The Modi government has been facing a lot of criticism for its recent policies to give impetus to Make in India - some being similar to those previously been adopted by now-booming economies in the earlier stages of their growth. It would be prudent to not make any hasty judgements and see how this plays out for India in the longer run.
Many free-market mavens are upset with India's Narendra Modi government for apparently turning its back on free trade.
The provocation: a series of measures since the 2018 Budget to raise import duties on auto parts, toys, candles, furniture and electronic items such as mobile phone components, television sets and microwave ovens, among several other things. India, they allege, is raising protectionist barriers once again, turning the clock back on the reforms initiated by every Indian government since 1991.
The Modi government's decision to pull out of the Regional Comprehensive Economic Partnership (RCEP) was criticised by these same people for the same reason.
How justified are these comments
Research carried out by India Global Business shows that free trade helps mainly those countries that have achieved a minimum competitive threshold. More importantly, it clearly indicates that every free trade champion across the world first created national champions behind high tariff walls before unleashing them on other nations in the guise of “free trade”.
High British tariffs killed Bengal's muslin industry
The first manufactured product that was subject to tariff wars was the Bengal muslin that British mills couldn't compete against. Having opened up the Indian market through military conquest, the British then levied very high tariffs on both the domestic sales and exports of this fine muslin, which was in heavy demand all over the world, while simultaneously permitting duty-free sales of British mill-made cloth in India. The muslin weavers soon went out of business leaving a vast market wide open for “free trade” by British industry.
This equation of free trade plus liberal democracy equals prosperity is a recent development in economic theocracy. It must be noted that countries such as the United States, which regularly lectured the world on the virtues of free trade and open markets was itself a votary of protectionism for much of its existence.
US prospered behind high tariff walls
President of the US, who ruled from 1897-2001, famously said: “We lead all nations in agriculture; we lead all nations in mining; we lead all nations in manufacturing. These are the trophies which we bring after twenty-nine years of protective tariffs.”
These policies continued until the Second World War. In fact, tariffs peaked in the US with the Smoot-Hawley Tariff Act of 1930, which increased import duties in the US by an average of 20 per cent. The insular and inward-looking US view on free trade and open markets changed after the Second World War only because its industries, untouched by the bombings that destroyed Europe and Japan, could them dominate the world.
Asian miracle followed the same template
Even the Asian miracle, first by Japan in the immediate aftermath of American occupation following the Second World War, then by the South East Asian countries and finally by China, followed much the same template - protection to domestic industries behind high tariff walls, generous subsidies and concessional loans and unwavering state support to prop up exports.
These are inconvenient facts that fly in the face of current economic orthodoxy. Of course, free trade must remain the desired goal rather than the starting point. That's where the Indian Nehruvian model went horribly wrong. High tariffs and import substitution were an ideological imperative shorn of sound economic logic. It was bound to fail, and it did.
Getting the basics right, at last
The Modi government, on the other hand, is not travelling down the import substitution path. Instead, it is creating the ecosystem for Make in India to flourish as a precursor to Indian companies joining the global supply chain.
As more Made in India iPhones, Samsung phones and toys slowly enter foreign markets, the success or failure of this policy will become evident.
Till then, it may be prudent to hold any hasty ideologically inspired judgment.
