India: Overview
India is demographically one of the largest nations in the world, marginally behind China. The nation is considered a developing economy with a massive potential for growth and the capability to become heavily industrialized. The gross domestic product for India in 2021 was $3173 billion, but the GDP per capita was only $1960 due to a large population of 1.4 billion (Trading Economics, 2022). The key spheres contributing to India’s GDP include agriculture, construction, manufacturing, mining, public administration, and utilities (Trading Economics, 2022). The unemployment rate in the nation is equal to 8.3%, with a labor force participation rate of 47.3% (Trading Economics, 2022). By August of 2022, India had exported and imported $34 billion and $62 billion worth of goods, respectively (Trading Economics, 2022). In other words, the country imports more goods than it exports.
Relevant Theories and Concepts
In order to conduct a substantive and comprehensive analysis of economic trade barriers in India, it is critical to revisit the concepts of the factor-endowment theory and the infant-industry argument from the textbook. In accordance with the factor-endowment theory, “the immediate basis for trade is the difference between pre-trade relative product prices of trading nations” (Carbaugh, 2019, p. 72). It means that a wide range of participants in the global economy have different resources in abundance, which they can offer to others. For example, a developing nation, such as India, has an abundance of cheap labor, whereas Switzerland, with an expensive labor force, has an abundance of financial services and products. Switzerland cannot compete with India in terms of labor price, but India cannot outperform Switzerland’s banking institutions. Therefore, a form of balance is achieved, where it is more sensible for Switzerland to have a higher degree of specialization in financial and banking industries, whereas India becomes a manufacturing hub for global goods similar to China.
Another important concept is the infant-industry argument, which is critical to understanding the trade barrier reasoning behind the Indian government. It is stated that it “does not deny the validity of the case for free trade … for free trade to be meaningful, trading nations should temporarily shield their newly developing industries from foreign competition” (Carbaugh, 2019, p. 147). In other words, the factor-endowment theory and the resulting efficiency of global trade are possible only after each nation finds and develops its unique economic specialties. Thus, a proponent of the argument would justify the trade barriers by claiming that India did not fully refine its economic strength yet.
Analysis
Trade Barriers: Why?
It should be noted that India is among the most protectionist nations among large economies. One reason for the trade barrier implemented by India is the most common one, which includes short-term political gains to avoid unemployment and the collapse of domestic businesses (Selby, 2017). In addition, there are national security reasons for the trade barriers since India is geopolitically pressured by three large superpowers, such as China, Russia, and United States. Allowing one side to be heavily intertwined in the Indian economy has a ripple effect on the relationships with the others (Selby, 2017). The barriers include standards, testing, labeling, certification, import licensing, anti-dumping, export subsidies, domestic subsidies, procurement, and service barriers (Rahman, 2019). Therefore, the most relevant reasons for the implementation of trade barriers are political, geopolitical, and protectionist.
The Effect on the Economy
Trade Balance
From the information presented in the first section, it is evident that India imports twice as much as it exports. In other words, the trade balance for the country is equal to $28 billion (Trading Economics, 2022). For decades, India’s trade deficit was static and negative, but it became worse during and after the COVID-19 pandemic, as shown in Figure 1 below. In addition, “India has been witnessing falling shares in world exports and imports. India faces significant non-tariff barriers that limit its trade with the world” (Rahman, 2019, p. 47). It was reported that “any sort of trade protection such as tariff and/or non-tariff raises the price in the home market while lowering the price in the foreign market” (Rahman, 2019, p. 47). A wide range of simulations and systems analyses show that India can benefit tremendously in the long run if trade barriers are removed or reduced, but it requires a willingness from the leadership (Rahman, 2019). Thus, the initial economic shock of unemployment and redistribution of resources is a massive political risk for the government.
Employment
Employment is among the most critical reasons why trade barriers exist in India. The majority of the labor market participants are not competitive with the international workforce, and they are employed by non-competitive domestic businesses (Selen, 2019). The protection of employment of the Indian population is a prime driver of trade tariffs, which are integrated “by the aim of the macroeconomic necessities and protective policies” (Selen, 2019, p. 437). The labor force participation rate is low compared to other nations, and thus, keeping low unemployment figures is even more important. A detailed overview of the employment indicators can be accessed in Table 1 below.
Table 1: Employment indicators
Economic Growth
The annual GDP growth rate for India can be accessed in Figure 2 below. From the chart, it is evident that the GDP growth was rather static for decades, as with the trade balance, but the COVID-19 pandemic led to heavy losses. However, the Indian economy is quickly recovering from its effects and emerging even stronger than before due to geopolitical shifts. It is rather challenging to determine whether or not trade barriers were the reason for the recovery.
Arguments: For and Against
The main argument for the trade barriers is the infant-industry argument, which essentially supports the efficiency of global trade, but advocates for equality in the specialization. In other words, it argues that developing economies need to properly find and establish their economic strengths before engaging in global trade freely. Otherwise, such nations would be simply losing to the foreign market participants without getting a chance to develop their own economic competitiveness.
However, the core argument against trade barriers is the fact that such measures hinder the efficiency and prosperity benefits brought by free trade. Tariffs and other barriers simply impair domestic growth and block external markets, delaying the growth potential of all parties. Protecting employment figures simply postpones the economic redistribution needed for India’s successful economic prosperity, where natural market forces would eliminate the useless jobs and replace them with new ones, in which India excels. Imposing tariffs on foreign goods denies Indian consumers from better, cheaper, and higher-quality goods from other nations.
References
Carbaugh, R. J. (2019). International economics (17th ed.). Cengage.
Rahman, M. M. (2019). How India faces trade protections? An analysis of trade barriers. Studies in Comprehensive Regional Strategies, 1, 47-80. Web.
Selby, J. (2017). Data localization laws: Trade barriers or legitimate responses to cybersecurity risks, or both? International Journal of Law and Information Technology, 25(3), 213–232. Web.
Selen, U. (2019). Why do countries use temporary trade barriers? Applied Economics Letters, 27(6), 437-440. Web.
Trading Economics. (2022). India indicators. Web.