[Answered] Rising import restrictions may put FTAs and global value chain integration at risk; external imbalances can be addressed with other foreign trade policy tools. Discuss.

The government has been working on reducing imports for several years and has raised tariffs along with other barriers. The government is also working on strategies to contain “non-essential imports”. Imports were denied if they were deemed “inessential”. They were also denied if they were accepted as essential but were indigenously available.

Issues with rising import restrictions:

• If imports can be restricted by non-tariff means, our negotiating partners would worry that the benefit of tariff concessions could be negated by resorting to import curbs. That is why the WTO prohibits quantitative import restrictions, except in circumstances of a balance-of-payments crisis.
• Protectionism does not benefit the domestic economy. It rather encourages inefficiency of domestic manufacturers.
• Our credibility in wanting to integrate with global value chains also requires assurances that imports will not arbitrarily be restricted. It might be possible that major manufacturers become reluctant to locate investments in India for global supply if there is a danger of arbitrary restrictions on imports.
• Import restrictions are sometimes urged because of our large trade deficit. This ignores our large surplus on the ‘invisibles’ account, reflecting booming service exports and also remittances.

What can be done?

• To address the issue of large trade deficit, our foreign trade policy should ideally declare categorically that quantitative import restrictions will not be used to reduce access to imports. Transparency of intent in policy is critical for building trust, and trust is essential to attract investors.
• Some restrictions are necessary for safety reasons- for example, on toys with harmful paints. We should upgrade our safety standards, and these should apply to all items, including the locally made.
• Foreign exchange reserves can take care of sudden temporary pressures.
• The policy of a floating but managed exchange rate gives the Reserve Bank of India all the flexibility it needs to allow the exchange rate to adjust in a way that will help contain imports and simultaneously stimulate exports.
• If problem reflects an excess of aggregate demand over supply, which is spilling into balance of payments, the solution lies in tightening fiscal and monetary policy.

India wants to integrate with global value chains and take advantage of the ‘China plus one’ approach being adopted by many multinationals. However, such arbitrary import restrictions won’t encourage foreign manufacturers to invest in India.