Narendra Modi cracks whip on import of non-essential items: will his protectionism work?

Narendra Modi has asked the commerce ministry to cut down on the imports of inessential commodities, multiple media reports suggested on Tuesday. A commerce ministry told a daily that it had identified nine commodities which included edible oil, pulses, fresh fruits, cashew, sugar, alcoholic beverages, processed and packaged items, cocoa products and sesame seeds among the inessential commodities. Edible oil comprised of 60% of imports in this basket.

Media reports suggested that the Prime Minister's Office (PMO) had asked to evolve a system of “periodic import appraisal” by  which imports of different goods can be evaluated on a periodic basis and steps can be taken to control the imports of such goods. The cut in imports is in line with Narendra Modi's "Make in India" programme that he had unveiled at his Independence Day speech. 

The logic behind the curbing of the import duty is not difficult to see. The first reason is to further control the current account deficit (CAD) in India. CAD in India has come down to 1.7% of GDP in the first quarter of 2014-15 as opposed to 4.8% a year ago. But if you compare the number to the 0.2% of GDP in the fourth quarter of 2013-14, it is still quite high.

One of the major reasons for the drop in CAD that has been possible over the past one year is because of a whopping 57.2% drop in gold imports, but non- gold imports have gone up. The curbing of the gold imports has also been possible due to the rise in the gold import duty, and the government has made it clear that it will be in no hurry to reduce the gold import. It is clear that the government is now taking the non gold imports seriously as well.

Though economic theory does not directly and causally relate fiscal deficit and current account deficit, specific research papers have shown that in the long run, the two are correlated positively. So the effort to bring down CAD could have positive effects on the fiscal deficit numbers as well.

Among the nine products, in several cases, the government has been working to bring down imports anyway. However, this must be easier said than done. Let us look at two products in the list: sugar and edible oil, both of which see high imports, but for different reasons.

Edible oil production in India has largely been stagnant for the past few years. As population, demography and lifestyle changes occur, the demand for edible oil has been rising steadily. Among this palm oil (used mainly to manufacture soap) and soyabean oil lead the pack. Now it is difficult to reduce the import of palm oil and all domestic soap manufacturers use it as a primary raw material. India meets half of its vegetable oil requirements through import. While the oil producers are asking for raising the import duty of edible oil for the protection of domestic producers. 

The government has said that it is not looking at raising import duty in oil for the sake of protectionism. But the rising import has made brought the oil producers under pressure due to low pricing abilities. The government here is not required to raise duties to protect farmers. Rather they must invest heavily in agriculture to make the sector more price competitive and increase the production capacity of the country.

On the other hand, India is a surplus producer of sugar and ranks just second to Brazil when it comes to the production of sugar. Reuters had reported last week, India is likely to produce 25-25.5 million tonnes in 2014-15 year compared with local demand of about 23 million tonnes, according to a statement by the Indian Sugar Mills Association. The government in this sector clearly follows a protectionist policy as it raised the import duty to 40% in August. It is estimated that sugar mills owe almost Rs 5,000 crore to farmers, and with prices falling, they were not being able to pay the farmers. India cannot export sugar much due to low global prices, while without the duty in place, it is difficult to stop imports.

Curbing non-gold imports for all commodities is not an easy policy to adopt, and each commodity must be taken in a case-to-case basis. The policies for all imported goods cannot be similar, and in that aspect, the decision to frame policy papers to lay out specific roadmap is essential.

The policy of protectionism offered to farmers and the industrialists is not new to India, as it has been practised in varying degrees since independence. That Narendra Modi will not blatantly follow free trade policies was clear in a bold decision to not sign the WTO deal which could compromise with India's food procurement and distribution policy. It also falls in line with the RSS notion of "Swadeshi" which wants to enable domestic manufacturing to strengthen itself, something that has clearly not happened in it. However, this needs to be backed by adequate public investment in agriculture to reduce the dependence just on rainfall. The cost of production of goods where India is a major producer has also to be aligned with the global costs to avoid heavy and unnecessary imports.

Without the right investments, the protectionist policies will fall flat.