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Our new trade policy must calm fears of rising import restrictions

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India’s new foreign trade policy, which is to be announced shortly, will be watched closely. Policy watchers will especially look to it for guidance on future policy trends on import restrictions, over which there have been some conflicting signals. The government says it wants India to integrate with global value chains and also to take advantage of the ‘China plus one’ approach being adopted by many multinationals. It is also negotiating free trade agreements (FTAs) with important trade partners. These initiatives play well with investors.

However, they also call for greater openness to imports and this conflicts with signals emanating from reports that commerce ministry officials are working to identify “inessential imports”. The concept of inessential imports brings back memories of the 1970s, when the Chief Controller of Imports and Exports used to decide whether imports needed by businessmen should be allowed. Imports were denied if they were deemed “inessential”. They were also denied if they were accepted as essential, but were indigenously available. These decisions were taken on the basis of advice by bureaucrats in the Department of Technical Development (DGTD) who had no experience of working in the private sector and whose technical knowledge was hopelessly out of date.

This system was widely viewed as a major factor responsible for insulating Indian industry from competition and creating a high-cost economy that could not compete abroad and which grew very slowly. Seminal studies by Jagdish Bhagwati and Padma Desai, and later T.N. Srinivasan, had established its inefficiency, but it had no effect on the entrenched system.

Import restrictions through licensing were finally abolished in 1991 for all except consumer goods; consumer goods were liberalized much later. But 1991, generally regarded as a turning point, was more than three decades ago! This means no Indian businessman below 50 years of age has any idea of how bad that system was. George Santayana’s much-quoted warning is relevant: “Those who cannot remember the past are condemned to repeat it.”

Fears of a return to import licensing may be exaggerated, but at a time when we are trying to attract foreign investment and technology, we need to send positive signals. The FTAs that the commerce ministry is negotiating are meant to reassure our trading partners that we intend to facilitate trade by lowering tariffs. But if imports can be restricted by non-tariff means, our negotiating partners would worry that the benefit of tariff concessions could be negated by resorting to import curbs.

That is why the World Trade Organization prohibits quantitative import restrictions, except in circumstances of a balance-of-payments crisis.

Our credibility in wanting to integrate with global value chains also requires assurances that imports will not arbitrarily be restricted. We are rightly trying to attract major manufacturers to invest in India to produce items for global markets. This is a constructive interpretation of “Make in India for the world” and the right response to the China-plus-one opportunity. But will major manufacturers want to locate investments in India for global supply if there is a danger of arbitrary restrictions on imports?

To address these issues, our foreign trade policy should ideally declare categorically that quantitative import restrictions will not be used to reduce access to imports. Transparency of intent in policy is critical for building trust, and trust is essential to attract investors.

Of course, some restrictions are necessary for safety reasons—for example, on toys with harmful paints. There is a strong case for us to upgrade our safety standards, but these should apply to all items, including the locally made. Imports are more likely to be affected because they are cleared at points where adherence to standards can be checked. Many domestic producers, especially in the informal sector, will escape this regulatory check because of enforcement difficulties, but this has to be accepted as part of a transition to modernization. In the longer run, consumers who are conscious of the need for higher standards will exercise their own judgement.

Import restrictions are sometimes urged because of our large trade deficit. This ignores our large surplus on the ‘invisibles’ account, reflecting booming service exports and also remittances. The balance we need to worry about is not of our goods trade, but our current account balance, which takes into account the invisibles surplus. That balance seems to be in reasonable shape. The combined deficit is expected to be about 2.5% of GDP and so there is no case for imposing controls on imports to deal with this particular problem.

In any case, there are other ways of managing the current account deficit. First, we have very respectable foreign exchange reserves that can take care of sudden temporary pressures. Indeed, there is no point in having reserves except to take care of a sudden but reversible deterioration in the current account or the capital flows needed to manage it. Second, the policy of a floating but managed exchange rate gives the Reserve Bank of India all the flexibility it needs to allow the exchange rate to adjust in a way that will help contain imports and simultaneously stimulate exports. Finally, if we judge that the problem reflects an excess of aggregate demand over supply, which is spilling into our balance of payments, the solution lies in tightening fiscal and monetary policy.

All these issues are in the realm of the finance ministry and Reserve Bank of India. It is best to leave those agencies to handle these problems with appropriate consultation with the Prime Minister’s Office. The commerce ministry is not the right one to handle these problems, and it would be good if India’s foreign trade policy makes this clear.

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