A protectionist turn: Customs duty hike in Budget 2018 is a step backwards

One of the more questionable changes brought about by the Union Budget was the decision to raise import duties on over 50 items. While introducing it, Finance Minister Arun Jaitley admitted that he was making a “calibrated departure from the underlying policy in the last two decades”. The move is aimed at providing a boost to the government’s flagship Make in India programme, and help the micro, small and medium enterprises, which can create a substantial number of jobs. It is also expected to yield Rs 60 billion in revenue in the coming financial year. Each of these objectives is valid in its own right, but the choice of policy tool to achieve them is, without doubt, an ill-advised one.

Even though the central idea is to boost domestic manufacturing, what is more likely to happen is that domestic consumers will suffer the impact of costlier imports. Merely raising import duties hardly ever improves the overall outcomes either for consumers or producers. India’s own past provides ample evidence of this. Before the economic liberalisation of 1991, India’s trade policy was essentially an instrument of the domestic industrial policy and high tariff barriers were used to protect the domestic industry. However, as is well known, it did not work out well for anyone. In contrast, after 1991, an expeditious reduction in tariffs not only benefited the consumers but also had a salutary impact on the quality and capacity of India’s manufacturing. In fact, a working paper from Brookings in 2017 rebuts the popular perception that India is a protected economy. The analysis shows that the applied average tariffs of India till 2015 were far lower than is commonly considered, and in fact, quite close to that of the US, which is considered to be a low-tariff economy. The customs duty hike is not just against this trend of history but also runs contrary to all the stated policy positions of the Narendra Modi-led government. 

In his speech, while addressing the plenary session of the World Economic Forum in Davos recently, Mr Modi had bemoaned the rising tide of protectionism across the world that was responsible for numerous tariff and non-tariff barriers being put up. In fact, he had gone as far as to equate this trend against globalisation with the threats posed by climate change and terrorism. Closer home, the resolve for opening up cross-border trade and finalising regional trade pacts was again at the centre stage when India hosted the heads of the Association of South East Asian Nations (Asean) for summit-level talks to commemorate 25 years of India-Asean association. Over the past 25 years, this trade has grown 25 times. It was decided that India would help a speedy conclusion of the Regional Comprehensive Economic Partnership involving Asean and 15 other countries. The PM has also been hard selling Northeast India for investments from Asean as part of India’s Act East policy. But such protectionist measures, as announced in the Budget, go against that ethos. What is unfortunate is that the customs duty increases come at a time when the rest of the neighbourhood is close to concluding the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The Budget action effectively rules out India’s role in such trading blocs, including the country’s long-pending desire to join the Asia-Pacific Economic Cooperation.

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