Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Trade Protectionism in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GATT

Mains level : Paper 3- Rising trade protectionism

Context

India’s efforts for deepening India’s trade ties with several countries could be scuttled by rising trade protectionism at home.

Increasing protectionism by India

  • Increase in average tariffs: As Arvind Panagariya has argued, the simple average of India’s tariffs that stood at 8.9 per cent in 2010-11 has increased by almost 25 per cent to 11.1 per cent in 2020-21.
  • These increases in tariff rates have reversed the political consensus on tariff liberalisation that India followed since 1991.
  • Initiator of anti-dumping measures: India is the highest initiator of anti-dumping measures aimed at shielding domestic industry from import competition.
  • According to the WTO, from 2015 to 2019, India initiated 233 anti-dumping investigations, which is a sharp increase from 82 initiations between 2011 and 2014 (June).
  • The anti-dumping initiations by India from 1995 (when the WTO was established) till 2020 stand at 1,071.
  • Expanding the scope of Article 11(2)(f): India recently amended Section 11(2)(f) of the Customs Act of 1962, giving the government the power to ban the import or export of any good (not just gold and silver, as this provision applied earlier) if it is necessary to prevent injury to the economy. 
  • Expanding the scope of Article 11(2)(f) to cover any good is inconsistent with India’s WTO obligations.
  • WTO allows countries to impose restrictions on imports in case of injury to domestic industry, not to the “economy”.
  • Restrictive rules of origin: Finance Minister in her budget speech of 2020 said that undue claims of FTA benefits pose a threat to the domestic industry.
  •  Subsequently, India amended the rules of origin requirement under the Customs Act.
  • Rules of origin determine the national source of a product.
  • This helps in deciding whether to apply a preferential tariff rate (if the product originates from India’s FTA partner country) or to apply the most favoured nation rate (if the product originates from a non-FTA country).
  • But India has imposed onerous burdens on importers to ensure compliance with the rules of origin requirement.
  • The intent appears to be to dissuade importers from importing goods from India’s FTA partners.
  • Impact of vocal for local: The clarion call given by Prime Minister Narendra Modi to be “vocal for local” is creating an ecosystem where imports are looked at with disdain, upsetting competitive opportunities and trading partners.

What are the implications?

  • Protectionist steps are justified on the ground that they would help domestic companies grow into viable competitors.
  • But the fact is that protectionism does not benefit the domestic economy.
  • It rather encourages inefficiency of domestic manufacturers.
  • It is likely to hurt exports, make domestic goods costlier and reduce benefits to consumers from increased competition.
  • So in the long term, protectionism is likely to have only a negative effect on industry’s ability to compete globally.
  • For India to reap the benefits of the summits and partnerships like Quad, there needs to be a fundamental shift in policy.
  • Amore pragmatic approach in line with the recent initiatives to reverse the retrospective tax legislation and provide support to the flailing telecom sector must be expanded.

Conclusion

India can’t maximise its interests at the expense of others. Its experiment with trade protectionism in the decades before 1991 was disastrous. We should recall Winston Churchill’s warning: “Those who fail to learn from history are condemned to repeat it.”

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