Union Finance Minister (FM) Nirmala Sitharaman was remarkably quiet in her budget speech on India’s Free Trade Agreement (FTA) negotiations. And this despite a new surge in the FTA talks. Until 2020, FTAs were not high on the economic policy radar of the National Democratic Alliance (NDA) government. The United Progressive Alliance (UPA) government signed 11 FTAs between 2004 and 2014. However, the NDA government only signed two, with Mauritius and recently the United Arab Emirates. India is famous for leaving the negotiations of the Regional Comprehensive Economic Partnership Agreement – an FTA made up of Asia-Pacific countries, including China – at the 11th hour. In recent years, the official narrative on FTAs has been that they have led to the deindustrialization of India in certain sectors.
However, from 2021, the government that was critical of FTAs began to take an interest in these treaties. India has launched negotiations with several blocs such as the European Union, Australia, Israel and recently the United Kingdom (UK). Perhaps policymakers finally realized that by not signing an FTA, India would fail to be part of global supply chains.
However, there is a fundamental dichotomy in India’s trade policy.
On the external front, India is eager for freer trade. But domestically, India is stepping up its efforts Aatmanirbhar Bharat (autonomous India). There is plenty of evidence to suggest that the narrative of a self-reliant India is a story of old wine in new bottles or a “movie” that India has seen before, as argued by Arvind Subramanian and Josh Felman. At the heart of this narrative is the belief that the erection of tariff walls would shield domestic industry from import competition and enable it to become competitive. This economic philosophy is spelled out in the latest economic survey, which indicates that tariffs on certain imports have been increased to provide “reasonable tariff support for goods manufactured in India”. Indeed, the average tariff rate in India has increased from 13% to 18% from 2014 to 2020.
According to the Economic Survey, over the past six years, about 4,000 tariff lines (about one-third of all tariff lines) have been subject to an upward revision of customs duties. The 2022-2023 Union budget continues the trend of protectionism by phasing out more than 350 customs-related exemptions. This trend was ushered in by the late Arun Jaitley in the 2018 budget when he made a “calibrated deviation” from the post-1991 policy consensus on lower tariffs.
The incongruity with this Trumpian logic (former US President Donald Trump built high tariff walls on the same ground) is that it puts the blame for India’s manufacturing problems squarely on the doorstep of international trade.
However, the reality is that manufacturing in India is suffering due to several factors such as lack of competitiveness, inability to achieve economies of scale, lack of land and labor reforms, infrastructural bottlenecks and regulatory issues, political uncertainty, the rise of cronyism where rules are changed to favor certain companies, heighten social tensions and increase corporate concentration, among others. The jury is still out on whether offering fiscal measures to the manufacturing sector such as production-linked incentives (called “subramanian raj” by Subramanian and Felman) would invigorate industrial activity and create jobs. As columnist Andy Mukherjee argues, two years of tariff increases in the electronics industry have increased the cost of assembling mobile phones in India by 8%, which in turn negates the benefits of proposed grant.
India’s contempt for imports mirrors the right-wing anti-trade narrative seen in the “capitalist” United States, where trade is squarely blamed for deindustrialization, the loss of blue-collar jobs and the enrichment of the external “other”, that is to say the “communist” China. However, the irony is that India, along with several countries in Asia, has been one of the major beneficiaries of the free trade regime over the past three decades.
For India to unexpectedly become “vocal for local” and make an anti-import argument a central part of its domestic economic policy, especially when many of its East Asian compatriots are integrating into mega FTA, reducing tariff and non-tariff barriers, is disconcerting.
The argument that these rate hikes are time-limited and will be reversed once the industry becomes competitive is easier said than done. Favorable tax regimes create their own set of vested interests and rights. Another argument advanced is that the tariff increases do not relate to the goods used as inputs or raw materials but to the finished products. This argument is an oversimplification of the realities on the ground, as modern international trade takes place through global value chains where the production process is dispersed across multiple geographies. Thus, it is not easy to classify goods into inputs and finished products as was the practice in the past.
In this context, it will be difficult for India to convince its current and potential FTA negotiating partners to open their markets to Indian products without the required reciprocity. Trade is not a one-way street. India needs a non-protectionist trade policy, which should include pro-market reforms, not pro-business reforms reminiscent of India’s “stigmatized capitalism”. This would allow international trade to be a harbinger of growth and opportunity in India.
Prabhash Ranjan is Professor and Associate Dean, Jindal Global Law School, OP Jindal Global University
Opinions expressed are personal