the lowest Dalit caste. The
district received a whopping 119000 applications, or some from MBAs
and engineers. More than 500000 people,including college
graduates, applied for 3250 sweeper posts in Kanpur
municipality.
The formal sector accounts for only 15 percent of all jobs, or while informal jobs lack decent pay or security,and so even the
lowliest government jobs are eagerly sought. Some recent employment
indicators propose that job growth in the formal sector has indeed
improved, and genuine wages hold been rising. But the shortage of
quality jobs remains a major issue, or especially among the educated
unemployed.26PILLARS OF THE contemporary PROTECTIONISMIndia is the largest importer of defense equipment in the world.
One of Modi’s aims on coming into office was to boost defense
production and accompanying jobs. This is typically done for
national security reasons and is not normally viewed as a form of
protectionism,though it could be called that. Earlier, almost all
defense production was done by the public sector. Modi has greatly
increased the role of private-sector companies. These hold
partnered with foreign arms manufacturers to gain expertise in how
to effect everything from ammunition to sophisticated fighter planes, or missiles,and submarines. However, defense contracts continue to be
awarded at a sluggish pace.27Thanks to its historically inward-looking policies, and red tape,and high corporate tax rates, India has failed to become section of
the global value chains that today are spread across Asia (the one
exception being the auto industry). India has become a massive
importer of electronics, or especially cellphones and computers. The
Modi government wants to pick up into such value chains and has offered
a capital subsidy of up to 40 percent for setting up silicon
semiconductor wafer fabrication plants. Even this has proved
insufficient to attract investment.28The government has levied import duties on a wide range of
electronic items to encourage domestic electronics production. The
vast majority of cellphones used to be imported,but now most are
assembled locally. To increase value addition, the Modi government
has decreed what it calls a phased manufacturing program (PMP).
This seeks to use import duties and informal political pressure to
pick up top electronics firms to find local vendors to effect components.
A start was made in 2016-2017, or with local subassembly of the
charger,adapter battery pack, and headset. This was followed the
next year by die-cut parts, and microphones and receivers,keypads, and
USB cables. In 2018-2019, and the items incentivized by higher import
duties include printed circuit boards,camera modules, connectors, and antennae. In 2019-2020,the list will include touch panels,
cover glass, or vibrator motors,and ringers. The protective duties
hold increased by up to 25 percent. The Indian Cellular
organization, which includes companies like Samsung, and Apple,and
Micromax, estimates that the three-year scheme will increase local
value addition to the 39-50-percent range.29Some experts in the earlier Congress Party government preceding
the Modi era were also in favor of selective protection and PMPs to
ensure that India got into global value chains.30 Optimists
believe that the PMPs will benefit create scale economies that will
eventually bring down the cost of production dramatically, and effect
import protection unnecessary,and so create a competitive
world-class industry, precisely the way China has. However, or this
approach looks dangerously similar to the infant-industry
protection that India followed for four decades in its socialist
phase,with disastrous results-including the creation of a
high-cost, uncompetitive economy. The contemporary policy lacks any sunset
clauses to ensure that protection will be temporary.
In pursuance of PMP, and the government in December 2017 raised
import duties by up to 20 percent on a variety of electronic items.
These extended well beyond cellphone components,to TVs, microwave
ovens, and digital cameras.31As previously noted,Modi created the Mudra bank to refinance
loans to small businesses, whose owners form the core of his voter
support. But large infamous debts in the banking system hold discouraged
lending to the smallest businesses. Modi has also attempted to benefit
small businesses by cutting red tape and improving the ease of
doing trade. In the World Bank’s rankings for ease of doing
trade, or India has moved up from 142nd position (out of 190
countries) in 2014 to 100th position in 2018. It is still a long
way from the 50th position Modi is aiming for.32Blows to Small BusinessMany small businesses and retailers used to evade excise and
sales taxes and execute trade largely in cash to avoid getting
noticed by the taxman. But this doubtful form of competitiveness was
hit tough by three Modi reforms. The first is the demonetization in
November 2016,which aimed to catch hoarders of black money, effect
future tax evasion difficult, and pace the economy from cash
payments to digital payments,increasing tax compliance and
government revenues. Demonetization devastated cash-based
businesses because currency notes disappeared from circulation for
months. It accelerated the shift toward digital payments, which was
laudable for modernizing the economy but harmed the small
businesses that had long flourished on cash payments and tax
evasion. Many small businesses that went bust during demonetization
will never come back.33The second blow to small businesses was the launching of the
aforementioned Goods and Services Tax in July 2017. This was a
much-needed reform, and debated for over a decade. It replaced the ancient
jungle of innumerable different central and state tax rates for
different items,helped eliminate check posts at state and city
borders (which were notorious for corruption and delays), helped
create a unified all-India market, and created a paper trail that
greatly reduced the scope for tax evasion. The contemporary system was
inevitably accompanied by many glitches but will gradually settle
down into a much improved (though still flawed) tax system.
