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The Big Story: Shut the stable door
This was Indian Prime Minister Narendra Modi in January 2018 at the World Economic Forum in Davos:
“Forces of protectionism are raising their head against globalisation. Their intention is not only to avoid globalisation themselves but also to reverse its natural flow. The result of all this is that we get to witness new types of tariff and non-tariff barriers…
Many countries are becoming inward-focused and globalisation is shrinking and such tendencies can’t be considered lesser risk than terrorism or climate change.”
And this was Modi on May 31, 2020, in his monthly Mann ki Baat radio address:
“One of our friends from Bihar, Shriman Himanshu has written to me on the Namo App that he dreams of the day when India reduces imports to the bare minimum…be it the import of petrol, diesel, fuels, electronic items, urea or even edible oils.
I understand his sentiments. There are many products that find their way into the country from outside resulting in wasteful expenditure on part of the honest tax payers. Their substitutes can easily be manufactured in India.”
In 2018, Modi compared protectionism to terrorism. In 2020, he speaks of reducing imports to “the bare minimum” and refers to self-reliance over and over in his speeches.
How do you bridge this gap?
One answer might be the coronavirus crisis. After all, global supply chains have been shattered by national lockdowns to prevent the spread of Covid-19, prompting many countries to reconsider their reliance on goods that arrive from elsewhere.
But sample these news stories from well before there was any concern about a global pandemic:
- February 2018, a month after Modi’s Davos speech: “This month [Modi’s] government raised tariffs on nearly 50 product groups, from clocks and kites to TV and auto components. The measures follow new duties imposed in December on electronic goods such as mobile phones and microwave ovens.”
- September 2018, after more tariff increases: Central government working on import substitution policy, says Union Minister Nitin Gadkari.
- November 2019, after even more duties raised in the Budget: India decides not to join Regional Comprehensive Economic Partnership trade bloc, Modi says his conscience did not permit him to sign pact.
- February 2020: “The government has proposed to amend the Customs Act to give it wide powers to ban imports and exports of goods that may hurt the local economy, clearing the way for it to bar imports of cheap toys and firecrackers from China.”
We described this raising of trade barriers as one of the three risky moves that India seemed to be taking when Finance Minister Nirmala Sitharaman presented the budget for 2020 in February, again, before the virus had become a global threat.
Clearly, India’s growing protectionism is not a consequence of the Covid-19 crisis, though, as the conventional wisdom suggests, the pandemic may have caused an acceleration of this preexisting trend. After all, Modi’s lockdown economic package is called Atmanirbhar Bharat, or self-reliant India.
Protectionism and import substitution – the idea that a country can find a way to build domestically rather than import goods by putting up barriers, even if the country has no competitive advantage and the move hurts consumers – has a long legacy in India’s economic history until the 1991 liberalisation.
Anticpating the Unintended has a useful explanation of the perils of such a policy this week.
Today’s economic thinkers, especially the ones associated with the Modi government, have usually considered such policies self-defeating and a legacy of former Prime Minister Jawaharlal Nehru’s era.
The current principal economic advisor to the government of India has even tried to insist that Modi’s new self-reliance push is not “a return to Nehruvian import substitution or autarkic isolationism” or “a return to licence-permit raj and inspector raj of the socialist era.”
Yet, here was Modi speaking at the Confederation of Indian Industry Annual Session:
“To make manufacturing in India, Make in India a major medium of employment, many priority sectors have been identified by discussing with organisations of various industries like you. Work has been started on these – furniture, air conditioner, leather and footwear. We import more than 30% of our demand for air conditioners. We have to reduce it as fast as possible.”
To illustrate what this actually means, Indian Express’ P Vaidyanathan Iyer broke down how such a policy would work for air conditioners:
“A draft plan… proposes to increase the basic Customs duty on nine key AC components by as much as 50%-165%.
This when less than two years ago, on September 26, 2018, the Finance Ministry had already doubled the basic customs duty on ACs to 20%, giving in to demands of domestic AC manufacturers.
This has raised red flags for a section in India Inc.
‘The new proposal is a throwback to the 1970s… the dangerous protectionist times,’ said a well-regarded CEO of an Indian manufacturing company, who has three big factories in western India, and has seen the draft DPIIT notification. ‘This is not promoting local industry, it is promoting uncompetitiveness and may inflate the cost as well,’ the CEO said.”
