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Atmanirbharta: Striking a balance between free trade and protectionism
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
Atmanirbharta is not a bad thing when you realise that the entire industry in the employment generating small and medium sectors have been wiped out under the onslaught of cheap imports.
Arvind Subramanian and Shoumitro Chatterjee have in a recent op-piece* argued that the present focus on Atmanirbharta seems to have overlooked the fact that the export-GDP ratio at 20 percent has been the key catalyst for India’s growth and hence India should ‘zealously boost export performance.’ They have concluded that ’embracing Atmanirbharta is to choose to condemn the Indian economy to mediocrity’.
Strong words indeed. Coming as they are from two eminent economists, one of whom till not so long back, was closely associated with policymaking at the highest level, these are views which need to be taken seriously.
The debate of protectionism versus globalisation, of export-led growth versus a path of import substitution, is an old one. The very fact that there is still a debate is an indication that the divide continues.
India, after a phase of focusing inwards, opened up. There was a complete revamp of the Ministry of Commerce and a chief ‘controller’ of imports and exports with all its negative connotations, was replaced by the director-general of foreign trade. The focus was on exports rather than merely regulating imports. The multiplicity of export promotion schemes, very many which faced challenges for being WTO non-compliant, would indicate that governments across political hues had never lost sight of the importance of exports.
The revenue impact because of export promotion schemes both during 2018-19 and 2019-20 was in the region of about Rs 25,000 crore. A similar amount for the years 2018-19 and 2019-20 has also been given as incentives under the direct taxes (Sections 10AA, 80-IA). Rebate of taxes on goods and services exported which runs in excess of Rs 50,000 crore on an average annually, is also given; the emphasis being on the export of goods not on taxes, and, finally are the free trade agreements-sixteen and counting. The revenue impact of this as per the budget document of 2020-21 for 2119-20 was estimated to be in excess of Rs. 65,000 crore.
All this apart from the incentives in the form of easy credit, credit subventions which are extended to exporters, the Special Economic Zones, and the Export Oriented Units. The Finance Minister had in the 2020-21 budget speech also announced a new scheme NIRVIK to achieve higher export credit disbursement. The government is in the process of introducing the Remission of Duties and Taxes on Export Products (RoDTEP) scheme from January 1, 2021. So, the emphasis on export promotion continues, even as undoubtedly, there has been an increasing focus on Make in India and its corollary- Atmanirbharta.
Trade has been steadily growing to reach a high of $538 billion in 2018-19. For the period ending September 2020, India had a trade surplus -aided not so much by an increase in exports but a reduction in imports.
Wanting to become Atmanirbhar is not a bad thing. More so when policymakers realize that excessive dependence on one country with whom relations are strained can endanger the economy. Atmanirbharta is not a bad thing when you realize that entire industries in the employment generating small and medium sectors have been wiped out under the onslaught of cheap imports. The toy industry is a painful example.
Atmanirbharta is not a bad thing when you realise that even at the higher end, industries are shutting down unable to compete against preferential imports under the FTA’s. Examples abound. One such, Mybox Technologies, a unit based in Noida and Delhi engaged in the manufacture of set-top boxes, employing in excess of 700 people, shut down after the commencement of the India-Thailand FTA Early Harvest Scheme. Set-top boxes imported under the preferential FTA rates were cheaper. The manufacturer became a trader.
It must never be forgotten that India’s auto industry is today a powerhouse only because of the protection which was afforded to it in its nascent stage. Similarly, the import duty on LED bulbs for instance was increased from 10 percent to 20 percent. This gave the necessary elbow room for Indian manufacturers to ramp up production. Today India manufactures in excess of 70 million LED bulbs.
So Atmanirbharta has translated in an increase in import duties in select products; in the introduction of measures to verify the documentation of imports availing preferential benefits; in emphasis on procurement from domestic companies.
However, India needs to adopt a nuanced approach. Industries in their initial phase need protection-enough to prevent infanticide. Protectionism has to be selective; for those sectors, and industries within those sectors, which need such protection in the form of tariff and non-tariff barriers. Policies should clearly enunciate sunset clauses. India need not be defensive about protectionism; forget the fact that every country in the world practices it in some form and degree. But India should not fall into the trap of prolonged, across the board protectionism. This will hurt more than protect.
Trade takes place because of comparative advantage. It should be the endeavor of the government to create such a comparative advantage by adopting a dynamic trade policy. FTA’s should be exploited by the Indian exporters as much as they are by our trade partners. Nearly 30- 35 percent of all imports are through the FTA route; the corresponding export figure at about 22 percent is much less.
There has been talking of a $1 trillion export target. This can be achieved only by making exports competitive. The present phase of Atmanirbharta should also be focussed on removing infrastructural challenges that impede domestic manufacturing as much as exports. Atmanirbharta should mean industrialization, infrastructure, and investments which will help both indigenous manufacturing and exports.
As Subramanian and Chatterjee have pointed out, being competitive only domestically is no guarantee of either efficiency or low cost. As has been said, protectionism protects the interests of producers, never the interests of consumers. And as the economist, Claude-Frederic Bastiat noted, “All economic phenomena, whether their effects be good or bad, must be judged by the advantages and disadvantages they bring to the consumer”.
—*Indian Express op-ed
—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal
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