Fact Check

Import Duties: Signs of Protectionism or Mitigating Sectoral Skews?

Import duties

The Print on February 15 presented a debate with the title, “With higher import duties, is Narendra Modi turning protectionist?”. Some of the commentators argued that certain decisions taken about import duties of late are protectionist in nature, and they extended the argument to claim that the Prime Minister is thus defying his own position on protectionism which he had asserted at Davos.

Rationale Behind Import Duty

Before terming it as “protectionism”, it should be noted that the increase in import duty is only on certain goods and the administration has provided a rationale for this. The press release from the Ministry of Finance says: To further incentivise the domestic value addition and Make in India, the Finance Minister proposed to increase customs duty on mobile phones from 15% to 20%, on some of their parts and accessories to 15% and on certain parts of TVs to 15%. This measure will promote creation of more jobs in the country. In fact, this will make the domestic items cheaper than imported ones and will generate more demand which, in turn, will create more employment opportunities for the people at large.

Balanced Approach, Not Protectionism

If protectionism was the aim of the government, how come there is such a leap and turnaround in Foreign Direct Investments (FDI)? One of the commentators has called this a move back to pre-reform-era protectionism. India is not living under the historical baggage of pre-1991 days. The current government can, therefore, make policies to boost domestic manufacturing as and when required. Its record on the FDI front perhaps counters the exaggerated claims of protectionism. In 2016-17, India received a total FDI of $60.08 billion, which has been an all-time high. Thus, India has certainly been opening itself up to the world and boasting a free market economy even as it attends to its interests like “Make in India”.

Problem with the Electronics Industry

The problem seems to lie in the fact that the electronics manufacturing industry received a tiny part of the total FDI coming into India. From April 1, 2000 to June 30, 2015, it received only $1.68 billion, or 0.66%, of the total FDI inflow of $258 billion.

While the electronics industry contributes 15.1% to the GDP of South Korea and 12.7% to China’s, in India, it has been a mere 1.7%.

OEM (Original Equipment Manufacturing)/ ODM (Original Design Manufacturing) is still in its infancy in India. It cannot be boosted when cheap imports are dumped on the Indian economy. This has been dealt with in detail in our earlier article “Electronics Import Duties: Reform Reversal or Boost to Manufacturing?

India’s Interests

When the above facts are put in context, which is apparently missing from the debate The Print published, the government’s action can be evaluated correctly. Also, while defining terms like “free trade” and “protectionism”, why would one need to adhere to the textbook narrative framed outside this country long ago?

As the Finance Minister had explained earlier, India needs to have a Social Welfare Surcharge on imported goods to provide for the welfare schemes of the government. For a country like India, large in area and possessing a big population, where employment generation is a key issue, perhaps it is not unfair to play the global market to its advantage? Apparently, the import duties are levied in India’s interest – that of sustaining the domestic market and expanding job opportunities here.

But above all, there is no blanket hike in import duties but a targeted and selective redress in certain area(s). In sum, it cannot be called protectionism since the government is fully open to foreign investment – in fact, more so than ever before – and is championing competition. Also, for the electronics goods sector per se, it could perhaps be called protectionism if India were not encouraging foreign manufacturers to come and set up shop in India. At the same time, those multi-nationals manufacturing electronic goods in India are enjoying the benefits of lower prices for their goods. Where then is the protectionism?