Amid all this, India still wants to be a part of the global supply chain, and indeed, has great hopes of attracting business that no longer want to work in China, so that it can boost exports.
Another former economic adviser to the Modi government, albeit one who burnt a few bridges after leaving, is unconvinced: “If we turn protectionist, I don’t know how we can be an exporting power,” said Arvind Subramanian. “Self-sufficient exporting powerhouse is an oxymoron.”
A more controversial argument may be that Modi doesn’t expect Indian exports to actually grow massively and so is rejigging the economy to look inward.
But former Reserve Bank of India Governor Urjit Patel brings up another contradiction:
“Why is India erecting trade barriers to imports through higher custom duties, [while] we are opening the capital account for ‘bond tourists’ further (even as hurdles are raised on outward remittances for households).
How does one square this circle since it is well founded that high import barriers ultimately undermine national competitiveness and it is mostly export earnings that will have to service external liabilities?”
A few other potential answers, besides the Covid-19 crisis, come to mind as an explanation for how Modi went from “protectionism is like terrorism” to “self-reliant India”.
There are, of course, domestic lobbies that will benefit in the short-run from such moves and a large section of Modi’s political base that has always pushed swadeshi, self-reliance, as an objective.
Another may be that this is the consequence of Modi relying heavily on bureaucrats rather than experts – Cadre vs Harvard, to add a twist to the prime minister’s expression. The Print’s Shekhar Gupta and Pradeep Chhibber, Venktesh Shukla & Rahul Verma have recently argued that this is what hamstrings the Modi government.
And finally, there is China.
One argument is that Beijing used “outward-looking protectionism” to grow, and that is what is being emulated, though this doesn’t quite hold up.
But also, at least some of the protectionism, in particularly the withdrawal from the Regional Comprehensive Economic Partnership trade negotiations, was aimed at protecting the Indian market from Chinese goods. But as an unnamed economist told P Vaidyanathan Iyer, “It is easier politically to gain approval of people at large, when it is about China… The problem is you cannot be selectively protectionist… you end up being protectionist, in general.”
Flotsam and Jetsam
Speaking of China, high-level military talks between New Delhi and Beijing on Saturday led to a commitment to “peacefully resolve the situation in border areas.” For background on the current India-China stand-offs, read our Friday Links edition from a couple of weeks ago. Meanwhile, Google removed a viral Indian app that promised to help delete Chinese apps from phones for violating its conditions.
Even as the Covid-19 crises rages, Home Minister Amit Shah on Sunday held a digital rally to begin the Bharatiya Janata Party’s campaign for the Bihar elections that are due later this year. (Even as every senior officer of the Home Ministry’s media wing has been shunted out.)
Ex-Congress President Rahul Gandhi has continued his interviews with experts, getting business leader Rajiv Bajaj to say India “flattened the wrong curve” meaning the economic growth one.
Indeed, India’s Covid-19 trend does not offer much hope:
Meanwhile, Congress Members of the Legislative Assembly in Gujarat have been resigning ahead of the Rajya Sabha elections slated for June 19, prompting the party to move its representatives into resorts.
The gruesome death of an elephant in Kerala turned into an opportunity for some ugly political point-scoring. And after Facebook invested in Jio, and Google expressed interest in Vodafone India, Amazon is in talks about buying a $2 billion stake in Airtel.
If you missed it, on the Friday Links edition of the newsletter, we brought you pieces on 1 year of Modi 2.0, India crossing the 200,000 mark in Covid-19 cases and more.
Scroll Ground Report
What happens when a new virus enters one of India’s oldest cities and poorest regions?
Supriya Sharma brings you a week of dispatches from eastern Uttar Pradesh, as Varanasi finally emerges from two months of lockdown. Read the first of her pieces here.
“Pawan wrote to the municipal corporation on behalf of the Kashi Mokshadayini Seva Samiti, the non-profit organisation that he heads, asking them to sanitise the area after every coronavirus-related cremation. ‘They did it once, only once,’ he said.
Bahadur Chaudhary, the vice-president of the dom community in Banaras, said the administration did not care for them. ‘Bas ghad ghad kar ke le aate hai body,’ he said. ‘They bring the [coronavirus] body without any warning. When the body is taken out of the vehicle, that’s when we see it is packed, and we notice the men wearing [PPE] kits. That’s when everyone starts to run.’
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