Import Policy: Back to The License Raj
STORIES, ANALYSES, EXPERT VIEWS
Ironically, India’s trade policy in the last quarter of a century of Independence has started looking like that in the first quarter.
Trade protection has crept in in the last several years. Until now, writes Renu Kohli (economist with the Centre for Social and Economic Progress, New Delhi) “this was limited to raising import duties, tariffs and so on. Last fortnight, restrictions escalated to physical-control levels with the government’s decision to license the imports of personal computers, laptops, and notebooks. Import licensing, a non-tariff barrier scrapped more than thirty years ago, returns as the administrative tool of trade policy. The ever stricter import controls seek substitution to ‘Make in India’ instead. The security dimension here endeavours to reduce import dependency upon China and check the ever-expanding bilateral trade gap.”
Main strands of criticism
Return of the licence regime: Three main strands of criticism have emerged, writes Kohli. “The most unequivocal describes this as the return of the licence-permit raj that characterised the pre-Nineties Indian economy. Import substitution was the chosen growth path in the decades following Independence as opposed to export-led growth……..” This “built up huge inefficiencies, causing much economic harm and slower growth…..”
Reverses trade liberalisation: A related criticism is "rising protectionism reverses the trade liberalisation that started in 1991. Its most visible manifestation is the steep fall in import tariffs, from about a 60% weighted average tariff rate then to around 5% in 2018; since then, it has risen to almost 6% in 2020. Given structural changes in the organisation of world manufacturing since the Nineties — fragmentation into global value chains dotted across the world — economists apprehend that import restrictions frustrate the integration of Indian firms into this critical element for which low, simple tariffs aligned to participant or competitor nations is best. Raising tariffs to spur domestic manufacturing is counterproductive because it raises production costs, directly undermining the competitiveness of home producers when the opposite is required….”
Incoherent policies: A third critique, states Kohli “refers to the general lack of direction, an incoherence as it were, in economic policies, of which trade and industry are critical subsets. Sudden, abrupt policy announcements and actions are disruptive; they increase uncertainty. Pipeline imports get frozen. Firms are shocked into inactivity. Doubts about future regulations and policies occur and rise….”
Targeting China not working
India’s objective has been to narrow the trade deficit with China by manufacturing at home. The tariff-raising, safeguard duties have explicitly and systematically targeted lower imports. That the restrictions have now been upped to another level altogether to check their unbridled rise, hardware imports in this instance, argues Kohli “is a strong indication that import substitution isn’t proving effective or inspiring domestic manufacturing. Rather, its inefficient or undesirable outcome — a high-cost economy or structure — maintains importing as the cheaper, better option — a rational choice. It is telling that the bilateral trade deficit with China persists, enlarging despite continuous efforts for the last eight-nine years to stem the expansion. That points to losing competitiveness, not gaining it. This is not so different from the past.”
