Is protectionism compatible with liberalisation? 

There needs to be serious participation by the market forces together with the government

July 15, 2022 12:15 am | Updated 04:59 pm IST

An ‘Atmanirbhar’ tea stall outside a BJP office in Mumbai.

An ‘Atmanirbhar’ tea stall outside a BJP office in Mumbai. | Photo Credit: AFP

At a time when the Central government says it is liberalising India’s economy, its economic policymaking on the external front has been marked by rising protectionism. With policies such as Atmanirbhar Bharat, there seems to be a conscious effort to protect the domestic economy from foreign competition. This raises questions on whether the government’s external protectionism is compatible with its promise of liberalising India’s economy. In a discussion moderated by Prashanth Perumal J., Biswajit Dhar and Ajay Shah talk about model of industrial policy that should be the way forward. Excerpts: 

Is the government’s external protectionism compatible with its broader liberalisation agenda?

Biswajit Dhar: The kind of protectionism we are seeing in the name of Atmanirbhar Bharat is disappointing because while there is a case for having an industrial policy, where you invest in industries that you think could be globally competitive, what is happening in India is there is a long list of sectors in which the government has embarked on import substitution that encourages domestic production. What is problematic is that you’re not talking about efficiencies which will make these sectors globally competitive. The emphasis is on producing in India rather than on efficiency.

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Ajay Shah: I want to put out two ideas. One, different countries should specialise in producing different things, and it is not easy for policymakers to understand what India will be good at and what India will be bad at. These are things for markets to discover. I always like to remind us of the story from the 1970s, when policymakers in New Delhi thought that electronics export was going to be a good thing. So, they created the Santacruz Electronic Export Processing Zone (SEEPZ) in Bombay and removed customs duties. By removing protectionism, they thought they were doing a favour to the electronics industry. And 30 years later, when you look back, what came out on top were the software industry and the diamond processing industry. So, the government’s industrial policy was wrong. It was not in electronics where there was a fabulous opportunity for India; it was in software and diamonds. The point is, the market economy knows how to discover these things, policymakers don’t.

The second idea is a very simple intuition: every time you cut customs duties, every time you remove elements of protectionism, firms in India which are users of those goods become more competitive. So, we grow exports from India by making raw materials cheaper. Again, one man’s output is another man’s input. Policymakers cannot tell what they should be backing. So, the wild strategy is to just remove all barriers to globalisation. That is the best path for us as a country.

Is the Centre’s external protectionism merely a reflection of its domestic economic policies?

Biswajit Dhar: Yes. We have been hearing about getting red tape out of the way for 30 years, but instead of getting it out of the way, I think it’s just piling on. Ease of doing business is a major issue. It’s clear that if the government doesn’t get its act together domestically, including the institutions, it’s not going to get any kind of investment — foreign investment or domestic. That’s going to be a huge problem. There’s been this discussion going on for the past 33 years as to why China or other Southeast Asian countries have been attracting foreign investment, while in India, with successive governments saying we have the most investor-friendly policy, investors are not investing long term. So, external and domestic reforms have to go hand in hand.

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Ajay Shah: There are many pieces to the problem that need to be sorted out. But we have to be strategic when we think about where the bottlenecks are. We need to debate the important bottlenecks that are impeding India’s participation in global supply chains and in the world of globalised production. And I want to link this with the labour market where we need to figure out where those domestic bottlenecks are that are holding back large-scale labour-intensive investment in India.

Doesn’t discretionary government policy in the name of Atmanirbhar Bharat bring along with it the risk of possible favouritism towards special interest groups?

Ajay Shah: It’s easy to impute motives and worry about corruption, but I actually worry about one basic thing, which is that nobody knows the future. It is very difficult to look at the future and figure out which Indian industry is going to do well and which is going to do badly. I mentioned the example of the SEEPZ. Those were some of the smartest people in the country at that time who were involved in economic policymaking. But they were not able to figure out that opportunity in India lay in software and diamonds, and not in electronics. So, I think that the market economy is a great method of discovery. It is a tool for figuring out what works and what doesn’t. It involves taking risks. Many private people have to try many things. Some will work, some will not work. It is not in the nature of bureaucracies to experiment. Industrial policy requires having a high level of knowledge, forecasting capability, and intellectual capacity in government. And you know, frankly, nobody in the world has the ability to forecast what’s going to happen five or 10 years out in the future. I feel we should all be modest and say that we don’t know. Let the market economy do the job of risk-taking, making mistakes, etc. Many firms will go bankrupt, and many industries will shut down. That’s okay. That’s how we find out what works and what doesn’t.