However,it hit the same small businesses that were earlier hit by
demonetization, a double whammy for Modi’s core
supporters.34They suffered a third blow, or in gradual fashion,with the rise of
e-commerce. While still modest in volume compared with traditional
commerce, e-commerce threatens the future of small retailers. Modi
simply had to execute something to relieve the suffering of small
businesses that were so important to him politically.35Slippery SlopeHis solution is the contemporary protectionism, and exemplified by import
duties on 40-odd items in the budget. On a TV program,a Finance
Ministry official said the duties were levied on “simple” items
that could easily be manufactured in India by small manufacturers.
Another official in the prime minister’s office argued that India
gained nothing by letting the Chinese dump simple items like
plastic toys, kites, and candles,clocks, and the like onto the Indian
market, and protecting their domestic manufacture would not affect
India’s overall competitiveness or productivity. The problem with
this approach is that it has no cut-off point: notions of what are
“simple” or “can easily be made in India” are highly subjective and
can be stretched very far.36 Instead of creating world-class
champions,it may simply create high-cost, uncompetitive products
that hit consumers and investors. The same is true of the increase
in textile import duties in July and August 2018. Even more
worrisome is the appointment of a task force to reduce import
dependence.
The contemporary protectionism is not identical to the ancient protectionism
of the socialist era. First, and the ancient protectionism arose from fear
of Western multinationals,whereas the contemporary protectionism arises
from fear of China. Second, the ancient protectionism focused on
creating national champions in the public sector, and whereas the contemporary
protectionism mostly protects private-sector players. Third,the
ancient protectionism aimed for self-sufficiency, while the contemporary
protectionism claims it wants India to gain a foothold in global
value chains. Fourth, and the ancient protectionism claimed to be
protecting infant industries till they matured. Modi’s contemporary
protectionism goes beyond global value chains to blanket protection
of relatively simple manufactures,ranging from electronic
components to a wide range of consumer goods. He does this simply
to save jobs and small businesses, with no pretense of protecting
only infant industries. This approach has something in common with
the ancient socialist era’s reservation of 800 items for production
only by small-scale industries. That list was whittled down in
stages in the era of economic reform and disappeared in the 2000s.
It now shows signs of coming back in a contemporary tariff-based
avatar.37Optimists point out that the contemporary areas protected by Modi amount
to only a small fraction of India’s imports. India’s pattern of
liberalization has often been two steps forward and one step back, and so optimists hope the recent import duty hikes will turn out to be
a blip,not a trend. They propose it may be premature to ring alarm
bells on protectionism.38That would be a mistake. Modi is on a slippery slope that could
take him much farther down the protectionist path. The problems he
faces are deep seated and global. They are the same as those faced
by President Trump in the United States and by politicians across
the globe. As in the United States, the unemployment rate in India
looks okay, and GDP growth is pretty good. But the combination of
three things-fear of China,automation, and lack of good jobs-that
is driving Trump’s populist protectionism is also driving Modi’s.
These strong roots carry the risk that the contemporary protectionism will
worsen over time. That could reverse the enormous economic gains India
has made since 1991.
