A greater protection(ism) from the pandemic and global trade

Aahana Srishti

India’s economic path after independence was guided by an attempt to disengage with a past of exploitative British rule. The latter believed in the ideals of laissez-faire and (one way) free trade, which encouraged a massive drain of wealth and ruin of the colony. The architects of India’s economy shaping its path for the coming two decades based their approach on certain pillars. These included the promotion of import substitution industrialisation, implying an explicit need of export pessimism, and protectionism, though not complete autarky.

The arguments given for these were the need to develop heavy industries whose growth will lead to a trickle down effect on the economy and, to shelter and promote cottage and small industries which would generate employment and boost savings. These savings would then be pumped back into the economy and the virtuous cycle would continue. The commanding heights were in the hands of the public sector with a very apprehensive approach towards the potential of the private sector.

During this time period, India saw an average growth of 3.5%, colloquially called the “Hindu” growth rate, which if not abysmal, was definitely marred with inherent structural flaws. The protected “infant industries” had no incentives to become efficient, and the heavy industries drew upon the forex reserves for import of capital goods as heavily as their size and pockets allowed. The consumers had no option but to purchase sub standard products as inefficiency and crony capitalism in the country grew. Overdependence on the public sector, excessive control of nearly all sectors of the economy, draconian laws like MRTP Act and FERA, and major flaws in the EXIM policy lead to the Balance of Payments crisis of 1991.

Post-1991, India’s economy charted a path of economic prosperity. The present $2.9 trillion economy is nearly six times that of 1991 levels and as of September 2020[1], we can boast of an import cover of 14 months. According to a report, rural and urban poverty halved between 2004-05 and 2011-12.[2] The service industry of India, which is the main driver of our economy, got a major boost as outsourcing and offshoring grew tremendously. Growth rates went up to as high as 9%, making India one of the fastest growing economies of the world, with international trade and openness acting as important engines of growth.

However, it will be unjust to not acknowledge the issues which still plague the economy, even after three decades of reforms. Sectoral and regional inequalities have widened, manufacturing sector has remained laggard, capital intensive industries have been promoted against labour intensive ones, and unemployment has reached historical highs. The reforms were not an all encompassing panacea, but our experience with a closed economy is much worse to be thought of as a past worth going back to.

Self reliance or Self sufficiency?

All conventional and modern models of international trade have promoted free trade. The formation of the World Trade Organisation reflects the same. India has been called one of the most protectionist countries, and is often embroiled in WTO disputes. However, it is constantly working to integrate herself more into the world economy.Speaking for the first time, the Indian Prime Minister at the World Economic Forum’s Annual Summit in 2020[3], called protectionism as dangerous as terrorism and climate change. This came in
the backdrop of the US President calling India a “tariff king” and having removed it from the Generalised System of Preference List[4].

Contrast this positive approach towards opening up, to the recently spoken words of the External Affairs minister. He criticised globalisation as being a harbinger of trade deficits and adversity to India.[5] He went as far as to imply a “deindustrialisation” of some sectors due to the forces of trade. This of course, is in sync with the Government of India’s approach towards a “Atmanirbhar Bharat”, which continues the streak of confusion. It may translate into self sufficiency or self reliance, terms having considerable differences if seen through economic lenses. Combining this with the slogan of “vocal for local” eerily brings back to life the ideas prevailing in India in the 1950s and 60s.

The steps taken adhering to the above include the new Public Procurement Policy, mandating at least 20% local content requirement, Draft Defence Policy with a negative list for imports of defence goods, an increase in custom duties and tariffs on electronic goods, amongst others. Since 2017, India has on average sustained an increase of tariffs by 5%.[6]The motorcycle company Harley Davidson, closed shop in India in September, 2020. The company had attracted a 100% high tariff hitherto.[7] The Finance Minister proposed a WTO inconsistent amendment to the Customs Act of 1962, giving the government the right to ban the export or import of any good “to prevent injury to the economy”. Driven by the need to protect the territorial integrity and sovereignty of India in the face of China’s aggression in Ladakh, the government sought innovative ways to respond. One of them was the banning of more than 250 Chinese apps. This had further inspired many calls for decoupling with China, India’s largest export partner. Mixing scientific economics with the whims and fancies of politics and rhetorics can be a recipe for disaster.