Biswajit Dhar: I think policy should be made by the government and industries having a dialogue. This has been the reason behind the success story of many Southeast Asian countries. They have not just let the market do whatever it wanted to. There was serious participation by the industry, or the market forces, together with the government. The government has to play the important role of a facilitator. And that kind of a dialogue really took place in Japan, [South] Korea, and many Southeast Asian countries. Singapore is another example. That is the way India should go. We tried to rely just on market forces for the better part of the last 30 years, but we didn’t make much headway. And in the process, we found that most productive sectors have been lagging behind. So, the moment the economy was exposed to foreign competition, we started finding the lack of depth in different sectors across the board. To overcome this, the government needs to hear what the players on the ground need, and respond adequately. To my mind, that is the model of industrial policy that is the way forward.

Why shouldn’t the Indian consumer be allowed to buy foreign goods if they are cheaper and better?

Ajay Shah: That is an act of government coercion, where the government stands in the middle and interferes with the ability of an Indian consumer to buy something from abroad or the ability of an Indian firm to buy something from abroad or the ability of an engineering firm to raise capital from a cheaper source abroad, and so on. And I really feel uncomfortable with the readiness and the willingness of policymakers to use the coercive power of the state in such fashion. People know what’s best for them. If a person wants to buy something from a vendor outside the country, why is it better when the government interferes? I feel that’s a fundamental question of freedom that needs to be brought on the table.

Biswajit Dhar: I do think that ad hoc protectionism is not really the way forward because ultimately we are living in a market economy and there has to be the freedom to choose. But I think we are actually talking about something more fundamental in the sense that we are looking at issues relating to falling competitiveness of Indian industry. What kind of a road map are you going to be following to get around the problem? The situation is increasingly becoming grim because due to the lack of competitiveness we are seeing the Indian economy suffer. If this situation continues, it would be very difficult to keep the macro fundamentals in check. Things are going to go pretty awry. I would say we need to look at how we are going to be on a more sustained pathway as far as our balance of payments is concerned. Our current account deficit is already threatening to go out of control. You need to have a government and industry partnership. The industry needs to identify the pain points, and they should ask the government to address these issues. For instance, the innovation sector the world over has needed a lot of government support. We saw what happened during the pandemic. Most of the major vaccines that were produced by these big pharmaceutical giants had substantial government backing. The government needs to play the role of a facilitator, and that’s a very important role without which I don't think we are going to get into a sustained pathway.

Ajay Shah: I agree, but then we have to confront the difficulties of state capacity in India. We are an underdeveloped country, and the capabilities in state structures are quite limited. In many ways we have actually not fared well in the last 20 years. So, we should be very cautious about what kind of mandate we wish to give the Indian state given its limitations.

Are we getting closer to the pre-1991 era of trade protectionism?

Biswajit Dhar: It’s not about how far or how close we are to the pre-1991 policy climate. I think it’s about the trend and the trend seems to be towards the Nehruvian model of self-reliance. You can call it Atmanirbhar Bharat or by any other name, but it’s self-reliance at the end of the day. The second thing that worries me about the Production-Linked Incentive (PLI) scheme are is that incentives are linked to certain capacities. That reminded me of a policy that was followed during the industrial licensing era, which was called the minimum economic scale. The government was telling the industry what could be the minimum economic scale and then directing the industry to produce along those lines. The PLI and its incentives at different levels smack of that kind of a policy. It’s the direction, not really the distance, that worries me. If you’re following this direction, there is a danger of reaching that someday, and that could be problematic in my view.

Ajay Shah: One measure that we should be thinking about is the weighted average tariff rate which is compiled by the World Bank. The rough picture is that there’s been no significant change in that number (6%) since 2008. So I don’t think there’s been a significant movement away from where we were earlier. That said, there are many other elements of protectionism which are not just about tariffs. Most importantly, it is about equal treatment of foreign companies. I feel that a lot of the regulatory system is moving in ways where national champions get policy support and foreign companies do not. I think that is the more worrisome thing to think about.

Ajay Shah is Research Professor of Business at Jindal Global University; Biswajit Dhar is Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University

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