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Mainstream, VOL LIII No 1, December 27, 2014 - Annual Number

India’s Foreign Trade Deficit, Rupee Slide and the Fraud of Modern Economics

Saturday 27 December 2014, by B P Mathur

The intense pressure being applied on India to sign the WTO’s trade facilitation agreement, sidetracking India’s legitimate concern of food security, shows the hard reality of international economic relations. Indian policy-makers fail to realise that behind the sophistry of international diplomacy, the Western countries are vigorously pursuing their agenda of finding markets for their products to give a boost to their stagnating economies. Nobel Prize winning economist Thomas C Schelling had summed it up when he said that ‘trade is what most of international relations are about. For that reason trade policy is national security policy and an instrument of economic power.’

Despite almost seven decades of independence, the economic relations between India and developed countries continue to be ‘colonial’, India a huge importer of manufactured and capital goods, while a large part of its export basket consists of agriculture and ‘primary manufactures’ in a shrinking global market. There is an old proverb—‘the more things change, the more they remain the same’. This has been never more true in the field of the current-day globalised economy, and unless India pursues a pragmatic policy we will remain in economic backwaters, ‘as hewers of wood and drawers of water’. It is necessary to look at economic history to draw lessons as Churchill said: ‘The farther back you can look, the farther forward you are likely to see.’

Prime Minister Modi has been emphasising the importance of manufacturing to make the Indian economy strong and vibrant. But how do we do it? Can we do it by blindly pursuing an ideology of a free-trading system, as we have been doing for the last two decades? Can we develop a strong manufacturing base on the ‘goodwill’ of the big economic powers—wooing foreign investment and laying the red carpet for them? Why can’t we build our industrial prowess, based on our inherent strength, on the time-tested principle of ‘self-reliance’, of which there is no substitute?

Shrinking Rupee

The economic history of Great Britain, Germany and the USA, in the 19th and early 20th centuries, Japan post-1950s and China currently, shows that they built their economic strength through higher value-added manufacturing exports. Much of India’s problems on the external front are due to a weak manufacturing base; as a result we are unable to export value-added industrial products. This results in a huge trade deficit, which puts severe pressure on the rupee, leading to a continuous decline in the value of the rupee in relation to the dollar. The launching of Five Year Plans in the 1950s resulted in heavy demand of imported machinery and industrial goods, in order to build a self-reliant industrial base. But the country was unable to build an efficient industrial sector which could compete internationally and exports lagged dynamism. The liberalisation of the economy in the 1990s has compounded the problem as it has given a further push to imports, which continue to grow exponentially without a corresponding rise in exports.

The table overleaf gives export-import for the last seven years. It shows a heavy adverse balance of trade: export earnings have been able to finance imports only to the extent of 60 to 65 per cent, putting a severe pressure on the rupee thus resulting in its declining value in relation to the dollar and other foreign currencies. Thanks to a dynamic IT sector and NRI remittances, which bring substantial foreign exchange for the country, as indicated in the table, there has been a measure of stability on our foreign exchange front.

Our policy-makers are indifferent to the burgeoning trade deficit. There is no serious effort to restrict imports, considering that we are unable to boost exports due to numerous factors beyond our control. India’s trade deficit is being financed largely by borrowing, both government and commercial, FII (foreign institu-tional investors), FDI (foreign direct investment), NRI deposits and other inflows. All borrowing, both government and commercial, in the long run has to be paid back in foreign currency, which can be done only through the generation of additional export earnings.

A good part of money flowing from abroad is volatile and its flow slows down when economic conditions in the country are not favourable. During the last few years India’s current account balance, which measures receipt and payment of commodity trade as well as services, has been adverse, resulting in a steep fall in the value of the rupee in relation to the dollar. The current account balance (CAB/GDP) was around -1 per cent during 2005-06; ranged between -2.3 to -2.8 per cent during 2008-09 to 2010-11, but jumped to-4.2 per cent in 2011-12, and-4.8 per cent in 2012-13 (it has come down to-1.7 per cent in 2013-14). This resulted in the rupee tail-spinning against the dollar from mid-2013 onwards, and its value falling to around Rs 60 to a dollar from around Rs 45 two years earlier, a fall of 25 per cent.

