Why is India Inc protectionist?

A recent Business Standard survey of chief executives of India Inc reveals business leaders expect the government to take immediate remedial steps to stem the rupee’s slide against dollar. This follows an 8.5% fall in the Indian currency’s value against the greenback this year.

Vimal Kejriwal, CEO and MD of KEC International, an engineering, procurement and construction major, said the government should impose limits on importing non-essential goods and expediting dollar remittances for exporters, apart from easing norms for foreign investment.

Others said, they expect the government to impose a higher import tax on all non-essentials like cosmetics, gold, and electronics in the near term.

The second-biggest consumer of gold, India imported $46 billion worth of the metal in FY22. On July 1, the government hiked the customs duty on gold from 7.5% to 12.5%. Electronics goods are the largest non-oil import segment. 

Around 80% of the CEOs surveyed by Business Standard expect additional steps from the RBI or government to contain the rupee’s fall.

Media reports indicate authorities have enhanced monitoring of select imports that have seen a sharp uptick in recent months. Non-essential imports may be targeted through duty hikes as a part of the government’s effort to contain the widening current account deficit.

India’s current account deficit in April-June was at $23.9 billion, or 2.8% of GDP, much higher than the $13.4 billion, or 1.5% of GDP, in January-March 2022.

When a similar situation emerged in 2018, the government raised import duties on 19 items including consumer electronics, diamonds, jewellery, jet fuel and leather footwear. 

These goods, however, constituted just 2.8% of India’s total import bill the previous financial year, raising question marks over the efficacy of the measure.

Since the Union Budget early that year, the government had, in fact, firmly moved India towards greater protectionism, raising tariffs on several different product lines.

The days of import substitution prior to liberalisation prove that such tariff increases are a counter-productive form of policy. 

By allowing only essential imports required for production and protecting the domestic producers from the competition, the policy hindered competitiveness, hurt consumers and damaged exports.

Post 1991, imports were significantly liberalised and duties brought down.

But in recent years, India has reversed its two-and-a-half decade-old policy of tariff reduction to favouring protectionism. 

Import substitution is regularly spoken of as a priority for the government on the argument that India’s ‘infant’ domestic industries need to be protected.

But even the mature automobile industry has sought protections.  

With India and the United Kingdom entering the last lap of negotiations over a free-trade agreement, passenger vehicle makers in India have raised concerns about any sharp reduction in customs duty on imported vehicles under the pact.

They argued that competing countries in the European Union shall also seek such a measure and this will ultimately hurt the domestic industry as India is negotiating an FTA with the trading bloc, too.

Arun Maira, Former Member Planning Commission & Former Chairman BCG India says Indian firms want to compete but seek a fair chance. Industries seek protection for a short while. It’s not fair to pit infant industries against global players.

Protectionist steps are being justified on the ground that they will let domestic companies grow into viable competitors so that they can sustain on their own.

But raising tariffs purely to protect industries eventually leads to high-cost and uncompetitive business environment.

At the end of the day, a balance is needed. Industries cannot expect to operate within a walled garden for perpetuity, especially when India’s stated aim is to integrate into global supply chains. Industries that have achieved a certain scale should now open up to competing in the global market without reservations.