Protectionism In The Age of Globalization: An Appraisal Of India’s Economic Policy

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Introduction

China is facing an unprecedented global backlash. The lackadaisical approach of the Chinese government in warning global leaders of the COVID-19 pandemic has resulted in a substantial number of infections and deaths, hitherto unanticipated by any country. With the imposition of lockdown measures, citizens have been compelled to stay indoors. As a result, the pandemic has halted economic operations in most countries. In an attempt to contain China’s manufacturing dominance and provide an impetus to the Indian economy, Prime Minister Narendra Modi, launched the “Atmanirbhar Bharat Abhiyan” (Self-reliant India Scheme) program on the 12^th of May 2020. 

The ambitious programme (also called Make in India 2.0) aims at making India self-sufficient through production of goods in India and optimum usage of resources, to boost the economy. It intends to make breakthroughs in the field of information, technology and innovation. To further the cause of the Prime Minister, India’s celebrated scientist Mr. Sonam Wangchuk, a native of the tribe in Ladakh, appealed to the Indian citizens to pledge abstinence from Chinese products by waging a wallet war against China in order to reduce India’s reliance on the country and pressurise Xi Jingping’s authoritarian regime.

However, the feasibility of such a pan India boycott has been called into question. India and China have been longstanding trading partners in the Asian market. Post liberalization, India has only expanded trade with China. As for FY 2018-19, India’s trade with China totalled to $87.07 Billion. Import from China amounted to a gross $76.8 Billion and India’s export to China totalled to $18.85 Billion, resulting in a massive trade deficit between the countries. As of 2020, imports from China decreased from $429.5 Million in January to $317.64 Million in February.

The Prime Minister announced a $1.7 trillion stimulus package to support small and medium enterprises facing severe liquidity crunch, as well as offered food security and relief measures to millions in the country. With economic operations coming to a halt, coupled with increased borrowing, the government debt ratio is expected to soar in the coming years. The 2020-21 budget allocation has restructured import tariffs by increasing the rate of custom duties and tariffs. Goods spanning electronic products, chemicals, textiles and food, amounting to $56 billion of India’s import, are expected to face higher customs duties, and “non-essential” goods from other countries are sought to be effectively curbed to bolster domestic manufacture and export.

Protectionism As An Economic Policy

“Protectionism” spelled out economic terms, refers to calculated actions taken by a state’s government directed towards increasing domestic production, while simultaneously imposing exorbitant taxes and tariffs on goods procured from other countries in an attempt to boost domestic consumption of local products. Economic nationalism and protectionism can be construed as the two faces of the same coin. Domestic policies are curated to bolster domestic economies in the larger context of competition from global products. The United States of America had resorted to such protectionism in the year 2019 by imposing 25% tariff rates on imports from China, in order to contain China’s hegemony in manufacturing as well as promoting local consumption.

The world economic order has undergone significant changes in the course of the last seven decades. The Bretton Woods Agreement, entered between the world’s superpowers, recognized the supreme importance of a globalised economy and stable international supply chains. International trade and investments were necessary to propel domestic growth and open the doors for an international market. However, there has remained a tussle between international commitments and primacy to a protectionist economic policy. A compromise was thus seen as the ideal approach to stabilize the economic order. India too, witnessed a phase of ‘globalization euphoria’ in the year 1991, when the country transitioned from a strictly social model to a liberalized economy under the auspices of Manmohan Singh.

However, the after effects of the 2008 financial crisis led to the biggest economic fallout after the 1920 Depression in the United States. With the US and EU facing first hand ramifications of the crisis, economies reliant on these countries too, faced a significant impact. A “crisis of confidence” led to seizure of markets and caused a trickle-down effect on the developing countries. Domestic exports, financial assets and foreign portfolio investments, were the worst affected in India because of the slowdown experienced in advanced countries. India’s growth, amidst the period plummeted to an all-time low of 3.3%. The disastrous consequences of the crisis propelled economic nationalism and protectionism as the feasible alternative.

The United States of America has been at the forefront of international trade and investment. Therefore, any significant steps taken in pursuance of protectionism in the United States, can rupture economies simultaneously. President Donald Trump’s campaign was focused on such a protectionist narrative. The slogan they adopted, ‘America First’ and ‘Make America Great Again’, was directed towards establishing the harmful effects of import and outsourcing on the domestic economy. Trump’s election marked a significant deviance from the mainstream American political agenda. The ‘Trade War’ declared by the US against China in 2019 resulted in tensions between the two ‘superpowers’. A slew of measures was employed in June of 2020, in retaliation. China prohibited import of certain agricultural produce from the USA, and as a counter move, America banned Chinese airlines from operating passenger flights to the US. Trump also resorted to delisting Chinese companies from the American stock exchanges and announced background checks against Chinese students who aspire to study in the American universities. The students with military links will be proscribed from attending American universities. In 2019, Huawei, was banned by the USA from producing any 5G related infrastructure in the US, for fear of data leakage to the totalitarian regime of Xi Jingping.

