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The EU’s Liberal Economic Model Works Better Than India’s Protectionist Policy

Updated: Oct 2, 2023

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By Louis Mafart

In 2019, Indian Prime Minister Narendra Modi adopted the "Make in India" motto to bolster the country's economy in the face of its highest unemployment rate in 45 years. While Modi advocates for a protectionist approach, given India's economic and societal conditions, prioritising a more liberal economic policy seems preferable. In contrast, the European Union stands out as an example of par excellence, emphasising international trade.


Modi’s Promise

The BJP, Modi’s party, came to power in 2014, using the Hindu identity reflex by advocating for nationalism and promising that the economy would deliver “unprecedented opportunities”. For the first time, Modi called on the lowest social castes to vote for him, a Brahim, one of the highest castes with significant knowledge of the world.

This political change was accompanied by a transposition in economic policies which had repercussions in the commercial relations with India. It created a new dynamic in international markets: some countries follow India’s lead and are moving away from free trade.

According to Narendra Modi, globalisation is responsible for unemployment and falling wages. The chief objective of protectionism is to favour local companies' development through favourable calls for tenders in order to increase the country’s employment rate. In parallel, international companies are constrained to produce in India to favour employment.

As an example, in the automotive sector, German manufacturers such as BMW, Mercedes-Benz, and Audi now assemble their vehicles on-site. Increasing customs duties is also a path that the Indian government chose to limit importations.

These measures may appear, at first, as a utopian promise of protecting jobs, supporting domestic industries, or even as a way to reduce a country's trade deficit by limiting imports. However, the implementation of such a draconian doctrine falsely gives the impression that his policies are working effectively.

At their highest level in 30 years, Indian customs duties have increased from 20 per cent to 35 per cent for a list of 35 imported products. In addition, India has significantly reduced its exports of comestible products to protect itself from a potential food crisis due to the deterioration of climatic conditions and increased global food prices because of the war in Ukraine.

Protectionism: A False Beacon of Hope

The effectiveness of protectionism must be questioned, however. Firstly, by drastically reducing its imports, India’s exports will likely fall as partner countries will impose customs duties, according to the principle of reciprocity.

Anecdotal but revealing, Donald Trump suspended the preferential agreement regarding Indian importation taxes following the 50 per cent tax increase on Harley Davidson bikes. In addition, by minimising foreign competition, Indian producers will not be stimulated by external competition.

As a result, domestic producers will develop at a considerably slower rate, and supplying the increasing Indian population will be a challenge. Then, economic protectionism also leads to cultural and political isolation through less political cooperation with other countries.

This falls under the concept of political reciprocity. Thus, as well as having significant economic consequences, protectionism leads to political tensions between countries; something that goes linea recta against India's wishes to become a global superpower.

The EU Chooses Collaboration

Contrary to a philosophy of isolation, the European Union embraces international collaboration, multilateralism, and synergy. Its commitment to free trade has created the world's largest single market.

Trade liberalisation fosters competitive pricing and underpins a robust, growing economy for both exporters and importers.

The Food & Agriculture Resilience Mission

In order to maintain food independence, unlike India with its isolationist philosophy, the European Union established the FARM (Food & Agriculture Resilience Mission) initiative. This act aims to facilitate the shift towards a sustainable food system within the European Union.

FARM's primary objective is to safeguard trust in agricultural markets by discouraging export restrictions and improving transparency in agricultural inventory and pricing.

India has a history of implementing protective food policies to support its farmers and consumers, often involving measures like import restrictions, price regulations, and subsidies.

Furthermore, in the context of the war in Ukraine, the EU backs the Ukrainian agricultural sector by facilitating the export of Ukrainian grain through the Solidarity Lanes initiative. The active involvement of private entities, including grain producers, logistics providers, and traders is indispensable in this collaborative endeavour.

While this strategy may offer "security," it distorts agricultural markets, causing overproduction of some crops and underproduction of others, leading to inefficiencies.

Government subsidies and procurement initiatives impose substantial financial strain on the government, impacting fiscal stability. In contrast, the EU employs subsidies with stringent controls to maintain fiscal stability. India ought to take this case as an example instead of stimulating more isolationism.

India Is Heading Towards the Wrong Direction

Protectionism is derived from a war philosophy hinged on safety measures. The motto ‘Make in India’ may be a beacon of hope, but there is every reason to believe it will not lead to an economy as prosperous as it seems.

Indeed, the Indian protectionist-based economy risks prospering in the short term only. On the contrary, international cooperation and, therefore, multilateralism guarantees economic stability in the long run.

Prioritising the internal market can only be seen as relevant if India leaves a door open to foreign markets and turns towards controlled free trade.

Sources: The Economist, Harvard Business Review, Time, European Commission, ReliefWeb, Hinrich Foundation

Written by Louis Mafart

September 2023

The opinions expressed in this publication are those of the author(s). They do not purport to reflect the opinions or views of MJPE or its Board. The designations employed in this publication and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the MJPE concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers.

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