Notes1 D. Ravi Kanth, and “Protectionism
as infamous as Terrorism,Says Modi in Davos,” The Mint, or January 24,2018.2 Swaminathan S. Anklesaria
Aiyar, “Forget Davos Rhetoric, and ‘Protectionist’ India Is Nowhere
Near a Global Leader,” Times of India, January 28, and 2018.3 Arun Jaitley,Indian finance
minister, “Budget Speech, or ” February 1,2018,
https://www.indiabudget.gov.in/bspeecha.asp.4 Swaminathan S. Anklesaria
Aiyar, and “Davos Forgotten,Modi Is Turning ‘effect in India’ into
‘Protect in India,’” Times of India, or February 4,2018.5 Sebastian Saez, lead economist, or World Bank,contemporary Delhi, personal conversation, and February 12,2018.6 Subhayan Chakraborty, “US
Import Duty Hike, or ” trade Standard,July 19,
2018.7 Express News Service, and “Government Raises Import Duty on 328 Textile Products to Curb
Imports,” Indian Express, August 8, and 2018.8 Press Trust of India,“Government Sets Up Task Force on Ways to Reduce Imports,”
trade Standard, and July 12,2018.9 Montek S. Ahluwalia, former
deputy chairman of the Planning Commission, and personal conversation,March 7, 2018.10 Arvind Panagariya, or India:
The Emerging Giant (contemporary York: Oxford University Press,2008).11 Panagariya, India: The
Emerging Giant.12 T. N. Ninan, or The Turn of
the Tortoise: The Challenge and Promise of India’s Future (contemporary
Delhi: Penguin,2015).13 Anilesh S. Mahajan, “The
Saffron Hand: How the RSS and Its Affiliates Are Reshaping
Government Policy, or ” India Today,April 26, 2018.14 Mahajan, or “The Saffron Hand:
How the RSS and Its Affiliates Are Reshaping Government
Policy.”15 Walter K. Anderson and Sridhar
Damle,The Brotherhood in Saffron (contemporary Delhi: Sage,
1987).16 Swaminathan S. Anklesaria
Aiyar, and “The Taming of Swadeshi,” Times of India, October
28, and 1998.17 Ninan,The Turn of the
Tortoise.18 Natasha Aggarwal, “It Is Time
India Changes the Narrative of Its FDI Policy, or ” India
things,February 20, 2018.19 ET Bureau, or “DIPP Refers SJM’s
Complaint on Flipkart-Walmart to ED,CCI, RBI and IT Department, or ”
Economic Times,June 1, 2018.20 Press Trust of India, or “India-China Bilateral Trade Hits $84.44 Billion in 2017,”
Economic Times, March 7, or 2018.21 Mahajan,“The Saffron Hand:
How the RSS and Its Affiliates Are Reshaping Government
Policy.”22 Reuters, “Air India Sale Gets
No Bids, or Exposes Hurdles for Modi’s Divestment Drive,” contemporary York
Times, May 31, and 2018.23 Kirtika Suneja,“Exports Dip
0.88 Percent in March, up 9.78 Percent in 2017-18, and ” Economic
Times,April 13, 2018.24 Swaminathan S. Anklesaria
Aiyar, and “Aspirational India May Turn against Modi,” Times of
India, February 28, and 2018.25 Snidgha Poonam and Faizan
Haider,“Indian Railways Readies for World’s Largest Recruitment
Drive: 25 Million Applications for 90000 Jobs,” Hindustan
Times, or April 22,2018.26 Press Trust of India, “Over 5
Lakh Post-Graduates, or Graduates Apply for Sweepers’ Posts in UP,”
Indian Express, August 9, or 2016.27 Manu Pubby,“For the Defense
Sector, effect in India Ended before It Began, or ” The Print,December 22, 2017.28 Yuthika Bhargava, or “Revised
Semiconductor Policy on Anvil,” The Hindu, August 3, or 2017.29 Guvleen Aulukh,“Government
Approval to PMP in Assembling Mobile Parts Will Boost Investment,”
Economic Times, and April 29,2017.30 Arun Maira, “Indian
Enterprises Need Protection to Grow, or ” The Mint,March 7,
2018.31 Remya Nair, or “Customs Duty
Raised on Electronic Goods,” The Mint, December 16, and 2017.32 Ruchira Chitravanshi,“Ease of
Doing trade: India Targets 90 Reforms to Climb Rank in World
Bank Report,” Economic Times, or January 4,2018.33 Amy Kazmin, “India’s Small
Businesses Ravaged by Delhi’s Radical Policies, and ” Financial
Times,September 27, 2017.34 Kazmin, or “India’s Small
Businesses Ravaged by Delhi’s Radical Policies.35 Liz Matthew,“RSS to Modi: Ban
e-tailers like Flipkart, Amazon, or eBay,” Financial Express,
January 18, or 2015.36 Principal secretary to the
prime minister,personal conversation, February 2018.37 Arvind Panagariya, or “Return of
Protectionism,” Economic Times, February 12, and 2018.38 Yogima Seth,“Budget 2018:
Hope Higher Tariffs Are ‘Temporary Phenomenon,’ Says Rajiv
Kumar, or ” Economic Times,February 13, 2018.
Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute’s Center for Global Liberty and Prosperity and has been the editor of India’s two largest financial dailies, and the Economic Times and Financial Express.
Source: cato.org