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Why protectionism is a return to bad economics

Open-ended protection leads to a perpetually inefficient domestic industry, large losses to consumers and to other sectors that use the now costlier products as inputs, and a permanently distorted economy.

analysis Updated: Feb 24, 2018 18:10 IST
Narendra Modi’,Minimum government,Protectionism
Congress activists frying pakodas at a roadside stall as mark of protest against Prime Minister Narendra Modi's remark (HT)

Four years on, is Narendra Modi’s famous maxim “Minimum government, maximum governance” turning out to be just another catchy campaign slogan, quickly discarded once elected?

Signs suggest a continuing reversion of the government away from its theoretical commitment to this maxim and back toward command and control methods that we supposedly discarded from 1991 and beyond.

To begin, price controls are back, something we thought we had left behind. Last year, after imposing price controls amounting to 85% of the original price on coronary stents, exactly as economics would predict, the result has been a hike in prices by hospitals for the overall surgical procedure, shortage of stents in the market, a big drop of foreign direct investment in this sector, with no actual gain for the supposed beneficiaries, the patients. What is most puzzling is that according to regulator National Pharmaceutical Pricing Authority’s own data, Indian manufacturers already had almost a 60% market share, which begs the question, why did they need to be protected?

Most recently the Union Budget’s explicit turn back towards import substitution with across the board tariffs on everything from kites and candles to electronic equipment, ended a 20-year trend of liberalising trade, which had given Indian consumers greater variety at much lower cost. Open ended protection never accomplishes its goals, and only leaves a perpetually inefficient domestic industry, large losses to consumers and to other sectors that use the now costlier products as inputs, and a permanently distorted economy.

Back in 2016, the government raised tariffs on imported steel in a bid to boost the domestic import competing sector and provide protection against cheaper Chinese imports. The result: small and medium sized manufacturing firms using steel as a key input cried foul, saying they were losing their export market and had to lay off workers as one of their main inputs had shot up in price. Once you go down the road of rolling out sector specific tariffs, a whole raft of rent seeking activities will occur, with industrialists trying to persuade bureaucrats and politicians that they too need a helping hand.

It is hard to resist the notion that we’re creeping back toward the days of the rightly much maligned Bombay Club, a group of powerful industrialists who made the case for protectionism. The rationale in those days was the dogma of socialism inherited from Nehru and Indira Gandhi but today the latter day members of the Bombay Club can make common cause ironically with the right wing Swadeshi movement which is suspicious of everything foreign and is highly receptive to protectionist arguments.

Another worrying trend in Modi’s late term economics is an apparent abandonment of his very worthy goal of generating large scale labour intensive manufacturing. The Make In India scheme has failed thus far to turn India into a global or even regional manufacturing hub but Modi seems to have shifted the terms of the debate and embraced the Swadeshi notion that any occupation, even a poorly paying and unproductive one, constitutes a “job”. As he said, “pakora selling is also employment”.

This entirely misses the fact that pakora selling is a low wage, low skilled, unproductive and highly precarious way of making a living. Pakora selling and other low value added service activities cannot absorb millions of workers entering the workforce every year.

Both Modi and Finance Minister Arun Jaitley, have also repeated job creation claims based on a now debunked study by economists Pulak Ghosh and Soumya Kanti Ghosh. Referencing a problematic study which claims fifteen million new jobs were created in the midst of demonetisation, GST roll out, and an economic downturn only suggests the government is not confident on the jobs front, simultaneously saying many jobs have been created while at the same time redefining a job as any activity.

Turning inward, increasing controls, and empowering the state rather than the market is a path to economic ruin not to prosperity. Yet late term Modi economics seems to be repeating all of these mistakes. Why?

Imagine if, in 2014, The BJP had campaigned on the slogan: “Pakora selling is also employment”. How would voters have reacted?

Rupa Subramanya is an independent economist and researcher based in Mumbai.

The views expressed are personal

First Published: Feb 24, 2018 18:07 IST