India’s New Protectionism Threatens Gains from Economic Reform

from CATO Institute,

Indian prime minister Narendra Modi has been hailed as an economic liberalizer, having sharply criticized rising U.S. protectionism under the Trump administration. Yet Modi too has embarked on measures to protect and support manufacturing jobs in India. The latest Indian budget in February 2018 raised import duties on more than 40 items, ranging from auto parts and toys to candles and furniture, in order to protect uncompetitive small businesses and create jobs in labor-intensive industries. Earlier, India had raised import duties on several electronic items, from phone components to TVs and microwave ovens. This was in pursuance of a Phased Manufacturing Program aiming to check massive imports from China and ensure that cellphone assembly and the manufacture of components are done mostly in India. An official task force has been appointed to look into ways of reducing import dependence. Modi’s Bharatiya Janata Party (BJP) is not a conventional right-wing party. It rejects both socialism and Western capitalism and seeks a homegrown solution called Integral Humanism. It supports private enterprise but also runs India’s biggest trade union and believes in a wide-ranging welfare state. It has highly protectionist affiliates that have always been wary of multinational corporations and international institutions. It believes in government intervention to create national champions, increase employment, and protect small businesses. The party also contains many liberalizers who succeeded in opening up the economy when the party ruled from 1998 to 2004, overcoming objections from BJP affiliates. When Modi came to power in 2014, he was seen as a liberalizer, bearing the slogan, “Minimum government, maximum governance.” In fact, he expanded the role of government in welfare even while liberalizing the economy incrementally. Optimists hope the new import tariffs are only temporary. The risk is that the new protectionism will get entrenched and reverse the major gains India has made since economic reforms began in 1991.

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