Early on in its tenure, the Modi Government through its actions, and non-actions, served notice that the prime minister is not a liberaliser. He does not believe in further opening up of the economy to foreign and domestic businesses. Nor does he believe in disinvestment of loss-making public sector undertakings. Nor, for that matter, would he offer special incentives to attract foreign investment. Modi is content to carry on as before, without being overly keen to pick up the thread of the economic reforms and liberalisation from where the Vajpayee Government had left it in 2004. In other words, Modi is not really business-friendly. In some ways, he is a statist.
Both in his politics and in the economic sphere, his inclination is to impose controls. In one word, he is a protectionist. Last week, continuing the tightening of imports, particularly in response to the depreciating rupee and slow foreign investments, the government imposed further tariffs on 19 ‘non-essential’ items. Among the items are air conditioners, refrigerators, footwear, etc. It is another matter that people who buy these luxury items are unlikely to feel the pinch of higher tariffs. But a five per cent increase on the aviation turbine fuel seems especially cruel given that the aviation sector is already going through a lean period. The aggregate value of these imports in the last financial year was Rs 86,000 crores, a figure unlikely to make an impact on the overall current account deficit which, at the end of the current financial year, might be closer to three per cent. The items slapped fresh tariffs last week barely constitute three per cent of the total merchandise imports. The higher tariffs are unlikely to boost the Make In India programme either.
Truly, the only thing that higher customs barriers are likely to achieve is to give the policy- makers a false sense of satisfaction that something is being done to stop the slide in the value of the currency and to check the rising current account deficit whereas actually both these objectives are hard to achieve by such short-sighted measures. Protectionist tariff hikes have not stopped the depreciation of the rupee which has lost over 13 per cent value against the dollar so far this year. Earlier in the year, import duty on 40 items was raised. In December, electronics goods, including televisions, mobile phones, etc were slapped higher import tariffs. In fact, a depreciating rupee itself ought to have helped boost exports to some extent but this does not seem to have happened. It is because the main reasons for the fall in the value of the currency are external while the causes for the sluggish exports are essentially domestic.
Without addressing the structural problems in the economy, it is unlikely we will see a major boost in exports. Even countries like Vietnam, Thailand, Bangladesh export far more ready-made garments than us. This is due to stifling labour laws and a woeful lack of efficient infrastructure. Inspector raj in the small and medium industries is worse than even in the large scale sectors. Aside from the socialist era laws, stifling trade unionism, restrictions on contractual employment, etc, act as a drag on the expansion of the garment exports sector. Additionally, the small and medium–level exporters have been set back by the lack of dispatch in the refund of GST. Despite public announcements, exporters have been hit by the blockage of their funds. Another area where there is urgent need of reform for containing costly imports is the coal sector. Despite sitting on record reserves of the black gold, India remains a huge importer of coal due to its failure to invest in the sector. Modernisation of old mines and opening of new ones has been put on the back burner, especially after the coal scam. Of course, despite the huge success in expanding the solar energy generation, India is unable to reduce the import bill for oil. This is one factor which has a huge effect on CAD, especially when the global crude prices are on an upward trajectory. Tinkering with the import tariffs, therefore, is not going to alter the overall picture. Policy-makers should stop deluding themselves with old and failed recipes for controlling the current account deficit.