From the time we began economic planning in the 1950s, the ‘Indian Rupee’ is a pathetic story of a depreciating currency. In 1966, when Indira Gandhi had just taken over as the Prime Minister, in an era of fixed exchange rate, India was forced to devalue its currency amidst intense international pressure, from the then prevailing rate of Rs 4 to a dollar to Rs 7.50. The 1970s marked the beginning of the floating currency regime, and the rupee is continuously losing out in its value against hard currencies. In 1991-92, the value of a US dollar to a rupee was Rs 25; in the years 1992 to 1997 its value ranged between Rs 30 and Rs 35; while from 1998 to 2012 its the value hovered between Rs 43 and Rs 47. There was a sharp fall in the value of the rupee towards June 2013 and thereafter, to Rs 60-65 to a dollar, and currently it is trading around Rs 60 to a dollar (November 2014).

The steep depreciation of a currency can have a devastating impact on the economy. Celebrated economist J.M. Keynes had observed: ‘There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does in a manner without one man in a million able to understand it.’

It is important to understand that the value at which a currency trades in the international market has nothing to do with its purchasing power. Any Indian who travels abroad knows that a cup of tea or coffee in the USA costs $ 1 to $ 1.5 and in West Europe it is Euro 1, while in India in most roadside restaurants one can buy it for Rs 10-15, a fifth of the price abroad. In appreciation of the fact that the market- determined exchange rate does not reflect a currency’s true worth, The Economist brings out Big Mac Index based on prices of hamburger sold in various countries by Macdonald, the giant international fast food chain. It is based on the theory of purchasing power parity. In the long range the exchange rates ought to adjust so that a basket of goods and services costs the same across countries. According to The Big Mac Index of January 2013, while one burger costs $ 4.37 in the USA, it costs $ 1.67 in India. Thus the rupee was undervalued by 62 per cent. The July 2014 Big Max index gives the price of a burger in the USA at $ 4.80 and India at $ 1.75, which shows the undervaluation of the rupee by 64 per cent. The exercise of valuing currencies in terms of their purchasing power is not a fantasy. The UNDP works out per capita income on the basis of PPP—Purchasing Power Parity. India’s per capita income based on PPP is           $ 3285. (HDR) As per the World Bank data (2013), India’s per capita income is $ 1499. Thus the rupee is undervalued by 55 per cent in relation to the dollar, if its purchasing power is used as the criteria.

We need to understand that the value of a currency is determined by the iron law of supply and demand in the international market and not by its ‘intrinsic value’, that is, its purchasing power of goods and services within a country. Therefore in order to make a currency strong and stable, exports must balance imports, if not create a surplus. All dynamic economies, Japan, Germany, China, command huge trade surpluses mainly on the strength of a strong manufacturing base.

Burgeoning Imports 

In India, no serious efforts have been made to cut down imports as the policy-makers have become victim of a neo-liberal economic philosophy, which advocates a free trade regime. Heavy imports on account of petroleum and gold have been mainly responsible for the worsening trade deficit. In 2011-12, 2012-13 and 2013-14, petroleum imports were of the order of $ 155 billion, $ 170 billion and $ 168 billion, while gold imports were $ 62 billion, $ 56 billion and $ 33 billion. There is a need to conserve on petroleum consumption, which requires complete reorientation of our energy policies. We should go in for more indigenous production, use flexi-fuel such as ethanol being used in Brazil and corn in the USA, and rely on renewable energy sources such as wind, solar and biomass, as is being done by Sweden and Germany. Gold imports are a huge drain on the economy.

