India’s protectionist trade policy: Licence Raj or strategy for a new world order?

Over the last year or so, India has banned exports of certain commodities including wheat and non-basmati rice recently. In the latest move, the country has imposed restrictions on imports of laptops and PCs, which was termed regressive by many experts.

Moneycontrol caught up with trade experts Professor NR Bhanumurthy, Vice Chancellor, Dr BR Ambedkar School of Economics University and Somnath Mukherjee, CIO & Senior Managing Partner at ASK Private Wealth, to decode what does this mean for India?

The government on August 3 announced restrictions on the import of laptops, tablets, personal computers, ultra-small form factor computers and servers, though it has deferred the move till October 31.

The benefits of protectionism

Mukherjee defended the move stating that smart protectionism of India’s trade will lead to its growth.

“We need to make a difference between liberalisation of free markets and liberalisation of imports. Imports are coming under increased scrutiny across the world, barring a few notable exceptions,” Mukherjee said.

Free-market liberalisation is the removal or reduction of restrictions or barriers on the free exchange of goods between nations.

“We are globally seeing countries making a very sharp move away from theoretical cannons of free-trade practices. The US has taken several measures, such as the CHIPS Act, which has given out significant subsidies. Even champions of free trade are now pivoting,” Mukherjee said.

The CHIPS and Science Act is a US federal statute that was signed into law on August 9, 2022. The act provides roughly $280 billion in new funding to boost domestic research and manufacturing of semiconductors in the United States.

“India's signature success story – auto sector – followed the same template where auto imports were put behind extremely high tariff walls and domestic production was promoted with significant schemes,” he said, adding that this is India’s attempt in the same direction.

“This move will boost India’s domestic manufacturing capabilities and address import imbalances with China,” as per Mukherjee.

China remains India's top import source nation for electronic components, accounting for a 32.13 percent share, according to the June monthly bulletin on foreign trade. During the April-June quarter this year, imports of electronic goods increased to $6.96 billion from $4.73 billion a year ago.

Long-term trade in peril?

However, Bhanumurthy disagreed and said this policy decision will be a drag on India’s long-term trade. “This is not a strategy that India should adopt if it wants to take on a country like China,” he said.

“Cooperating with other countries while being part of global value chains will help bring down the cost of production, which is the only way to compete with the outside world,” the economist said.

As per him, India should have benefitted better had it looked at policy measures in terms of levying higher import tariffs than enforcing licences.

“We need different policies on services and manufacturing. While we are competitive in services and can afford stringent policy measures, our manufacturing exports depend on imports. We need more flexible policies there,” he said.

Watch the whole discussion here