India must be practical in managing its trade policies

India has conceded a lot of trade and industry policy headroom. It dropped tariffs much more than was required by the WTO guidelines


Rumblings of trade wars, cyber invasions of countries, and mass expulsions of diplomats mark the end of the Panglossian, “world is flat”, view of globalization. Social media is in the dock. The World Trade Organization (WTO) is in the intensive care unit. Economists bravely defending theoretical benefits of free trade are on the back foot.

The Indian government is hard pressed to create more jobs and sustainable livelihoods. Chinese products are flowing into the country, providing good value for consumers no doubt, but also killing Indian enterprises and jobs they provide. When the going gets tough, the tough must get going. “Make in India” will remain a slogan if both, the Indian government and Indian entrepreneurs, don’t step up to their challenges.

M.K. Gandhi said that when he was fighting for India’s political freedom, Jamsetji Tata was fighting for India’s economic freedom. Tata put up a modern, integrated steel plant against great resistance from the British government. However, he was determined that India must have industrial capabilities. He turned to American consultants for technological guidance, and to Indian citizens for financial support when the London market turned him away. After India’s independence, its industrial policy nurtured the growth of capabilities within the country. Foreign companies were welcomed to partner with Indian enterprises. Phased manufacturing programmes were mandated, whereby, progressively complex products were made entirely within the country.

For example, Tata Engineering and Locomotive Company (now Tata Motors) was established next to the Tata steel plant in Jamshedpur with the help of Daimler-Benz of Germany in 1954. Within 15 years, Tata trucks had over 95% Indian content. Moreover, they met Daimler’s international quality standards: indeed, Daimler exported them as Daimler trucks to many countries. The trucks had thousands of components made by dozens of Indian manufacturers. The supply chain developed within India created hundreds of thousands of jobs. Tatas built on this foundation, and by the 1970s, exported products as Tata products proudly bearing the Tata logo on the grill in place of the Mercedes star. Moreover, having learned how to make a good truck, Tata’s moved on to improve the design of the truck and even designing new products in its research and development centre. Thus, the 407 light commercial vehicle was developed to successfully beat the competition from Japanese truck producers who were welcomed into India in the 1980s. Meanwhile, Tata’s entry into new export markets continued. The suppliers of components to Tata—Bharat Forge, the TVS group, and many others—began to directly export.

Industrialization is a process of learning: of enterprises and people in a country learning to do what they could not do before. Indian government policies provided the carrot and stick for rapid learning. High import duties against import of assembled trucks provided the carrot and shield. The time-bound, phased manufacturing programme, whereby imports of components would be forbidden after stipulated periods, provided the stick. With the same policies, Maruti and its suppliers grew in the 1980s. The supply base of components in the country attracted other automobile producers and Indian auto component producers expanded their exports.

A counter-factual story is Indian electronic hardware manufacturing. When India liberalized its trade in the 1990s, the hardware industry did not have the lobby power that the Indian auto industry had built. Thus, when the WTO asked countries to “voluntarily” sign the International Technology Agreement in 1996, and reduce import duties on electronic products to nil, India complied. China did not. It delayed for six years, shielding its industry and building its electronic products’ capability to become the factory of the world.

India has conceded a lot of trade and industry policy headroom, which it need not have so soon. It dropped tariffs much more than what was required by the WTO guidelines. This pleased consumers within the country, no doubt. And also foreign producers. Duty structures became “inverted”, with import duties on finished products reducing fast, which again pleased consumers and importers. This crimped the growth of manufacturing and the deepening of India’s industrial base.

Machine tools embody the technology of manufacturing industries. In 1991, Indian and Chinese machine-tool industries were comparable. By 2010, China’s industry was 50 times the size of India’s! Indeed, not only was India flooded with Chinese toys, garments, and consumer goods, Chinese power equipment manufacturers were winning large orders from India’s mega power projects. Indian manufacturers with world-class credentials, such as Larsen & Toubro and Bharat Heavy Electricals Ltd, complained that the playing field was no longer level. Import duties had been dropped to zero for suppliers from China (and other countries), whereas they should have been maintained at around 10% to compensate for domestic duties and costs incurred by manufacturers within India, which was acceptable to WTO. Now when India’s policymakers have picked up courage to raise duties on imported electronic hardware, a strategically important industry, free trade dogmatists say that evil protectionism is creeping back again.

WTO was expected to apply the principle of “less than full reciprocity in multilateral trade negotiations” with which its predecessor, General Agreement on Tariffs and Trade, had stimulated growth around the world. Governments need policy headroom to craft the right combination of trade and industry policy that will enable growth livelihoods and incomes for their citizens. WTO has pushed too hard, egged on by powerful lobbies in developed countries and by free trade ideologues everywhere, to eliminate all forms of support for growth of deep industrial capabilities in developing countries: with duties dropping too low, phased manufacturing programmes banned, and domestic preferences in purchase forbidden. WTO needs fundamental reforms. More global trade is good, provided it is regulated justly. India should push for global trade reforms. Meanwhile, it must clear-headedly take care of its own interests for more “Make in India”.


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