In the beginning of 2013-14 when the current account deficit reached an unsustainable level, the government took several policy-measures to reduce the import of gold, such as increase in import duty and restriction of advances given by the banks and NBFC. This resulted in subs-tantial reduction of the import bill to $ 33 billion, from a level of $ 60 billion—which shows that bold policy-measures can help cutting down wasteful imports. India is a huge importer of vegetable/edible oil, 60 per cent of its annual demand of 18 million tonnes is met through imports (palm-oil accounting for 80 per cent, the balance by soyabean and sunflower oil). The import bill was Rs 46,000 crores for 8.5 mt in 2011-12, Rs 56,500 crores for 10.1 mt in 2012-13 and Rs 51,700 crores for 9.1 mt in 2013-14 (March-Feb). The low duty regime (duty on crude oil was nil and refined oil 7.5 per cent, raised to 2.5 per cent on crude and 10 per cent on refined in 2013) gives a boost to imports and adversely impacts the economy of the entire domestic oil industry. In 1994-95 India was practically self-sufficient in edible oil production, importing only three per cent of consumption. India can impose duty upto 300 per cent, the permissible bound rate, and encourage domestic production. The shortsighted policy of pampering the urban consumer has prevented national self-sufficiency and played havoc with the livelihood of farmers who grow oilseeds.

India consumes huge quantities of fertiliser but is unable to meet its demand through domestic production and imports almost one-third of its requirement. Imports were of the order of Rs 53,000 crores during 2011-12, Rs 48,000 crores during 2012-13 and Rs 38,000 crores during 2013-14. We have huge reserves of coal, but are unable to produce enough quantity to meet the full demand, due to years of policy-paralysis and corruption, in what is known as Coalgate, and are forced to import huge quantities of costly coal. (During 2013-14, imports were 169 mt, out of 740 mt of domestic consumption, constituting 23 per cent of the demand.)

India’s Self-goal

: Our import policy is self-defeating, as it is unable to protect both domestic industrial as well as agricultural products. The domestic power manufacturers, among which is the navratna PSU BHEL, are facing unfair competition from Chinese equipment manu-facturers who are dumping their products in the market. A high level committee, headed by a member of the Planning Commission, recommended a levy of 14 per cent import duty to protect domestic manufacturers, in the face of zero duty. This was rejected by the Ministry of Finance on the spurious ground that the cost of power generating equipment on mega projects will increase.

In the face of such unhelpful attitude of the government, how can the domestic power industry come up? India is an efficient producer of steel, the fourth largest in the world, after China, Japan and the USA (production 81 mt in 2013). However, it has a liberal import regime and has been importing six to eight mt of finished steel annually for the last several years from China, Korea, Japan and other countries. In 2014 there has been surge of imports mainly from China, as it has a huge surplus capacity and is dumping it at predatory prices. There is a low duty of 7.5 per cent on steel, which is hardly a deterrent. The steel producers have been urging the government to raise the duty to 15 per cent and impose quantitative restriction on imports to protect the domestic industry. How can such a vital industry as steel develop unless a fair environment is given to it?

There has been a huge surge in the import of fruits and nuts in the last few years. [The import bill was Rs 4500 crores in 2011-12, went up to Rs 5300 crores in 2012-13, an increase of 17 per cent, and jumped to Rs 7150 crores in 2013-14 (April-February), an increase of 35 per cent in eleven months]. The government’s policy to import fruits and vegetables ostensibly to please the urban consumers is seriously flawed. Agriculture expert Devinder Sharma faults the decision of August 2014 to import potato, for the first time, on the apprehension that there will be a shortfall of production. (Dainik Jagran, October 25, 2014) The government did not provide any relief to the farmers in 2011 and 2012, when prices crashed due to bumper production and they were forced to sell at throwaway prices and even dump on the road-side, incurring huge losses. In one month (August-September 2014), India has imported a vast quantity of tomato ketchup, tomato pulp and juice worth $ 3,76,000 from China, $ 94,000 from Nepal and $ 44100 from the Netherlands. This was in the face of bumper production of tomato in the country a few months back, with prices slumping and farmers doing distress sale, feeding cattle or just throwing it away. The import of pasta from Italy is growing every year at the rate of 39 per cent and has jumped from a level of Rs 339 crores in 2003-04 to Rs 1722 crores in 2013-14. Pasta is a simple product made from wheat; it needs no technology and can be easily made in the country.

