The Prime Minister has called for import substitution. He wants that we should ourselves make the goods that we are importing at present. Kudos to the PM for raising this issue. Actually, the first steps in this direction were taken by the government a few months ago. The government had made known its intention to make a National Procurement Policy. Preference would then be given to domestic suppliers in purchases made by the government. Let us assume the government needed to buy file covers for keeping the records.
Foreign suppliers were willing to provide these at, say, Rs 8 per a piece while domestic suppliers wanted Rs 10 per piece. The government proposed that it would buy the expensive covers from domestic suppliers so that production took place, jobs were created and taxes were paid in the country in the manufacture of the file covers.
The government would certainly lose money in the purchase since it would be buying expensive domestic file covers while cheaper foreign file covers were available. However, the country would gain from the generation of jobs and from the ‘multiplier’ effect of domestic purchases. Purchase of file covers from a foreign supplier would lead to increased production, technological innovation and entrepreneurship in the foreign country.
These multiplier benefits would accrue in India if the government purchased the file covers from domestic suppliers. However, that proposed National Procurement Policy would only be applicable for goods purchased by the government. Foreign goods coming into our markets will remain unaffected by that policy.
The Prime Minister has taken this correct approach forward in suggesting that we should substitute imported goods with domestic production. In doing so he has expanded the scope of the procurement policy. The principle of promoting domestic production espoused by the Prime Minister would be applicable to all foreign trade, not only to government purchases.
The situation of government purchases and market supply is different in the rules of the World Trade Organisation (WTO). We are required to maintain low rates of import duties for market supplies. Foreign countries can impose punitive import taxes on our exports if we exceed these levels. These low levels of import duties enable foreign suppliers to sell cheap in our market and, in the process, often kill domestic industries as is happening in the imports of Chinese goods.
The negative impact of WTO-mandated low import duties can be counteracted by our government. Let us say the Indian government imposes higher rates of import duty on imported goods. The sale price of imported file covers in the Indian market increases from Rs 8 to, say, Rs 11 per piece. In this case all consumers in the market will find it cheaper to buy domestic file covers that are available at Rs 10 apiece. Jobs will be created and taxes will paid in the country in the manufacture of these file covers.
The consumer will be forced to pay Rs 11 for a file cover that could be available for Rs 10 from imports. However, people of the country will gain from the generation of jobs and from the multiplier effect of domestic purchases. Present rules of the WTO, however, do not allow the imposition of such import taxes. But there is no bar to providing preference to domestic manufacturers in government purchases.
Thus, the Government of India has rightly decided to provide special preference to domestic suppliers. But we cannot impose higher import duties on file covers for sale in the market. The statement of the Prime Minister in favour of import substitution seeks to break this barrier. However, the giving preference to domestic production in the market entails renegotiating the WTO Treaty.
Therefore, we have to assess whether the benefits from giving preference to domestic production are more than the benefits from remaining in the WTO. If benefits from the giving preference to domestic production are more then we should impose higher import duties on imported goods, give preference to domestic producers and, if necessary, withdraw from WTO. Here lies he challenge before the Prime Minister.
The four pillars of WTO are trade in goods, patents protection, trade in services and investments. At present agreement has been made only in respect of the first two pillars namely trade in goods and patents protection. Developed countries are trying hard to have investments included in the WTO while developing countries are seeking easier access to the services markets. But these are in the future.
For the present the writ of the WTO is restricted to trade in goods and to protection of patent rights. The ground reality, as it has unfolded in the last 20 years since the signing of the WTO Treaty is that India stands to lose both from free trade in goods as seen in the import of Chinese goods; and also from patents protection since the patents are mostly held by multinational corporations based in the developed countries.
The present hue and country against Chinese goods is an indicator of the loss to us from the WTO-mandated free trade in goods. We earn much less from export of goods than we pay for the import of goods. Thus, our trade balance is adverse. Therefore, we will gain more from withdrawing from free trade in goods and exiting from the WTO. We earn from export of services such as software, call centers, medical transcription, tourism, etc.; and we receive large amount of remittances from Indians working abroad such as in West Asia.
The export of services and the migration of labour are both outside the purview of the WTO. Therefore, we have less to lose from taking a hard stance in the WTO. Let us say we withdraw from the WTO. Our exports of goods will be subjected to higher import tariffs in foreign countries while goods imported from foreign countries will be subjected to higher import duties in India. We will incur small losses from higher import duties imposed on our exports by the foreign countries because we export in less quantities.
We will gain more from the higher import duties imposed by us on imports from foreign countries because we are importing in more quantities. Therefore, I do not see a loss to us from exiting from the WTO. Prime Minister Modi should be congratulated for pushing the correct policy of import substitution that had been wrongly abandoned by Manmohan Singh. He must immediately commission a credible study of gains and losses from the WTO. We must come out of the WTO and protect the jobs our people. Author was formerly Professor of Economics at IIM Bengaluru