India’s Evolving Trade Policy: Protectionism or Pragmatism?
Introduction
India’s trade policy has transformed significantly in the last five years, posing a key question: Is the current tariff regime influenced by protectionist instincts, or is it a reflection of a pragmatic economic strategy? With over three decades of experience in industry and strategic decision-making for a $15 billion manufacturing company, I’ve witnessed firsthand how tariff policies affect competitive landscapes.
Policymakers are navigating a complex landscape where they aim to protect domestic industries while also reaping the benefits of trade liberalization. On one hand, increased import duties and trade defense measures, such as anti-dumping investigations, aim to shield local producers. On the other hand, the government pursues aggressive export targets, forges new trade agreements, and introduces production incentives to facilitate better integration into global markets. This analysis delves into India’s tariff strategy, assessing whether recent policies signify protectionism or a pragmatic recalibration based on various economic indicators.
India’s Comparative Advantage and Trade Specialization
India displays notable comparative advantages in specific sectors, showcasing both strong performance and potential for growth. Indicators suggest India excels in skilled industries and services, particularly in IT and business process services, where it captures a significant share of global exports. The manufacturing sector fares well in pharmaceuticals and transport vehicles, leveraging skilled labor and large-scale production capabilities.
Despite these strengths, the country struggles to capitalize fully on its potential in labor-intensive sectors like textiles and apparel. Although India possesses advantages such as low-cost labor and rich traditional know-how, its share of global apparel exports has stagnated. This reveals a troubling divergence: while India shines in certain medium- and high-tech goods, it inadequately exploits its potential across all sectors.
India’s trade profile presents mixed results. While the country improved its global merchandise export share slightly—from 1.7% in 2014 to around 1.8% by 2023—this remains modest compared to competitors like China, which dominates with over 14%. The nation’s ranking among merchandise exporters has ascended from the 19th to the 17th position globally during this period.
India’s export composition reflects diversification but still lacks scale; merchandise exports constitute only about 13% of GDP, down from around 17% a decade ago. This limited trade specialization indicates the economy is less driven by exports compared to its East Asian counterparts. Addressing internal challenges such as infrastructure gaps and technology adoption could boost India’s trade specialization in both traditional and emerging sectors.
India’s Tariff Strategy: Protectionist or Pragmatic?
The evolution of India’s tariff policies has ignited debates over their nature—are they reflective of protectionism or a pragmatic response to economic challenges? India’s recent history reveals a trend towards higher import tariffs, a notable contrast to the post-1991 era of liberalization. The simple average of tariffs increased by around 25% over the last decade, reaching an average of 11.1% in 2020-21, which many have described as a “creeping rise in protectionist tariffs.”
From 2018 onward, customs duties were raised on several categories, including electronics, textiles, and auto parts, aimed explicitly at promoting domestic manufacturing through initiatives like “Make in India” and Atmanirbhar Bharat. The government initiated a surge in anti-dumping investigations (233 from 2015 to 2019 alone), which further cemented the perception of a protectionist agenda. The World Bank’s 2024 report highlighted the detrimental effects of high import tariffs on essential inputs, raising costs and impeding integration into global value chains.
However, government officials argue that these tariff hikes are part of a strategic plan to nurture emerging industries and correct trade imbalances. While measures like raising duties on certain imports protect local industries, they also risk inciting retaliatory tariffs and increased costs. A nuanced view reveals that India’s trade policies blend protectionism and pragmatism. Tariffs on electronics and textiles bolster local production while concessions on raw materials for textiles and steel can enhance global competitiveness.
Composition of India’s Exports: Landscape of Manufactured Goods
In recent years, the composition of India’s exports has dramatically shifted, with manufactured goods now making up a substantial portion of the export basket. In fiscal year 2021-22, merchandise exports surged to a record high of $418 billion, with manufactured products leading the way alongside significant agricultural and mineral contributions.
Key export categories include engineering goods, petroleum products, gems and jewelry, chemicals, and pharmaceuticals. Engineering goods, a broad category encompassing industrial machinery, automobiles, and iron and steel, constitute the largest segment—a testament to India’s strength in heavy industries. Notably, in 2021-22, engineering exports crossed the $100 billion mark for the first time, making up roughly 25% of total merchandise exports.
