Budget smacks of a return to protectionism

Narendar Pani | Updated on July 05, 2019

Under cover But for how long?

Custom duty hikes justified to make ‘Make in India’ a success. Infra push could put pressure on finances

A disquieting feature of Finance Minister Nirmala Sitharaman’s maiden Budget is its indications of a return to the pre-liberalisation era. It is not just that the customs duties have been raised on 37 items, with the increase in the duty going up to 25 percentage points on one item. The increase has been justified as a necessity for the ‘Make in India’ programme to succeed. This case for protectionism is a refrain from the years before liberalisation and carries all the risks that led up to the crisis of 1991.

Higher customs duties will raise the prices of these products for their users. As some of these products are inputs into other manufactured goods, the increase in costs is very likely to be passed on to the final products. Since the Finance Minister has made it clear that she believes ‘Make in India’ hinges on protectionism, it will be a surprise if other industries do not queue up for similar protection next year. If that happens, the lack of competitiveness that drove India to the crisis of 1991 could well return to haunt the economy.

The Finance Minister evidently believes that the decline in competitiveness would be temporary. She expects a substantial improvement in infrastructure to improve the efficiency of Indian business. The Budget thus has some rather grand plans for improvements in infrastructure. She spoke of spending ₹50-lakh crore on railway infrastructure between 2018 and 2030.

If infrastructure spending on such a scale is carried out efficiently it may even lead to a reduction in the costs of manufacturing. But in the absence of competition, the manufacturers will have little reason to pass on the benefit to consumers. We could then be left with huge infrastructure without an impact on the overall competitiveness of the Indian economy.

Infra financing

The pressures on competitiveness will be further increased if the process of financing the infrastructure turns out to be inflationary. The Finance Minister no doubt hopes that a large part of the funds for infrastructure will come from foreign capital. And it well might. But the Budget is also alive to the possibility that the funding of large infrastructure would involve greater borrowing.

The Finance Minister called for deepening of the market for long-term bonds. And it is quite conceivable that instruments would be developed to keep this borrowing out of the Budget. In which case, the fiscal deficit will continue to look good even as borrowings increase, with resultant pressure on inflation.

The pressure on finances could also lead the government to look at unusual sources of generating resources. And the picture that emerges, when this need for resources is placed in the context of the Economic Survey’s position on data, is not a very pretty one.

Access to database

The Survey spoke of the private sector gaining access to databases for commercial use. The Finance Minister has also made it easier to centralise data sources by making PAN and Aadhaar interchangeable and possibly even providing primacy to Aadhaar. Since Aadhaar is already linked to bank accounts and mobile phones the data could help track the movements of a large number of Indians. This database would certainly be commercially viable and hence saleable.

The utility of such a database could extend beyond the commercial world as well. The Economic Survey speaks of using nudge economics to push behaviour in certain directions. The examples the Survey provides are of directions that few can challenge. But the nudges could also be in directions that are not necessarily ideal, especially if the data on the behaviour of virtually every Indian enters the political domain.

The writer is a professor at the School of Social Science, National Institute of Advanced Studies, Bengaluru

Published on July 05, 2019

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