This move has led to anxiety about the superpowers with respect to the ‘Phase One Deal’. The Deal was propounded to resolve longstanding issues between the White House and China, in connection with trade deals and market access. President Trump has also outlined a $200 billion increase in Chinese import of US goods in the following two years. A vicious cycle of economic fortification has been observed between two of the world’s most prosperous economies. The COVID-19 outbreak has exacerbated across countries globally and furthered the Trump administration’s scepticism of Xi’s policies, as thousands of lives and millions of jobs were lost, with several corporations already filing for bankruptcy.

India’s position on Protectionism

With the growing tensions between Beijing and Washington, India could be the resultant beneficiary. By increasing its foothold in the global export market, India can lead in the development and manufacture of categories, which face sanctions in the US and China. Land, twice the size of Luxembourg has been made ready to set up manufacturing units of various MNCs, with special deals signed in the state of Uttar Pradesh and Andhra Pradesh.

However, India faces considerable obstacles in furthering this ambitious goal. Therefore, any policy decision needs to be preceded by informed discussions. As of November 2019, India withdrew from RCEP, despite seven years of intense negotiations. With power shortages, weak infrastructure along with cumbersome tax rates unskilled workforce and rigid labour laws, it faces the fear of losing international investments to other South Asian economies like Vietnam. India can reduce the complexities in regulation and implementation by effecting a uniform regional agreement and work in co-operation with its Asian counterparts on the lines of a regional economic bloc.

Additionally, the 2020 budget did not subterfuge its protectionist narrative. Like Trump, Modi’s election manifesto was directed towards replacing China as the world’s manufacturing hub and assuring Indians of more employment opportunities through ‘Make in India’ project. By imposing hefty custom and import duties on foreign goods which can be “easily manufactured” in India, the Modi led government showcased a stringent protectionist strategy.

When elected to power in the year 2014, Modi’s slogan ‘Minimum government, Maximum governance’ ushered optimism and support from the business community. He was considered a liberal yet ‘nationalist’, determined to trailblaze a dynamic Indian economy. In his famous address at the Davos Meet in 2018, the Prime Minister emphasized on the fact that ‘backlash against globalization’, could be one of the biggest threats to modern civilization. Condemning Trump’s radical protectionist sloganeering of ‘America First’, he stated that “many societies and countries are becoming more and more focused on themselves. Everyone is talking about an interconnected world, but we have to accept the fact that globalization is losing its lustre”. But the irony is the inherent ideology of the ruling political party which is akin to Trump’s ‘America First policy’.

The Modi administration’s policy of integrated humanism marks a significant deviance from the insistence on privatization by free-market ideologues. Unlike socialism which advocates excessive state involvement in an economy’s growth, the government seeks to promote “indigenous” privatization along with social welfare measures provided by the state to bolster small industries. The “welfare” offered by the administration, may include protectionist anti-import policies too, such as the anti-dumping costs imposed on Chinese goods. Foreign investments and contributions are welcomed if they fuel economic growth and uplift the lives of the citizens.

The Prime Minister has been unequivocal from his 2014 campaign, in spreading the protectionist narrative. ‘Make in India’, and the recent ‘Go Vocal for Local’ are used as tools to entice Indian manufacturers and enforce consumers to make a switch in their consumption habits. The Modi government aims to bolster domestic production by utilizing the potential of human resources available in the country and become. The ideological inclination of the present dispensation stands in direct contradiction to the globalization backlash speech, which was deemed poisonous and detrimental to a world order.

Conclusion: Conundrums With Protectionism

India has misjudged the utility of the protectionist tool. Policy makers believe that, larger macroeconomic objectives can be achieved by microeconomic distortions. However, distortions such as increased rate of customs and import tariffs cut out the possibility of attracting efficient producers. These producers offer cheap yet quality purchase for the consumers. The free market forces of demand and supply can offset larger macroeconomic objectives.

The Indian government seeks to increase and stabilize the country’s GDP and offer employment opportunities to its citizens by offering a a boost to the MSME sector and contributing to consumer welfare. However, restrictive strategies, such as import tariffs, deter the growth of trade and favour the sustained presence of inefficient producers at high costs. In allocating important resources and capital to these producers, domestic consumers are forced to pay market prices for relatively inferior goods that they could have obtained cheaply through imports. There is always a risk of domestic consumers abstaining from purchasing locally manufactured commodities if they’re devoid of quality. The decision to proliferate manufacturing in the country in pursuance of a protectionist policy would offset a drastic decline in market demand. Additionally, it would lead to reduction in manufacture, loss of jobs, and ultimately lead to greater unemployment. The larger macroeconomic objectives can be weakened by market distortions.

(This post has been authored by Dhanishta Mittal and Srishti Suresh, 4th year B.A. LL.B (Hons.) students at NALSAR University of Law, Hyderabad)

 

Cite as: Dhanishta Mittal and Srishti Suresh, ‘Protectionism in the age of Globalization: An Appraisal of India’s Economic Policy’ (The Contemporary Law Forum, 27 August 2020) <https://tclf.in/2020/08/27/protectionism-in-the-age-of-globalization-an-appraisal-of-indias-economic-policy> date of access.