Be a neighbourhood guru, first!

When Trump called India a “tariff king”, he was not far wrong. The reality is that tariffs that were initially imposed as a temporary measure to protect infant industries, to allow them to grow, became a permanent feature of life in India. Governments also found it a convenient and easy way to raise funds. They turned out to be a monster that protected a few rich industrialists for a short while, but kept them from being competitive, and left industries stunted and forever infants. It was all part of the socialist dogma for almost 50 years after independence.

What successive governments chose to ignore was that tariffs were ultimately paid for by the hapless public. They created (particularly when combined with industrial licensing) mini monopolies, poor quality and together with high local taxes, too, needlessly high prices. In the West, the public were acutely conscious of tariffs raising prices, which politicians could ignore at their peril. But unfortunately, in India, the conventional wisdom didn’t link tariffs to high prices and poor quality in the minds of the voters. Few people linked the failure of our economy to the actions of the politicians. It is only in the last few years that a growing number of voters have begun to hold the governments, at the centre and in the states, responsible for high prices and economic failure. 

To the extent that tariffs come down, across the board, we will begin to see lower prices. We have seen that with VAT too, as with the recent rationalisation, prices in a wide range of goods have begun to fall. That VAT is still too high is a separate story for another day.

The WTO framework allowed developing countries to set higher tariffs. But with major economies ignoring WTO rules, the world over countries have begun to negotiate and implement bilateral free trade agreements (FTAs). Trump has certainly helped India in a way by forcing India to lower tariffs and to fast-track its FTAs.

Even before Trump, our governments had recognised the advantages of FTAs, and had signed an FTA with ASEAN several years ago – the first with any major economic bloc. But our FTA with the European Union has been dragging on desultorily for almost 20 years. We finally managed earlier this year to sign one with the UK, but it still hasn’t been ratified. We are told that the EU agreement is close, but will probably miss the end-of-year target. But to the credit of the present government, it is moving quickly. The India-UAE agreement got done very quickly, and hopefully, the US agreement will be concluded, at least in part, in months. A few days ago, Piyush Goyal, the minister in charge, announced that the government was simultaneously negotiating 50 agreements!

But sadly, India has made no progress with our immediate neighbours. We run huge surpluses with all of them, including Pakistan (before both governments blocked trade), and our economy is way ahead of all of them. Should we not afford them large one-way concessions as we expected from the West? In fact, our government can and should offer unilateral abolition of all duties on imports from our neighbours. 

This will establish us, forget Vishwaguru, at least as the neighbourhood guru!