Chinese Threat to Industrial Growth

China, a communist country with a non-democratic political system, has embraced the capitalist market economy model, and has confronted the world with a unique economic phenomenon. Over the last two decades China has become legendary for its ability to undercut prices everywhere from consumer goods to industrial products. The China price has redrawn global manufacturing, put legions of people out of work around the world, and become an open wound in international trade.

A flood of counterfeits and knockoffs from China are drowning the Indian industry.1 Shanzhai cellphones, called “China mobile” in India, have captured a massive market share in the country, as Chinese manufacturers have a competitive advantage because they evade tax, regulatory fees and safety checks at home. Chinese companies have captured smartphone, electrical appliances and many other low-end product market. Gujarat’s ceramic industry, which makes tiles and sanitary-ware, local small and midsize players, face a severe crisis as low-priced ceramic imports from China are growing at dizzy annual rates, pricing them out. Some unscrupulous Indian importers in league with Chinese companies are undervaluing goods to evade duty. The declared value of an MP3 player is Rs 1.83, when it sells in the market for Rs 230; of an LED torch is Rs 8, when it sells for Rs 150 to 200; an emergency light is Rs 16, when it sells for Rs 620. The Directorate of Revenue Intelligence found that for over 3600 items brought from China, the importers declare one to nine per cent of the value of goods—customs duty is 31 per cent of the declared value. (The Times of India, January, 23, 2014)

The Fraud of International Trade Theory

The new liberalised economic policy, embraced by India in 1991, which basically means easing the flow of goods, services and capital, has been largely responsible for India’s current economic woes. The doctrine of free trade is deeply embedded in economic theory. Adam Smith, considered the father of the free trade doctrine (1776), expounded it when England was a staunch mercantilist country. Subsequently David Ricardo built the theory of comparative advantage as the foun-dation of the free trade doctrine. Stated simply, it means that each country has an advantage in the production of commodities, in which it has abundant supply of factors of production that go into its making. Thus a country with a high proportion of labour should produce labour intensive goods and those with abundance of capital should produce capital intensive goods (manufactures), and hence all countries trading with each other would gain and the overall income and welfare would be maximised.

The theory, based on the premise of free and open markets, has no relation to the real-life situation. Distinguished Latin American economist Raul Prebisch established the fallacy of the theory of comparative advantage and its inapplicability to the ground reality. Making an empirical study, he demonstrated that the long-term terms of trade of primary products exported by developing countries are continuously declining vis-a-vis industrial goods, and thus the net effect of the global trade is to siphon off income from the developing countries to the industrialised ones. Nobel Prize winning economist Gunnar Myrdal observes that while the international trade theory argues that it has an equalising effect on factor prices, leading to equalisation of income between countries, in practice international inequalities are growing and have become a pressing concern in international politics.

The economic history of the developed countries demonstrates that by protective measures and state support they have built their industrial muscle. Britain was the most protective country during much of its economic rise during the 1720s to 1850s. Britain adopted free trade only in the 1860s, when its industrial dominance was absolute and by 1870, it accounted for 45 per cent of the world trade in manufactured goods. Michael Barratt Brown2 comments: ‘Britain’s industries were reared behind protective walls, nourished on imperial tributes and encouraged by the destruction of competition from the East. But once established they no more needed protection, plunder and protected markets.’ Protection became a drag on development. ‘Free trade was the instrument of Britain’s industrial supremacy holding back development elsewhere.’ However, two early industrial powers, Germany and the USA, were not impressed by Britain’s free-trade doctrine. The young German industry developed its own lobby, and had economist Fredrick List to espouse their cause and propagate the ‘infant industry’ doctrine. German industry thrived under protection and overtook Britain.

