Protectionism doesn’t protect you

The Anonymous Alien

The argument for invoking protectionist measures such as high duties on imported cars and technologies and blocking or hindering competition in domestic retail from companies like Walmart goes something like this: India is a developing country, and its home-grown companies need time to mature, adapt and prepare for competition from companies in more developed countries.

There are three huge problems with this argument. First, when you level 110 per cent duties on say, a Toyota, to protect, say, a Tata, you are in effect protecting one company and its tens of thousands of employees at the expense of hundreds of millions of Indian consumers. In short, consumers pay more — a lot more — for a Toyota so Tata and its employees don’t have to battle apples to apples with Toyota. That strikes me as unfair to millions of Indian consumers.

Second, protectionist measures help fuel inflation. Why? Because when you raise prices of imports through duties, you are increasing the average price consumers pay for goods and encourage domestic companies to raise prices since they can do so while still undercutting imports. What, in turn, does inflation do? It eats at savings, distorts consumer buying habits and erodes confidence in the economy at large, which hurts economic growth. This too strikes me as unfair to millions of Indian consumers.

But the third and biggest problem with these measures — even if you like them — is that they are unsustainable. At some point in the not-too-distant future and as India’s economy becomes one of the largest in the world, other countries simply aren’t going to put up with this. They are going to demand that India open its doors to foreign competition, and, if India refuses, the consequences could be dire. One can imagine retaliatory measures by foreign countries including high duties on exported Indian goods and — watch out for this one — measures to stop Indian BPOs in their tracks.

The effect of all this on the Indian economy could be draconian. Exports — still small but growing — could drop off a cliff. And the million or so Indians employed by BPOs could find themselves jobless.

What’s the solution? How do you protect the Indian auto industry from global behemoths like Toyota, Ford and VW when, frankly, most people would agree that Indian cars today just don’t measure up? And how do you save the tens of thousands of small retailers in India who are unlikely to be able to compete with the likes of Walmart?

You can’t save them all, but you can give them a fighting chance. And here’s how: Start phasing out these duties, slowly and, most importantly, systematically and predictably over time, so that in, say, ten years, they are on-par with international import duties. Do this, and you accomplish several important things.

First, you stop in its tracks inevitable calls from other countries to raise duties against India exports. If these other countries see India is on the path to global trading equality, they’ll most likely give India 5 or 10 years to get there.

Second, it gives India’s industries the time and impetus to adapt. If, say, Mahindra knows that their one competitive advantage against imports — price — will be gone in ten years, they then have adequate time and motivation to start building cars that compete in quality, performance and price apples to apples with global players.

Third, inflation will slowly fall (relative to not reducing import duties) because the price of imported goods will fall. This builds consumer confidence and helps to spur economic growth — important in an economy that is seeing slowing growth and high inflation.

Finally, and most importantly, the threat of foreign companies competing in India on an even playing field with domestic companies will force these domestic companies to start behaving, well, better. Imagine a generous “no questions asked” return policy — available almost universally in the West — available to you in India at your local retailer. (Right now, whenever I buy something in India, I do it in fear that the product will break the next day or not fit and leave me with virtually no return options). Imagine domestic cars offering repair records rivalling say, a Honda’s. Imagine, overall, an economy that is more customer-service driven, in every way.Now that strikes me as very fair to the Indian consumer.

A foreigner’s observations on living, working, surviving and thriving in India.

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Category: Opinion