India @75 should shun protectionism and get more competitive

Today, we celebrate the completion of 75 years since attaining Independence from colonial rule. It is natural to reflect on the journey and look ahead.

Our trade policy, during this period, has gone through broadly three different phases – a restrictive import and export policy till 1991, a progressively liberal policy since then and back to somewhat protectionist policy in the last few years that is still being played out.

In the initial phase, the main aims of the trade policy were to allow only essential imports required for production and to protect the domestic producers from competition by maintaining high import duties. The Reserve Bank of India administered the exchange rates. The trade with the East European block led by the Soviet Union was in non-convertible rupees. The export promotion efforts included setting up Free Trade Zones, duty exemption for import of inputs and capital goods, income tax exemption for exporters and even grant of cash assistance. We exported mostly commodities and some labour intensive goods. These policies did not work and resulted in severe foreign exchange crisis in 1991.

In the second phase, the imports were substantially liberalized. The import duty rates were brought down. The exchange rate was allowed to be market determined, with the Reserve Bank of India intervening mainly to curb excessive volatility. The rupee payment arrangement was phased out. Most export promotion schemes continued with suitable modifications. Incentives were granted through duty credit scrips. Many trade agreements were signed to improve market access. These changes in trade policy were accompanied by a number of other policy changes to address the structural issues in the economy. The advent of information technology, mobile telephony and internet helped improve productivity. We exported a wider range of agricultural products and manufactured goods, especially petroleum products, gem and jewellery, auto parts, engineering products, pharmaceuticals, chemicals and so on.  By and large the policies gave the desired results.

In the third phase, the non-tariff barriers for imports have gone up. The import duties have been raised on a number of items. More anti-dumping, safeguard and anti-subsidy countervailing actions have been taken. The export promotion schemes continue but the duty credit schemes based on export performance have been abolished. Goods and Services Tax was introduced for almost all items. Some relatively inconsequential bilateral trade agreements have been signed. But, the exports have stagnated since 2014-15, except during the year 2021-22 when high commodity prices and high freight rates pushed up the export figures.

We have come a long way in the last 75 years. We can be proud of several achievements, especially in adopting information technology. There is enough entrepreneurship to drive growth. Enough capital is available to fund new ventures. Our financial system is well developed. Global opportunities abound. However, many other countries have also made significant strides. Indeed, India at 75 looks less confident of taking on competition in the international markets. The industry is asking for more protection and more subsidies. India walked out of the Regional Comprehensive Economic Partnership (RCEP) agreement saying its producers are not too sure they can compete.

The task ahead is to discard the protectionist trade and tariff policies that have failed us and adopt the liberal policies that have helped us. We must take advantage of the global opportunities by getting more competitive.

email : tncrajagopalan@gmail.com