The US was the most protective country in the world during most of the phase of its industrial ascendency—from the 1830s to 1940s. This is what Ulysses Grant, the President of the USA, had to say in 1891: ‘For centuries England had relied on protection, had carried it to extremes, and had obtained satisfactory results from it. After two centuries, England had found it convenient to adopt free-trade because it thinks that protection can no longer afford anything. Very well, then gentleman, my knowledge of my country tells, when America has gained all it can out of protection, it too would adopt free trade.’

Distinguished scholar Noam Chomskyobserves: “There is not a single case on record in history of any country that has developed successfully through the adherence to ‘free-market’ principles: none. Certainly not the United States.”3 The industrial revolution took off in the USA because of the high protective tariff to keep British goods out. In the late nineteenth century when European countries were advocating laissez faire, American tariffs were five to ten times as high as theirs—and that was the fastest economic growth in American history. In the 19th century, it was cotton textiles which had fuelled the industrial revolution. When Egypt, which had its own cotton resources, wanted to start an industrial revolution, Britain thwarted it by the use of force. Chomsky has the following to say about India:

India generally was a real competitor with England; as late as the 1820s, the British were learning advanced techniques of steel-making there, India was building ships for the British Navy at the time of the Napoleonic war (1803-15), they had a developed textile industry, they were producing more iron than whole of Europe combined—so the British just proceeded to de-industrialise the country by force and turned it into an impoverished rural society.

Cambridge economist Ha-Joon Chung explains how all of today’s rich countries used protec-tionism, subsidies and other state-supported measures to promote industrialisation. Japan, Fin-land and Korea severely restricted foreign invest-ment, while France, Austria, Finland, Singapore and Taiwan used state-owned enterprises to promote key industries.

The free-trade, free-market policies are policies that have rarely worked... while these policies have slowed down growth and increased income inequality in developing countries in the last three decades. Few countries have become rich through free trade, free-market policies and few ever will.4

Agriculture in the developing countries is particularly vulnerable to competition from abroad. India was a huge importer of foodgrains during the 1950s and 1960s, was going around the world with a begging bowl and facing humiliation. Cheap PL 480 food imports from the USA in the fifties and sixties had a deleterious effect on India’s wheat economy, created price repression and farmers lost interest in its production. During the Indo-Pak war of 1965, the USA stopped food supply as a political offensive, and forced the country to give attention to foodgrains production. The leader-ship provided by Prime Minister Lal Bahadur Shastri and Agriculture Minister C. Subra-maniam, coupled with the development of a high-yielding variety of wheat and price support for farm products, spurred agricultural production in the country and brought about national self-sufficiency. In my book Foreign Money in India (Macmillan,1989), I have demons-trated how import of cheap food-grains ruined the Indian farm economy, and only when bold reforms, like minimum price support, were taken up, there was spectacular growth of food production. Today India is able to feed not only its vast population, but exports high quality rice and occasionally wheat.

Today the star performers among developing countries—such as South Korea, Taiwan, Singa-pore, and China—which have become export power houses have done so on the foundation of a strong manufacturing base. They did not open up their economies but followed sequenced industrial and trade strategies which helped industrial development and growth. While export expansion can help in expediting economic growth, the same cannot be said about import liberalisation. There is no systematic relationship between a country’s average level of tariff and non-tariff restrictions and its subsequent economic growth. The sub-Sahara African and Latin American countries, that followed the orthodox reform agenda under the structural adjustment programme administered by the IMF and World Bank, which led to indiscri-minate trade liberalisation, had to face the consequence of de-industrialisation and margi-nalisation of their economies in the international division of labour.

WTO and West’s Bullying

The World Trading Organisation (WTO) came into existence in January 1995, replacing GATT (General Agreement on Trade and Tariff), and included in its ambit agriculture, which was earlier excluded from the multilateral trading system. Termed Agreement on Agriculture (AOA), it was hammered, after years of protracted negotiations, in what is known as the Uruguay Round. The agreement is heavily loaded in favour of the rich countries, which give billions of dollars as subsidy to their farmers, but have no obligation to reduce it, as it is classified under ‘income subsidy’ which is considered non-trade distorting. On the other hand, countries like India, which give, what is classified as ‘producers subsidy’, are required to reduce or eliminate it, with a provision that for public stock holding for food security, subsidy upto 10 per cent of the value of a particular crop can be given.

