India may be pushing a wrong trade policy

India may be pushing a wrong trade policy

The breath of fresh air came in the 1990s when liberalisation threw away licensing restraints for most sectors of the economy. Both GDP and industry growth revived.

As Panagariya put it, the Nehru model of self-sufficiency and import restraint – was destined to fail.

In the end, the objective of self-sufficiency which required rapid diversification of production structure proved fatal to growth and poverty alleviation aspirations of Indian policymakers.

There was an inherent conflict between the rapid achievement of self-sufficiency and productive efficiency. It is baffling that the policymakers failed to see this obvious contradiction not only in the 1950s but also during the subsequent two to three decades.

Panagariya explains how the Nehru focus on heavy industry led to creating a separate structure for low capital and high employment industries which were then called cottage industries – like apparel, footwear, furniture, and numerous other light manufactures. That later became the small-scale sector. To protect them new laws were created reserving items for this sector, with a cap on labour and investment. Hence the entire sector was designed to remain dwarfed.

Tariff and trade

With imports blocked, small scale sector products reserved for low capital enterprises, it was not surprising that protection went further and introduced import tariffs as high as 355%. Gradually, post the 1991 liberalisation, policymakers began loosening their grip on imports. Tariffs began climbing down. This continued till 2010.

Thereafter, even though the maximum tariff rate remained at 10%, the simple average of industrial tariffs began climbing – from 8.9% in 2010-11 to 11.1% in 2020-21.

Similarly, the number of items with rates above 15% also began climbing.

Thus, protectionism has begun rearing its head once again.

The result was a clampdown on imports. That in turn impacted exports as well (see chart). Post 2014, imports declined, and so did exports.

Now if India wants to increase its exports, it will have to loosen its grip on import tariffs. Imports will rise, but so will exports.

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