February 2018 taught me — and I hope many others — a lesson in politics: that 25 years are long enough to erase memories of the past, especially the economic past. Twenty-seven years ago, India was a closed economy.
* Imports were bad, import substitution was good.
* Tariffs were good, higher tariffs meant safer economy.
* Foreign exchange was a precious commodity, so hoard what little we had.
*Taxes were necessary, higher taxes underlined dire necessity.
*High interest rates benefit depositors and bankers, borrowers and investors be damned.
It did not matter that India was a poor country and the Indian people — the overwhelming majority — were poor. At least they were safe, or so we believed. And then happened two unlikely events. A cruel accident of history placed PV Narasimha Rao in the office of Prime Minister of India. And he appointed an unassuming scholar, Dr Manmohan Singh, as finance minister. Both had been long-serving, loyal members of the Establishment and were expected to defend the Establishment.
De-constructing the Hard Work
On July 3, 1991, India woke up to the fact that a demolition squad had assumed power in New Delhi. Brick by brick, the old structure was brought down; brick by brick, a new edifice was erected. After 27 years, it is still work-in-progress.
Unfortunately, another demolition squad seems to have insidiously burrowed its way to the seat of power in New Delhi. This squad seems to have begun the work of de-constructing the edifice that was painstakingly built over the last 27 years and re-erecting the dirigiste economy that was the cause of India’s long history of low growth. How else can one explain the recent decisions, including the ones that were part of the
Since 1991, India’s ‘Manufacturing’ sector has grown at about the same average rate as the GDP/GVA. However, exports have increased. Exports in 1990-91 amounted to 6.93% of GDP. By 2016-17, the proportion had increased to 19.31% . It is wrong to assume that the manufacturing sector will grow, or that exports will increase, only behind protectionist walls. On the contrary, protectionism will starve the country of capital and technology and will make the manufacturing sector’s exports uncompetitive.
There are enough safeguards against unfair trade practices. The World Trade Organization agreements allow a country to impose tariffs subject to ceilings. ‘Surge’ in imports can be countered by imposing Safeguard duties for a temporary period. ‘Dumping’ can be penalised by imposing Anti-dumping duties. Besides, there are permissible non-tariff measures to prevent cheap, poor quality goods invading the Indian market. Major manufacturing and trading countries have prospered under an open, competitive and rule-based world trade system. India too has benefited.
Reversing the Direction
Is there a re-think under pressure from the so-called swadeshi lobbies? Just before the Budget, and in the Budget, the government announced a number of measures that seem to suggest that the protectionist (and taxation) lobbies have gained strength. Here are some of them:
1. In December 2017, Customs duties were increased significantly on a number of electric and electronic items such as mobile telephones (0-15%), microwave ovens, cameras, monitors etc. Apparently, this was not a short-term measure.
2. Huge increases in tariff were announced in the Budget on a large number of goods, including fruit juices, perfumes and toiletry products, automobile parts, footwear, imitation jewellery, mobile telephones (to 20 %), smart watches, toys and games, silk fabrics, vegetable oils, and a number of miscellaneous items like kites, candles, sunglasses etc.
3. Capital is being taxed in multiple ways. The RBI has identified five taxes on capital, including the latest Long Term Capital Gains (LTCG) tax, that will inhibit investment.
4. National Stock Exchange and Bombay Stock Exchange have terminated their licence agreements with the Singapore Stock Exchange on sharing live data, ostensibly to prevent the index futures market from shifting to Singapore to benefit from less taxes and lighter regulation.
5. The fiscal deficit will be allowed to rise this year and next year above the targets announced earlier, unmindful of the impact on inflation which, according to the RBI, may increase to 5.6% during April- September 2018.
6. Every rise in crude oil prices will be reflected in the retail prices of petrol, diesel and LPG, with no thought given to the alternative of cutting excise duties on these petroleum products or bringing them under the GST.
Confession of Failure
Taking protectionist measures is a confession that the Make in India campaign has flopped, that the much-trumpeted rise in the index of Ease of Doing Business is an illusion, and the claim of improved infrastructure is an empty boast. Voices of dissent are now being heard from within the Establishment. Dr Arvind Panagariya, former vice-chairman, NITI Aayog, has been scathing on the increase in Customs duties. Dr Rathin Roy, member, PMEAC, has criticised the breach of fiscal deficit targets. Dr Surjit Bhalla, another member, PMEAC, has lambasted the LTCG. Dr Rajiv Kumar, vice-chairman, NITI Aayog, has lamely expressed the hope that the measures will be temporary. The Monetary Policy Committee of the RBI has listed six uncertainties that will be inflationary. Three of them are directly related to the Budget announcements.I am reminded of what George
Santayana said: “Those who do not remember the past are condemned to repeat it”.