How protectionism has hurt industry

The ‘Make in India’ campaign seeks to make India a manufacturing hub for exports. The endeavour is central to creating mass employment opportunities, which in turn is pivotal to any effort to alleviate poverty. Some 1.25 crore jobs need to be created every year for those who will enter the job market; an additional 15-25 lakh jobs a year must be created for those who are underemployed in rural areas.

However, for the ‘Make in India’ dream to be realised, and ramped up to a scale where it can generate those jobs, manufacturers must have a stable and profitable market to sell their goods. Mere incentives for new investments will not create more jobs: they will only render old investments unviable.

As the GDP growth and the decline in poverty are at most times moving in opposite directions, and the fact that the domestic market sentiments are currently depressed while the GDP growth rate is moving up, clearly tells us that we cannot have a domestic market-led employment generation to happen even if our GDP growth remains healthy, It has to be driven by export markets.

Given India’s very low market share in exports, the country has a huge head room to increase exports of manufactured items should exports become competitive.

Our exports, however, are uncompetitive when all the costs are factored in, including the cost of raw materials and duties to which they are subjected.

For exports to be globally competitive, three conditions must be met: raw materials should be available at (or lower than) international prices; the cost of converting these materials into saleable products must be internationally competitive; and our exports must not be subjected to higher import tariffs in their respective markets than goods from other exporters enjoy.

Indian manufacturers are fairly competitive at converting materials into internationally competitive products, thanks to the low cost of our willing-to-be-trained labour.

This is despite the infrastructural limitations they face and the relatively higher transaction and logistics costs. But our export competitiveness is severely hampered by the other two factors — higher raw material costs and higher duties imposed by importers.

Why are raw material costs high? For one thing, the profit guarantee scheme for monopoly producers gives them undue pricing power. Indicatively, the price Indian consumers pay for metals, cement, caustic soda, viscose, polyester, plastics and tyres is much higher than in most parts of the world.

These industries are cocooned by anti-dumping duties and BIS certification requirements, which give enormous unmerited pricing power to monopoly domestic manufacturers and enable them to overcharge consumers and industry.

Overprotected, producers of raw materials have made unproductive investments, including acquisition of heavy loss-making overseas assets, and have become severely uncompetitive vis-à-vis their international peers.

Such profligacy has been subsidised by the government, and eventually by taxpayers. And our manufactures and exporters suffer as a consequence of such rent-seeking behaviour. Even companies with captive mines enjoying near-zero cost of ore, coal and limestone seek and get these protections; and they sell their output at prices higher than those that prevail internationally.

These protectionist urges run deep. At a time when well-run global companies with a large number of patents are struggling to survive, our ‘monopoly manufacturers’ are seeking ‘price protection’ as a matter of right and fattening themselves.

What makes our manufactured product exports costlier to users in the developed world, the very large consuming markets?

Out of fear of competition, companies well-entrenched in the domestic market are preventing free-trade agreements (FTAs) being signed with huge consumption markets, even with countries where wage costs in those countries are 10 to 20 times higher, like EU, Canada and Australia

If ‘Make in India’ is to become a reality, such rent-seeking ecosystems must be dismantled wholesale. This is the most important reform that will make Indian industry export-competitive.

The textile industry alone will be able to generate 25 to 30 lakh jobs a year should it have duty-free access to the European Union, Canada and Australia in the way our neighbouring countries and Vietnam do.

The leather industry and other labour-intensive industries will be able to register double-digit export growth. Likewise, engineering exports, castings, forgings, machined components and subassemblies will likely grow at a fast clip.

Once India emerges as a competitive manufacturing base, overseas and domestic investments will automatically flow — even without any incentives. That will give the government more fiscal elbow-room to focus on improving infrastructure.

In conclusion, the government should critically review the entire regime of anti-dumping duties taking into account the global commodity market situation. Instead of giving untrammelled pricing power to domestic raw material producers, it must factor in the free resources given to them and inhibit them from profiting unjustly at the expense of domestic consumers.

To prevent the BIS certification requirement from being misused as a protectionist measure, the government should open up inspection to private labs, which can give quality certification to imported cargo in double-quick time.

And most importantly, the government should sign FTAs with countries where high labour costs prevail, so that domestic manufacturers can source raw materials at internationally competitive costs and export to major destinations without suffering import duties and become export-competitive.

Both GDP growth and the rate of poverty removal will go up rapidly once we dismantle such rent-seeking ecosystems.

The writer is the chairman and managing director of Loyal Textile Mills