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Modi backtracks on free-trade vow with import curbs in India

Prime Minister Narendra Modi has championed free trade in global forums over the years, but his record back home appears to be one of rising protectionism.

By: Bloomberg | Updated: February 19, 2020 4:41:28 pm
Modi backtracks on free-trade vow with import curbs in India Prime Minister Narendra Modi in New Delhi on Friday, Feb. 14, 2020. (AP Photo: Manish Swarup)

Prime Minister Narendra Modi has championed free trade in global forums over the years, but his record back home appears to be one of rising protectionism.

The government has increased import tariffs over the last two years to curb cheap goods from abroad and support small and medium-sized local manufacturers. In November, Modi pulled India out of the world’s biggest regional trade deal. And earlier this month, Finance Minister Nirmala Sitharaman proposed in her budget to change rules that will allow the government to ban the import of any goods it deems harmful to domestic industries.

Sitharaman also raised import levies on medical equipment, footwear and furniture in the budget, and said the government will strengthen rules to allow for additional levies to be imposed when imports of some goods surge significantly.

“The trade measures announced in the budget are indeed somewhat worrying,” said Pravin Krishna, a professor of international economics and business at John Hopkins University in Washington. “They indicate a backslide of the liberalization process that began three decades back.”

Growth Goals

In January 2018, Modi used a keynote speech at the World Economic Forum in Davos to lament the rising trend of protectionism, calling on fellow leaders to embrace more open trade. He’s taken steps over the years to reduce barriers to foreign investment and make it easier to do business in the country, as part of his goal to double the size of the economy to $5 trillion.

However, with the economy’s sharp downturn since last year and domestic industries under pressure, Modi’s government is strengthening barriers again. Unemployment is at a 45-year high and growth is set for its weakest performance in more than a decade in the current fiscal year.

Arvind Panagariya, a Columbia University professor and a former adviser to Modi, said the budget proposals show “a disturbing pattern” emerging in India’s trade policy. “We have chosen to punish our consumers to protect our inefficient small producers, which will never become globally competitive,” he wrote in the Economic Times newspaper.

US Tensions

Government officials deny that the nation is becoming more protectionist. “After the global financial crisis the trend toward globalization has actually sort of reversed across the world,” said Krishnamurthy Subramanian, the chief economic adviser in the Finance Ministry.

Modi first announced curbs on non-essential imports in 2018 to rein in the current account deficit and halt a rout in the rupee at a time when investors were dumping emerging-market assets.

That same year his government also announced tit-for-tat tariffs on some US goods after President Donald Trump slapped additional levies on steel and aluminum from India. Trade tensions between the two countries have been simmering for a while already, with Trump complaining about tariffs as high as 100% on Harley-Davidson Inc. motorcycles.

We're not treated very well by India, saving big trade deal with them for later: Donald Trump Prime Minister Narendra Modi with US President Donald Trump at a ‘Howdy Modi’ rally in Houston last year. (File Photo)

Trump is due to visit New Delhi later this month, by when India hopes to have a trade pact with the US and sweetened its offer for market access to American products. But any substantive agreement looks unlikely, with Trump Tuesday saying he’s “saving the big deal for later on.”

India is keen to clinch a trade deal with the US, its second largest trading partner, after walking out of the China-backed Regional Comprehensive Economic Partnership, or RCEP.

While some nations in the RCEP grouping are keen for India to join the treaty, Malaysia’s Deputy Trade and Industry Minister Ong Kian Ming said Monday that some of New Delhi’s demands, particularly with regard to access for its services professionals, may not be so easily accepted.

Amitendu Palit, a senior research fellow at the National University of Singapore, said India is raising trade barriers while at the same time trying to boost foreign investment, leaving the world “very confused.”

“It’s kind of selective globalization,” he said. “Unfortunately, the two don’t work in exclusion.”

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