rime Minister Narendra Modi has enumerated a number of positive signs in the economy seen in September and expressed hope that GDP growth rate will pick up in 2021-22. He has pointed out that agricultural production is at record levels; a 15 per cent increase in freight hauled by the railways is seen; India has emerged as a global supplier of PPE, pharmaceuticals and ventilators; India has seen a 13 per cent increase in inward FDI in April-August which is highest ever.
However, other disturbing indicators are emerging at the same time. Only three months ago a number of global agencies had forecast a 5 per cent decline in India’s GDP this year. Today they have forecast a 10 per cent contraction. GDP per capita or income per person is a better indicator of the state of an economy because while GDP is a measure of total income of a country, GDP per capita is a measure of the income of a citizen of the country. The International Monetary Fund has assessed that India’s GDP is likely to be $1877 per capita against Bangladesh at $1888 per capita. We have slipped behind Bangladesh. Global rating agency Moody’s has downgraded India’s sovereign rating to Baa3 which is the lowest investment grade rating. A further downgrade would make it difficult for the Government of India as well as Indian companies to access foreign funds. Our manufactured exports are slipping. Our exports of iron ore increased by 63 per cent and of rice increased by 33 per cent between June 2019 and June 2020. However, our key manufactured exports of jewellery declined by 50 per cent, leather products by 40 per cent and textiles 35 per cent.
India stands at 94th rank in the World Hunger Index which is lower than Bangladesh at 75th, Myanmar at 78th, Pakistan at 88th rank. Our performance in containing Covid is dismal. As of 29.10.2020, we have had 87 deaths per million population against 1 for Sri Lanka, 22 for Myanmar, 26 for Bangladesh, 30 for Pakistan and 31 for Nepal. These negative indicators give us a reason to re-examine the way forward.
We have before us two paths here onwards. Former RBI Governor Raghuram Rajan has warned that India should not adopt the path of protecting domestic industries by raising import duties as has been done recently for some products. Protectionism means that we increase import duties collected on foreign goods entering India so that their price increases; and the price of domestic production becomes less in comparison; leading to sale of the latter. He has warned that we had followed the same protectionist policy before the economic reforms of 1991 with disastrous results. A license permit raj was prevalent that enabled selected big domestic companies to extract monopolistic profits and the politician-bureaucratic alliance to extract huge corruption money. At that time the government not only had prohibitive import taxes of up to 150 per cent but also quantitative restrictions. One was not allowed, for example, to import cars even by paying the 150 per cent import duty. The domestic businesses could sell their goods at high prices and they shared the bounty with the politician-bureaucratic alliance. Say, the cost of production of a tube light in India as well as China was Rs 500. Now, the government at that time imposed an import duty of Rs 200. This led to increase in the cost of imported tube light to Rs 700. The domestic manufacturers increased the sale price to Rs 700 because they were ‘protected’ both from foreign competition due to high import taxes and from domestic competition because license permit raj. They made a windfall of Rs 200 per tube light that they shared with the politician-bureaucratic alliance. Rajan has done well to draw attention to this peril in increasing import duties. However, governments have utterly failed to put an end to the extortion by the politician-bureaucratic alliance. Thus, we need a Plan B. Here, protectionism comes back.
The present situation is different than the pre-reform period on three counts. The first difference is that we had quantitative restrictions or prohibitive duties on imports previously. One, for example, could not import a car even by paying a 150 per cent import duty. Presently we can increase import duties by a relatively small amount. For example, if the government imposes an import duty of Rs 200 on tube light, then the politician-bureaucratic alliance will be able to extort only Rs 200. Imports will come in if they extort Rs 300. The first difference is that there is presently an upper limit to the extortion. Second difference is domestic monopolies held sway in the eighties. For example, the Tatas reportedly wanted to manufacture cars but the government did not give license to them in order to protect the monopoly of the Birlas. This monopoly was broken only when Sanjay Gandhi jumped into the fray. At present we have dismantled the license permit raj and competition prevails among big businesses—both domestic and foreign. Therefore, chances of extortion of monopolistic profits are much less today. Third difference is the exposure of our businesspersons to global manufacturing and marketing practices was limited. Today a number of Indian businesspersons have set up manufacturing facilities in China and they are importing into India the goods made by them in China. Thus, our businesspersons have acquired frontline technologies. An increase in import duties today will not lead to the situation of the eighties because competition among big businesses will reduce the extraction of monopolist profits; and imports will set an upper limit to the extortion.
The result of increasing import duties will be that the price of goods will increase in domestic market. The price of tube light will increase from Rs 500 to Rs 700. The extortion by politician-bureaucratic alliance will increase behind the protectionist barriers, say, by Rs 100. Yet, competition between big businesses will prevent the extraction of monopolist profits. I estimate that the price of a domestically produced tube light will be Rs 600 while that of the imported tube light will be Rs 700. As a result, the Indian businessperson who is presently manufacturing tube lights in China and importing them into India will shift his manufacturing facility to India and ‘Make in India’ will succeed. Therefore, we should not be bound by our past experiences and increase import duties as a second-best path within the present dismal political situation.
The writer is a former Professor of Economics at IIM Bangalore.