India’s aversion towards international trade can also be seen in its stance to not join the Regional Comprehensive Partnership Programme(RCEP). It is made up of the 10 ASEAN countries and it’s FTA partners,and is the world’s largest Free Trade Agreement, comprising 30% of global trade and population. India’s apprehension with respect to rules of origin and a mixed bag response of earlier FTAs as suggested by the Surjit Bhalla Committee are valid, however the gains from trade must not be undervalued. At a time when the world is growing to be anti China and yet signing a deal with it emphasises the dragon’s importance in the global economy. For India to be a leading Asian and global player and to counter China, this should have been seen as an opportunity. Moreover as manufacturing firms may move out of the Asian giant, India must be open to leverage the chance, literally.

In a recently published research paper, Shoumitro Chatterjee and Arvind Subramanian have argued as to how India’s export growth is no less than an exemplar model and highlight its immense importance in its economic growth till today.[8] The Indian Government believes that the domestic market is large enough for promoting economic growth, however given the variety of income percentiles, the market for many goods remains restricted and would continue to be the same in the smalland medium term. Hence, India cannot adopt an inward looking policy which does not focus on exports.

Furthermore, the assumption that growth is driven by demand and not by exports can be refuted through facts. The research paper highlights that, for almost three decades a stellar export performance has played a critical role in India’s overall growth. For example, between 1995 and 2018, India’s overall export growth averaged 13.4% annually. This is the third best performance in the world among the top 50 exporters. It is nearly twice the world average growth and not far behind China’s growthof just over 15%.

Another aspect that the paper touches upon is the underutilised capacity of the low skilled labour intensive sectors of the economy. While India’s longstanding inability to export unskilled manufacturing products is an indictment but equally it is an opportunity, especially with China vacating export space in these products. Hence India needs to capitalise this opportunity given its comparative and acquired advantage. The Government must realize that the path to self-sufficiency is through export promotion and global economic integration rather than through protectionism and import-substitution.

Perils of deglobalisation

A cause of greater concern is that this streak of protectionism is not just limited to India but has affected a range of countries in the world. The WTO has said that the global trade which was already slowing down because of the US-China trade war, is projected to plummet by 13% to 32% this year.[9] In one of the recent G20 summits, the explicit vow to resist all forms of protectionism that has been included in the communiques following every summit meeting was omitted for the first time since the global financial crisis. [10]

While acting as a catalyst, the coronavirus outbreak has pushed countries further within their cocoons. For economic nationalists, this is a time to revel. Nearly every major economy has instituted either an export ban or imposed quantitative restrictions on medical supplies. A grave outcome of this is vaccine nationalism and profiteering. Russia’s rushed approval for its potential vaccine Sputnik V even before it completed its Phase II trials is a case in point.[11] Nations like the USA have entered into pre purchase agreements with pharma companies, securing vaccine supply for their own citizens. On the other hand, there is a threat that many of these companies may turn human tragedy into a business opportunity. Using patents as a shield, they may charge exorbitant amounts to those who may not have the luxury to afford.

In the face of anti- China sentiments brewing in the world, the Chinese premier has come up with a “Dual Circulation model” in one of the papers published by the state. This aims at making China self sufficient through “internal circulation”, or “atmanirbhar” as we Indians would call it, while continuing to make the world be dependent on it through an “external circulation”.[12]

A World Bank Document on Covid 19 and food protectionism pointed out even graver dangers facing humanity.[13]The analysis shows that, in the quarter following the outbreak of the pandemic, there was a tendency for global export supply of food to decrease between 6 and 20 percent and global prices to increase between 2 and 6 percent on average. Moreover, it highlights a “multiplier effect” of trade policy. In an economy affected by an adverse shock driving up prices, consumers face a loss which induces governments to impose export taxes. This starts a chain reaction in other countries as well, leading to further rise in prices and consumer welfare losses. This is a correct example of beggar-thy-neighbour policy. As the world’s food exporters battle the crisis by imposing export bans, the import food dependent countries face a double whammy in the form of a viral as well
as a hunger epidemic.

