Budget 2022: Dismantle protectionism and crony capitalism for growth

The Prime Minister declared January 16 as ‘Start-up Day’ to emphasise the significance of start-ups in the economy. Technological advancement and innovations have indeed opened up new frontiers of economic growth and brought new set of players into the market to expand the economic pie. Last year alone saw 42 unicorns (worth over $1 billion) emerge in India. A study finds that 90 of 1,078 founders across 500 US unicorns during 1997-2019 were born in India – topping the list of such immigrant founders.

These are heartening developments that prove Indian talent can innovate and compete with the best in the world, given a fair chance. India saw a boom in IT sector in the past three decades with the rise of global players like Infosys, TCS and Wipro, providing employment and revenue, thereby significantly contributing to growth in the post-liberalised economic paradigm.

But such miracles can’t happen if open market competition is stifled and the level-playing field is distorted in favour of a select few at the cost of the rest. Two such areas that stand out and need to be addressed: protectionism and cronyism.

The budget presents the right opportunity.

Dump protectionism forthwith

The Prime Minister’s welcoming approach to start-ups goes against the protectionism policy the government has been following by erecting trade barriers – hike in import tariff and abstaining from the free-trade agreement among Asia-Pacific nations, Regional Comprehensive Economic Partnership (RCEP) in 2019. There is not only very sound economic logic to promote free trade for high efficiency in production of goods and services and growth, India’s own past experience showed that it benefitted from a robust growth in exports after trade was liberalised in 1991.

Additionally, India had also witnessed the downside of protectionism that accompanied the infamous licence-permit-raj in 1960s and 1970s. While domestic industries flourished, Indians were saddled with inferior goods and services of high cost, exports were low (as not competitive globally) and growth rate remained below 4% – derisively described as “Hindu rate’ of growth in literature.

That is why when the AatmaNirbhar Bharat Abhiyan of 2020 sought to protect domestic industries from competition in the name of promoting self-reliance, even the government’s staunchest supporter, former NITI Aayog vice-chairman Arvind Panagariya, baulked and advised against it. Arvind Subramanian, who was chief economic advisor to the finance ministry during 2014-18, wrote a paper ‘India’s Inward (Re)Turn: Is it Warranted? Will it Work?’ in October 2020, with fellow economist Shoumitro Chatterjee of the Pennsylvania State University, to warn against the move.

Their paper provided evidence and economic logic to argue that import substitution had failed India earlier and would so again because, among other things, India’s domestic market was not big enough to provide the growth impetus that global market can. They were the first ones to reveal that India had already reversed the trade liberalisation policy in 2014 by erecting import barriers. They wrote: “Since 2014, there have been about 3,200 tariff increases at the HS-6 digit level (on most-favored-nation imports), a strikingly large increase. As a result, the average tariff has increased from 13% to nearly 18%. The largest increases occurred in 2018 when there were nearly 2,500 tariff increases amounting to nearly 4 percentage points. We estimate that the tariff increases affected import categories that amount to about $300 billion or about 70% of total imports.”

The 2021 budget further added to the list by hiking import tariff on a wide range of manufacturing products – electronic and mobile phone parts, iron and steel, chemicals, auto parts, solar panels, textiles etc.

The impact of such a policy is quite visible, particularly after the 2018’s upward revisions. Growth in imports tumbled to -0.8% in FY20 and -13.6% in FY21, from the robust growth in the previous three fiscals. Not just that, growth in exports also fell, to -3.3% in FY20 and -4.7% in FY21 (also from robust growth in the previous three fiscals).

Why did exports fall?

It is because exports are linked to imports, which economists call “import intensity” or import components of exported goods. In the post-liberalised era, import of raw materials and intermediary goods increased and contributed significantly to growth of exports. A study by the Institute for Studies in Industrial Development (ISID) found import intensity had risen from 10.5% in 1993-94 to 32.5% in FY14 for the whole economy and from 12.9% to 51% for the manufacturing sector (in the case of petroleum products the jump was from 5.8% to 91.4%). So, if imports fall, exports fall too and the prospect of an export-led growth takes a big hit.

Given that the pandemic has caused massive loss of income (job and business losses) whatever little support the domestic market could provide to boost growth in a protectionist regime, stands diminished too. In any case, India’s middle class (the main consumer class) was too small at about 1-2% of the population in the pre-pandemic period, Subramanian and Chatterjee had estimated in their paper, unlike China’s 25%. Thus, while domestic market may play a big role in China’s growth that is not the case with India.

In another questionable move, India walked out of the new free-trade group RECP in 2019, after years of negotiations to provide protection to domestic producers. The RECP constitutes countries which contribute 30% to the global GDP. Protectionism may be good politics. It is rank bad economics.

Say no to cronyism

The other big contra-intuitive move is the promotion of crony capitalism. This is bad because it damages the level-playing field, distorting the field to suit a select few at the cost of all other players in the market. It also creates financially and politically powerful corporate entities beholden to a particular party and its government for such favours, thereby posing a threat to the democratic polity and good governance.

By now the spectacular growth of two particular industrial houses has been highlighted by none other than former CEA Arvind Subramanian as the two ‘As’. Some may argue that both during the licence-permit raj and the subsequent liberalised era India witnessed cronyism too. While that is true, it must be kept in mind that cronyism began to recede in the liberalised era and there were less trade barriers, allowing new entities like Infosys, TCS and Wipro to become truly global players.

Arvind Subramanian’s 2 As—the Adani and Mukesh Ambani groups—are emerging as most dominant players in farm trade and green energy – causing anxiety in many quarters. Just one group, Adani has emerged as the largest airport operator in India by taking over all public airports privatised since 2014, in spite of having no prior experience or expertise in running airports and despite strong objections from the finance ministry and NITI Aayog over building a private monopoly.

Take the case of business empire of yoga guru Ramdev. Is it a coincidence that right after his foray into palm oil plantation in Assam, Tripura and other northeastern states (through the newly acquired Ruchi Soya) was announced, Centre came up with the ₹11,040 crore National Mission on Edible Oils-Oil Palm (NMEO-OP) in August 2021, despite the red flag from the Indian Council of Forestry Research & Education (ICFRE)? The pandemic also saw Ramdev’s untried and untested herbal ‘Coronil’ being promoted by central ministers on wrong claims that the WHO had approved it, which the latter denied.

What makes cronyism at the cost of public sector and other private entrepreneurs, along with protection from competition, even more dangerous is the opaque Electoral Bond which allows unanimous, unlimited and unscrutinised flow of unaccounted money from private entities in India and abroad to political parties. Such flow of private funds is bound to rig governments and public policies to serve private interests.