n Parliament last week, Prime Minister Modi lashed out at the Nehru-Gandhi family for impoverishing and fragmenting India through terrible policies. He sneered at the “old India” of the Congress party and promised a “New India”.
True, Congress is guilty of many sins that have deservedly diminished its stature. Shashi Tharoor pointed out that 19 of Modi’s 23 “new policies” were in fact old Congress policies with new names. Nothing wrong with that. It’s sensible to pick up and upgrade the best ideas of your opponents.
The problem arises when you start picking up their worst, failed policies. Jawaharlal Nehru merits credit for creating a secular democracy while other post-colonial regimes quickly became dictatorships. But his socialist, inward-looking economic policies, aimed at creating jobs and making India a manufacturing power, ended in the “Hindu rate of growth” of just 3.5%, half as fast as Asian neighbours following outwardlooking policies. In 30 years after Independence, the number of poor Indians almost doubled, a devastating failure of “old India.”
Modi should slam the Congress for those lost decades. But why is he reverting to Nehruvian protectionism? He has failed to create his promised 100 million jobs in manufacturing. Will protectionism do so now, having failed in Nehru’s time?
The rot started in December, when import duties were raised to 20% on electronic items ranging from mobile phones and TVs to digital cameras and microwave ovens. Soon after, Modi went to Davos and castigated US president Trump for protectionism. So, optimists dismissed the December tariff hikes as an aberration.
But then came the Budget, which increased duties on 40 more items, explicitly for “protection”. These had no logical pattern. Duties were raised on candles, kites, sunglasses, cigarette lighters, toiletries, toys, watches, footwear and furniture. Auto parts, tyres, edible oils, and processed foods got higher tariffs. The highest hike was to the level of 50% for fruit and vegetable juices.
Some businessmen have long demanded higher tariffs. They say they don’t seek Nehru’s “old protectionism,” aiming for self-sufficiency. They say they want to copy China’s policy of first building up an industry behind tariff walls, attaining huge scale economies, and then swamping the world with cheap exports. They say this “new protectionism” is outward looking and succeeded in China and other Asian tigers.
This theory has many flaws. The truly protectionist era in China was under Mao and failed for three decades. Then Deng Xiaoping gradually opened the economy, dropping tariff and non-tariff barriers. To get into the WTO, China had to further liberalise imports in the 2000s. This yielded record growth.
Certainly, China had restrictions on foreign investors and obliged them to transfer technology, which China absorbed and improved on. But India too restricted foreign investment and demanded transfer of technology in its socialist era and got nowhere.
China’s main advantages are good educational and health standards, high female participation in the workforce, excellent infrastructure and some autocratic measures (like land acquisition with little or no compensation) that India cannot and should not copy. Once, China kept its exchange rate artificially low, but no more. Most important, the Chinese Communist Party closely monitors the performance of its provincial and district chiefs, who are promoted based on good performance, inducing sustained development. India lacks these characteristics, even though it has other advantages.
The main point is that China’s success was grounded not in protectionism but economic liberalisation, including falling import tariffs. It created scale economies and competitive exports by keeping costs down. India, by contrast, has artificially raised land prices through land acquisition laws; has high interest rates because of historically accumulated fiscal deficits; has labour laws that artificially inflate the cost of formal labour; has high electricity rates for industry to subsidise farmers, and high railway freight rates to subdsidise passengers. Getting rid of these distortions will do far more for Indian business and exports than raising tariffs.
Few will believe the business claim that initial protection will help India reap scale economies, slash costs and become a world-class exporter. Even before the recent hikes, India’s tariff rates were 10-15%, among the highest in Asia. Will raising the rate to 20% really make India a world-class producer and exporter of candles, clocks, furniture and toiletries? India is already a big exporter of auto ancillaries, so why raise tariffs there? Fruit juice is not an infant industry, but Modi has levied a 50% import tariff on it as a panic reaction to farm distress. This is not how China became a champion. Nor will it make India a champion.