The world in general and India in particular have come a long way from selfish mercantilist policies to promoting mutually beneficial multilateral trade. The pandemic should be seen as a chance for the world to realise the need to come together in the face of adversity and to stand united in the face of it. In this regard, the coming of the COVAX facility lead by GAVI and WHO is a step in a positive direction.[14] It is a public private global health partnership aiming to ensure access and availability of coronavirus vaccines to all member nations, irrespective of their contribution. The unseen virus has traversed oceans and continents, and by closing our borders, the virus may or may not perish but the world economy potentially will.

About The Author

Aahana Srishti is an Economics graduate from Indraprastha College for Women, University of Delhi.

 
Photo Credits:Velocity Global
 

References

1.CEIC. “India Foreign Exchange Reserves: Months of Import”, accessed from https://www.ceicdata.com/en/indicator/india/foreign-exchange-reserves-months-of-import

2. Panagriya, Aravind. “Eliminating Poverty: Creating Jobs and
Strengthening Social Programs”, Occasional Paper No. 2, NITI Aayog,
Government of India.

3. Ranjan, Prabhas. “ What Does Being ‘Vocal about Local’ Mean for India’s Global Trade Strategy?”, accessed from https://thewire.in/economy/india-global-trade-vocal-about-local

4. Chaudhary, Dipanjan Roy. The Economic Times. “Trade deal with tariff king India by year-end: Donald Trump”, accessed from https://economictimes.indiatimes.com/news/economy/foreign-trade/trade-deal-with-tariff-king-india-by-year-end-donald-trump/articleshow/74310266.cms?from=mdr

5. Haider, Suhasini. “A day after RCEP, Jaishankar slams trade pacts, globalisation”, accessed from https://www.thehindu.com/business/a-day-after-rcep-jaishankar-slams-trade-pacts-globalisation/article33110309.ece

6. Chaterjee and Subramaniam, “India’s Export-Led Growth: Exemplar
and Exception” Ashoka Centre for Economic Policy Working Paper No. 1
October, 2020

7. Business Standard. “Here’s why Harley-Davidson is shutting shop in India”, accessed from

https://www.business-standard.com/article/automobile/here-s-why-harley-davidson-is-shutting-shop-in-india-120092500720_1.html

8. https://ashoka.edu.in/static/doc_uploads/file_1602585132.pdf– same as 6th

9.Lee, Yen Nee. “Coronavirus pandemic will cause a ‘much bigger wave’ of protectionism, says trade expert”, accessed from https://www.cnbc.com/2020/04/10/coronavirus-expect-a-lot-more-protectionism-says-trade-expert.html

10. MONETARY POLICY REPORT APRIL 2017, “– The economic consequences of increased protectionism”, accessed from https://www.riksbank.se/globalassets/media/rapporter/ppr/fordjupningar/engelska/2017/the-economic-consequences-of-increased-protectionism-article-in-monetary-policy-report-april-2017#:~:text=Effects%20of%20global%20protectionism,goods%20and%20services%20would%20diminish.

11. SputnikV, “The first registered Vaccine against COVID 19”, accessed from https://sputnikvaccine.com/

12. Yao, Kevin. Reuters. “What we know about China’s ‘dual circulation’ economic strategy”, accessed from https://www.reuters.com/article/china-economy-transformation-explainer-idUSKBN2600B5

13. Espitia et al. “Covid-19 and Food Protectionism”, Policy Research
Working Paper 9253, World Bank Group, Macroeconomics, Trade and
Investment Global Practice May 2020

14. WHO. “COVAX: Working for global equitable access to COVID-19 vaccines”, accessed from https://www.who.int/initiatives/act-accelerator/covax

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7 Comments

  1. Nice article Aahana,
    Provides deep insight into India’s economic trends post independence and pros and cons of both pre and post 1991, drawing comparions globally.

  2. Nicely written article, Aahana.
    Like the way comparison being made with changing global trends and incorporating pandemic into the context is a interesting read.

    1. Very well conceptualized n articulated article.Give a good insight into Globalisation verses averse effects of pandemic via a vis economic trends since 1991..Good work n keep it up..

  3. Well written and insightful. Appreciate the depth of research and the tone of argumentation.
    Keep it up… you have now raised the bar! Look forwrad to more!!

  4. Very well written! The article was in a good flow.

  5. An insightful article, Aahana.
    Clearly makes one think of all the possible different ways our nation could have and also should handle the economic trends.
    Thanks for sharing this with me.

  6. This is such a well-analyzed article. More power to you, Aahana Di!

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