Our new trade policy must calm fears of rising import restrictions

Source: The post is based on the article “Our new trade policy must calm fears of rising import restrictions”published in Live Minton 20^thMarch 2023.

Syllabus: GS 3 –Economy

Relevance: Issues with categorizing import

News: “Those who cannot remember the past are condemned to repeat it” – George Santayana.

This quote holds significance in the upcoming foreign trade policy in which the Commerce Ministry has said that they are working to identify “inessential imports”.

What are inessential imports?

The concept of inessential imports was used in the 1970s when the Chief Controller of Imports and Exports used to decide whether imports needed by businessmen should be allowed.

Imports were denied if they were deemed “inessential”. They were also denied if they were accepted as essential, but were indigenously available.

These decisions were made based on the recommendations of Directorate of Technical Development (DGTD) officials, who lacked private sector expertise and inadequate technical understanding.

What are the concerns associated with categorizing imports as inessential imports?

Lowers Competition:This classification was one of the factors that protected Indian industry from competition and produced a high-cost economy that could not compete internationally and developed slowly.

Can Affect Foreign Trade Agreements (FTAs): This categorization might send wrong impressions to the countries signing FTAs with India.

The FTAs are designed to convince business partners that India aims to cut tariffs to promote trade. However, the FTA partners could be concerned if imports can be limited by non-tariff measures.

It is because of this that the World Trade Organization prohibits quantitative import restrictions, except in circumstances of a balance-of-payments crisis.

Can Have Impact On Foreign Invest in India:India is encouraging foreign firms to invest in India and make goods for international markets. This would enable India to take advantage of the China-plus-one plan and integrate with global value chains.

It will also support India’s “Make in India for the World” effort. However, such arbitrary import restrictions won’t encourage foreign manufacturers to invest in India.

Therefore, our foreign trade policy should unequivocally state that it will not utilise quantitative import restrictions to restrict access to imports.

Must Read: Non-essential curbs – Policy focus must shift from imports to exports

Why India shouldn’t be concerned about restricting imports?

Import restrictions are being urged because of large trade deficit. However, India also has a large surplus on the ‘invisibles’ account due to the booming service exports and remittances.

Further, the combined deficit is expected to be about 2.5% of GDP and so there is no case for imposing controls on imports.

Moreover, India should also not be concerned about its Current Account Deficit because – a) India has a good amount of foreign exchange reserves that can take care of sudden temporary pressures, b) the policy of a floating exchange rate gives the Reserve Bank of India the flexibility to allow the exchange rate to adjust in a way that will help contain imports and simultaneously stimulate exports and c) if our balance of payments is being impacted by an excess of aggregate demand over supply, then tightening fiscal and monetary policy would be the optimal approach that can be adopted.