Protectionism is not the way forward, customs duty hike will only bring woes
There is well-founded nervousness over protectionism coming in through the back door in the name of prime minister Narendra Modi’s signature ‘Make in India’ campaign. Add to that fears that, like the US administration under Donald Trump, India is throwing a protective cover around domestic manufacturing with the avowed objective of expanding local industry. This follows from the Union budget proposals to hike customs duty on a host of items as a ‘restrictive measure’ against Chinese goods that have swamped the market.
From vegetable oils, furniture, juices, smart watches and auto components to imported phones, all have become expensive after finance minister Arun Jaitley raised customs duty on these items on February 1. For instance, the customs duty on mobile phones was hiked to 20 per cent from an earlier 15 per cent. Similarly, specific TV components will now attract an import duty of 15 per cent that was either abysmally low or zero duty. The hike in customs duty, Jaitley hinted, will provide a fillip to the ‘Make in India’ campaign and secondly mobilise some revenue in a difficult year. What the finance minister did not spell out however was that the duty revision was aimed at curbing imports from China in these two vital areas. At least 10 major industry sectors have had been impacted due to the hike in customs duties.
Over and above this, the social welfare surcharge made imported goods expensive by 7 per cent though all cesses were abolished. The surcharge is over and above the hike in customs impost. A closer analyses drives home the point that the ‘Make in India’ campaign has not been a runaway success. In fact, Niti Aayog vice chairman Rajiv Kumar had hinted at modest gains in the campaign. Liberal market-oriented economists like Surjit Bhalla and Ratin Roy, who are part of prime minister’s Economic Advisory Council, are also not particularly enamoured of the ‘protective measures’.
With great difficulty India has got out of the mindset that earlier prompted it to raise walls and reduce foreign competition to protect domestic industry. Instead, it unleashed the industry’s potential big time by establishing global linkages and drawing huge advantage from international practices. India as a country had deplored protective measures recently unleashed by president Donald Trump especially on the unfettered movement of technology professionals. Both tariff and non-tariff barriers tested by the European Union have proved meaningless. If these artificial barriers have not worked for 28 countries of the European common market, there is no reason to believe they will work to India’s advantage.
Now that the barriers have been put up, it is necessary to ensure that inefficiencies and quality issues do not crop up. For instance, India has a huge stake in the auto components industry globally. Select parts in automobile engines, brakes, suspensions and airbags account for about 50 per cent of the $43.5 billion domestic components industry turnover annually. By increasing the duties on imported goods from 7.5 – 10 per cent to 15 per cent, the finance minister would have targeted the larger share of this market for local manufacturers. But then, without competition or very few foreign rivals, will the Indian components industry become smarter and globally competitive? What if India’s trade partners retaliate with their own restrictive measures to stonewall our exports?
Hence, tariff and non-tariff barriers cannot be used as protective measures to further India’s domestic industry and export interests. Tariff and non-tariff barriers should be very selective and only used as ‘retaliatory measures’ to restrain others from using protectionism against India. The Modi government should not go the Trump way to make India great again in terms of world share of economy. As Rajiv Kumar put it, one only hopes that the hike in customs duties was only temporary and would be rescinded as a progressive, flexible and open economy demands.