Some Infants Never Grow Up!

By: Bhuvana Anand (Director, CCS) & Vipin P. Veetil (Research Guide, CCS)

“I am one who is not subscribing to this view that our exports have reached a stage where we can do away with some of the incentives” said Anand Sharma, Minister of Commerce today, justifying an extension to the Duty Entitlement Pass Book Scheme (DEPB)—an export promotion policy. In the 60 odd years since the 1944 Bombay Plan, Mr. Sharma would have us believe that our industry still needs “infant” protection. And who are these infants might you ask? Top “industrial groups including Tatas, Reliance Industries, Bajaj Auto…” last week made a “fresh” representation to the Ministry of Finance asking for the continuation of the DEPB.

The DEPB is a scheme which “neutralise(s) the incidence of basic and special customs duty on import content of export product”. In principle, if one were to import cotton, process it, and export manufactured shirts, then one is reimbursed the import tax paid on cotton. In practice, the DEPB uses certain prescribed rates as it is painful to compute the import component of each export item.

The infant industry argument was first popularized by Alexander Hamilton—first US Secretary of Treasury in 1790. The crux of the argument is a nascent industry in one country cannot possibly compete with a mature industry in another; high import tariffs and other government measures are necessary to give the former a chance to grow and compete. While the argument has a seductive appeal at the aggregate level, it makes no sense at the level of the individual. The argument is akin to saying we ought to keep good football players out so that young ones can emerge! The reality is that young football players emerge by playing with and learning to compete with established ones. Also, the infant industry argument assumes away the fact that in capitalism economic development happens under the “perennial gale of creative destruction”

“Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action; this fact is important and these changes (wars, revolutions and so on) often condition industrial change, but they are not its prime movers. Nor is this evolutionary character due to a quasi-automatic increase in population and capital or to the vagaries of monetary systems, of which exactly the same thing holds true. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates” (Joseph Schumpeter, Capitalism, Socialism, and Democracy).

The industries that grow under protection today might well be obsolete tomorrow; innovation propels economic growth not protectionism. The funny thing about the infant industry argument is that it is never the infants who make it!

The purpose of production is consumption, not vice-versa. Individuals aim to maximize consumption and happiness, and increase leisure; legal rules that aim to “create employment” and “expand production” have got their first principles wrong. This exactly why asking for an extension of DEPB rather than asking for a whole-sale removal of import tariffs is a bad idea. At the very base it begs a simple question: why should those who produce for the domestic market pay import taxes while exporters are exempt from it? Using our shirt example, why should an Indian consumer pay a higher price for a cotton shirt manufactured in India (because of import duty on cotton) than an American consumer imports it from India?

For all its flaws, what is worrying about the DEPB story is not just the bad economic policy, but the crony capitalism. If small enterprises were to succumb to the temptation of having an easy road paved for them, one could condone their petition. But that established industries should adopt an immensely myopic approach, not just from the point of view of their own growth, but as business leaders who are every day at the fore front of shaping our economic future. The Tatas and Reliance Groups could have written to Prime Minister’s Office asking for a removal of import tariffs, instead they chose to write to the Finance Ministry for an extension of the DEPB. Alas, this is not a trait peculiar to India alone. Around the world, business leaders are known to collude with policy makers to curry short-term, narrow-minded favours, often inimical to their collective long run interest.

California based, tech economy pioneer, Peter Thiel, describes the problem accurately when he points out that “we tend to like a government very much when we believe we’re among its net winners. That makes it very hard to think clearly about whether any of its laws are just or unjust.” Petitioners supporting the DEPB have demonstrated just this; India’s business leaders will support mindless protectionist policies even if it goes against their entrepreneurial spirit. We need business leaders committed to the idea of an open market minus caveats, who fight not just to score benefits for their fiefdoms, and refuse to engage in what Thiel terms “unacceptable compromise politics”.

Lenin once said “The capitalists will sell us the rope by which we will hang them”. The DEPB is one such rope. Both India and its bourgeoisie stand to gain if the latter took a more principled approach to government intervention. Besides, big boys don’t look good in diapers.