Petroleum products follow closely; India, despite being a net importer of crude oil, transforms large volumes into refined fuels and petrochemicals, with exports reaching approximately $60 billion in 2021-22. The gems and jewelry sector taps into India’s skilled workforce, especially in diamond polishing, contributing around $40 billion annually.
Conversely, the textile and apparel sector has struggled, with exports estimated at over $30 billion, losing ground to competitors like Bangladesh and Vietnam. This landscape underscores a notable shift towards a manufacturing-led export profile, diverging from the outdated notion of India primarily as a primary goods exporter.
Challenges Encountered by Indian Industries Under Current Tariff Policies
The blend of tariff and trade policies poses formidable challenges for domestic industries, affecting their cost structures and global integration.
Higher Input Costs and Inverted Duty Structures
A common concern is the impact of high import duties on raw materials, which inflate input costs and hinder competitiveness. The phenomenon of inverted duty structures—where import taxes on inputs are higher than on finished goods—particularly hampers sectors like electronics, chemicals, and textiles. For instance, a textile firm might face a 10% duty on imported fabric while the finished garment draws a mere 5% duty. This anomaly not only erodes cost competitiveness but also discourages local value addition.
Export Competitiveness and Global Value Chains (GVCs)
The limited integration of Indian industries into global value chains challenges growth prospects. Elevated tariffs have the dual effect of inflating domestic production costs and potentially provoking retaliation abroad. Many multinationals view India primarily as a local market, hampered by a tariff and regulatory framework that complicates the seamless flow of materials and products.
Countries like Vietnam rank higher on preferred investment lists due to their more open trade regimes, highlighting a competitive disadvantage for Indian industries. If tariffs remain relatively high and cumbersome, opportunities for foreign investment and GVC participation may dwindle.
Policy Uncertainty and Frequent Changes
Rapid changes in trade policy have introduced an element of unpredictability for businesses. Sudden tariff hikes, import bans, and shifts in export incentive schemes create regulatory uncertainty. The government’s 2021 amendment of the Customs Act, allowing bans on goods to “prevent injury to the economy,” while WTO-consistent, adds to this unpredictability.
Frequent policy changes can hinder long-term investment plans, creating a climate of hesitation for firms aiming to build export-oriented capacity. The lack of stability complicates efforts to establish reliable supply chains, as businesses must continuously adapt to evolving regulations.
Strategic Recommendations for Gaining Competitive Advantage
Given the opportunities and challenges posed by India’s current tariff regime, businesses—especially large manufacturers and those engaged in global trade—should adopt strategic measures to strengthen their competitive position amid these policies.
Focus on Operational Efficiency and Product Differentiation
Companies should refrain from complacency during this protected period and instead focus on enhancing operational efficiency. Investing in modern production technology, workforce training, and lean manufacturing processes can mitigate cost disadvantages. Moreover, innovation and product differentiation can enable Indian firms to carve out niches in higher-value markets, less susceptible to competition from lower-cost producers.
Advocacy for Tariff Rationalization and Trade Facilitation
Industry leaders should actively collaborate with the government through associations like CII and FICCI to advocate for a simplified and rationalized tariff structure. By providing data-driven evidence to policymakers, businesses can push for the timely correction of inverted duties and promote fast-tracking free trade agreements, which can significantly enhance competitiveness.
Capitalizing on Government Support Programs
The government’s initiatives, such as Production-Linked Incentive schemes, offer favorable financial assistance for scaling production and exports. Companies should leverage these support programs while ensuring compliance with their requirements, allowing them to offset higher input costs and improve competitiveness in the global market.
In summary, Indian industries are at a pivotal stage: while benefiting from a protective home market due to tariffs, they must also strive to become world-class exporters. Addressing structural issues while utilizing current advantages can propel Indian firms forward, enabling them to transform challenges into opportunities for sustained growth in an increasingly interconnected global economy.