Protection sits ill with globalisation

Protection sits ill with globalisation

High tariffs will weaken productivity, currency

Stone walls do not a prison make, versified the poet, but the budgetary move to jack up protectionist tariff barriers for dozens of goods across entire industries, including newsprint, chemicals, automobiles and electronic goods, would surely push India into a hole of inefficiency devoid of global competitiveness. The government’s plan to borrow abroad fits into a strategy of efficient globalisation. But with productivity gains dragged down by protection from competition, the currency would weaken and the cost of servicing foreign loans, mount. External sovereign borrowings and raised duties on everything — from optical fibre to automotive engines — work at cross purposes.

At one remove from the supply and demand for foreign exchange that together set the value of the rupee, two factors work to weaken and strengthen the currency: the difference between domestic and external rates of inflation, and the difference between domestic and external rates of productivity gain. Protection retards productivity and competitiveness. That would weaken the currency and make servicing external debt onerous not just for the government, but also for industry. It would also make it difficult to achieve the $5 trillion goal. True, the finance minister has also lowered tariffs for certain items like camera modules of mobile phones and hot-rolled steel coils, in a bid to make in India. This strategy of raising duties on some goods and lowering them on others implies that the government knows better than the private sector what private enterprise is good at making. This is silly.

The sensible policy is to have a low, uniform rate of import duty. This would mean that every sector would enjoy the same, low rate of effective protection. Such a policy would not throttle new kinds of industry that enjoy zero protection coming up in India, nor penalise, say, steel utensil makers even as steel makers are cosseted. Low uniform tariffs help the small and medium sector with low input prices. Policy goals must be coherent, and raising tariff walls does not gel with seeking to globalise.