What is protectionism
Protectionism is an economic policy aimed at shielding domestic industries and workers from foreign competition.
This is achieved through various measures that essentially restrict imports and promote domestic production.
Key points about protectionism:
Tariffs: Taxes imposed on imported goods, making them more expensive and less competitive with domestic products.
Import quotas: Limits on the quantity of specific goods that can be imported.
Subsidies: Financial assistance provided to domestic industries to make them more competitive.
Government regulations: Creating technical or safety standards that favor domestic products over foreign ones.
Protect domestic jobs: By making foreign goods more expensive, protectionism aims to encourage consumers to buy domestic products, supporting domestic businesses and their workforce.
Grow domestic industries: Protection can give infant industries time to develop and mature without facing fierce competition from established foreign players.
National security: Protecting strategic industries like steel or healthcare can be seen as essential for national security, even if it comes at the cost of economic efficiency.
Need for evidence based policy analysis and transparency in promoting domestic industry
India’s toy industry is minuscule.
Between 2014-15 and 2022-23, toy exports increased by 239% and imports declined by 52%, turning India into a net exporter, as reported in a recent official press release.
An unpublished case study by the Indian Institute of Management Lucknow (IIM-L), sponsored by the Department for Promotion of Industry and Internal Trade (DPIIT), reportedly credits the
export success to various promotional efforts under the aegis of ‘Make in India’, initiated since October 2014.
We examine the official statistics to analyse the possible reasons for the reported success, as the case study is unavailable in the public domain.
The trade balance was negative ₹1,500 crore in 2014-15, which turned positive from 2020-21 after a gap of 23 years.
The turnaround in the labour-intensive industry, at a time when such industries are not doing too well, is indeed credible.
In principle, there could be two reasons, the first being protectionism.
A rise in import duties could reduce the demand for toys.
The imposition of non-tariff barriers can shrink supply, raise prices and thus reduce demand.
Alternatively, investment upswing could expand capacity and augment labour productivity to boost competitiveness and exports.
In February 2020, customs duty on toys (HS code 9503) was tripled from 20% to 60%.
Since January 2021, non-tariff barriers (NBTs), namely, quality control order (QCO), and mandatory sample testing of each import consignment were imposed, restricting imports.
Protectionism for a limited period — as per the infant industry argument — may enable the domestic industry to make adequate investments, allow for “learning by doing” and enhance productivity to compete globally.
Such protectionism needs to be complemented with investment policies, and provision of localised, industry/cluster-specific public infrastructure to stimulate a virtuous circle of expanding domestic capabilities to face international competition.
In the absence of these pre-conditions, there is a real apprehension of the demand for protectionism getting entrenched in the industry, culminating in what Anne Krueger famously contended: “rent-seeking”.
India has enough experience with such policy failures.
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