Is protectionism compatible with liberalisation?

Source: The post is based on the article “Is protectionism compatible with liberalisation?” published in The Hindu on 15^th July 2022.

Syllabus: GS 3 – Inclusive growth and issues arising from it.

Relevance: To understand India’s economic policy.

News: The government is planning to liberalise India’s economy. But with policies such as Atmanirbhar Bharat, the government seems to protect the domestic economy from foreign competition. This raises questions on whether the government’s external protectionism is compatible with its promise of liberalising India’s economy.

What are the challenges associated with India’s policies to protect the domestic economy?

Not efficient: Industrial policies generally invest in industries that could be globally competitive. But in India, there is a long list of sectors in which the government has embarked on import substitution that encourages domestic production. The emphasis is on producing in India rather than on efficiency.

Not able to predict the future: In the 1970s, the government thought that electronics export was going to be a good thing. So, they created the Santacruz Electronic Export Processing Zone (SEEPZ) in Bombay and removed customs duties. By removing protectionism, they thought they were doing a favour to the electronics industry. And 30 years later, the software industry and the diamond processing industries came out on top.

Against ease of doing business: There is still high red-tapism in India.  Further, in most productive sectors also India is lagging behind its counterparts. All this make fall in competitiveness of Indian industry.

Restrict the benefits of consumer: The government stands in the middle and interferes with the ability of an Indian consumer to buy something from abroad or the ability of an Indian firm to buy something from abroad or the ability of an engineering firm to raise capital from a cheaper source abroad, and so on. This raises fundamental question of consumer freedom.

Industrial licensing era policy: Policies such as Production-Linked Incentive (PLI) scheme provide incentives to certain capacities. In this, the government determine the minimum economic scale and then direct the industry to produce along those lines.

What should be done to improve the Indian economy?

Reduce custom duty and protectionism: Every time India cut customs duties, and removes elements of protectionism, firms in India which are users of those goods become more competitive. Hence, India can increase exports by making raw materials cheaper.

External and domestic reforms have to go hand in hand: China and other Southeast Asian countries have been attracting foreign investment just because they execute external and domestic reforms together. India should also focus on both instead of an isolated approach.

Government has to be a facilitator: Instead of picking select sector and promoting them, India can leave that to the market economy to discover the sectors. If the government want to intervene, the policy should be made by the government and industries having a dialogue.

Japan, [South] Korea, and many Southeast Asian countries follow this dialogue based approach. This might cause many firms to go bankrupt, and many industries will shut down. That’s how India can find out what works and what doesn’t.

Provide freedom to consumer: Ad hoc protectionism is not really the way forward because ultimately we are living in a market economy and there has to be the freedom to choose.

Role of industries: The industry needs to identify the pain points, and they should ask the government to address these issues. For instance, during the pandemic, big pharmaceutical giants had substantial government backing in producing vaccines and other medicines.