A 1970s argument

Don't blame trade openness for failure to grow manufacturing

It has been reported that, at a recent discussion at high levels of the government on the future of India's trade engagement with the rest of the world, Finance Minister P Chidambaram warned against "rushing" into free-trade agreements, or FTAs. The point apparently being made by Mr Chidambaram, who otherwise has a reputation as a reformist, was that manufacturing is important for India's economy and for employment, and that the manufacturing sector suffered when tariffs were lowered for imported goods; that India's services exports did not rise enough to make up for the increased goods imports; and that the finance ministry's revenue department was concerned that the commerce ministry had no clear idea of how much was being lost to the exchequer through FTAs.

Mr Chidambaram's plea for manufacturing as central to job creation is an important point. It is a pity, however, that he is embedding it in a retrograde, anti-reformist and pre-1991 line of thinking. The argument for more open borders for trade is the same today as it has been since P V Narasimha Rao and Manmohan Singh opened up the economy in 1991; that, without it, Indian manufacturing would be grossly inefficient, and Indian consumers would suffer. Consumers would be forced to buy inferior goods at higher prices, thereby reducing their real income. It is worth noting that Indian manufacturing, when protected from the world prior to 1991, was not known for expanding jobs vastly; it was largely capital-intensive, with a high proportion of intermediate goods imports in its value-addition mix. Not only is Mr Chidambaram's suggestion that FTAs be avoided a way to reduce real income for consumers, it would not even succeed in creating jobs - merely higher income and rents for existing Indian manufacturers. It is, thus, doubly dangerous. Prime Minister Manmohan Singh will certainly be aware of these facts.

Hopefully, India's focus on moving ahead with integrating into the world economy, which has been a focus of this government and one of its few partial successes, will not be rolled back. There is a small window to sign a crucial FTA with the European Union, which has the potential to vastly benefit India's consumers and its companies alike. Dr Singh must not listen to naysayers who wish to turn India back to the 1970s and 1980s. If manufacturing in India has not grown as much as has the rest of the economy, and has in some parts suffered, trade policy cannot be blamed for it. As the World Bank has recently confirmed, India is a terrible place to do business, and has only got worse under the current administration. If the rupee finds its true value, regulations are relaxed and infrastructure improved - if a more business-friendly environment is created - then trade openness is exactly the opportunity that is needed to push Indian manufacturing into reform and expansion. Sadly, the finance ministry instead seems to want to recommend an overvalued currency and trade barriers, claiming that it is needed for employment and jobs. These were the arguments of the 1960s and 1970s, and history has long since repudiated them. It is unfortunate that they are being raised again in a nominally reformist government.