However, there is a catch. The reference price at which subsidy is to be calculated is the price in the year 1986-88. The government was procuring rice in 1986-88 at Rs 3.52 per kg, while in 2012 the minimum support price fixed was Rs 19.65 per kg. Thus the subsidy becomes Rs 16.13 per kg, and the whole operation of India’s vast PDS system will become violative of the WTO norms and invite its sanction, if the WTO’s archaic rules are to be followed.5 This was the issue at stake in the Bali WTO discussions in December 2013, when India quite justifiably refused to sign the trade facilitation agreement. India was dubbed a ‘spoiler’ for its principled stand. Pressure is again being applied in every international meet, but mercifully India has refused to relent, and some compromise formula is being worked out.

The developed world’s perfidy would be apparent when we examine the huge subsidy they give to their agriculture produce. In 2001, the level of support offered by the OECD countries was over $ 300 billion, the US $ 95 billion and the EU $ 106 billion. In 2012, the farm support offered by the OECD countries has only marginally come down to $ 259 billion, accounting for 19 per cent of their gross farm receipt. The US Government gave about $ 30 billion subsidy to its farmers, 27 EU countries gave $ 107 billion. Some of the highest providers of subsidy are Japan: 56 per cent of gross farm receipts, Korea: 54 per cent, Norway: 63 per cent, Switzerland: 57 per cent. An OECD study noted that the emerging market countries are also giving huge subsidy, with China topping the list with a whopping $ 166 billion, Russia $ 13 billion, Brazil $ 9 billion.6

If a country is subsidising its farm produce for the benefit of its poor and vulnerable section of the population, it should be considered a legitimate policy-initiative. However, when it leads to surplus production, as is happening in the US and EU and dumped in the international market at low prices, it causes havoc with the farm economy of the developing countries. The USA’s subsidies go to crops like corn, soyabean, wheat and the cotton and EU subsidies go for milk, butter and sugar. They dump these cheap products in African and other developing countries’ market, destroying the farmers’ livelihood and their economy. Farm subsidies in the European Union and United States are increasing the gap between the rich and poor countries. They undermine the livelihoods of the poor and small-scale farmers, they encourage overproduction, distort trade and depress prices, resulting in the ‘dumping’ of cheap subsidised produce in the poor countries. The biggest impact of such unfair agricultural trade rules and practices is on farmers and low paid workers who suffer and national food security is undermined.

Economist Utsa Patnaik7 questions the very foundation of the free-trade doctrine as it is based on a wrong premise and says that specialisation and enforced trade can lead to two very adverse outcomes. First is the re-emergence of an inverse relationship between agriculture exports and domestic food availability in the developing countries and the second is de-industrialisation. Tropical and sub-tropical regions are bio-diverse and produce a large range of food and diverse products, which Western countries, with their temperate climate, cannot produce to sustain their high standard of living. In a typical Western supermarket there are on an average 12,000 items of food alone, and 60 to 70 per cent of these items have wholly or substantially tropical or sub-tropical import content. ‘If these were to disappear from the supermarket shelves the standard of life in the Northern population will plunge to the near-medieval level.’ She calls upon Third World countries to fight back against attempted re-colonisation, and the discipline of economics in India to get rid of the ‘intellectual servility to the self-serving ideas generated in the mainstream of theorising in the Northern universities’.

India produces a a little over 2600 MW of electricity (March 2014) from solar power which is just about one per cent of the total installed power capacity. It is planned to have a production capacity of 20,000 MW by 2022. In order to develop indigenous capacity, the Jawaharlal Nehru National Solar Mission has enjoined that equipment supplied to it for some of its projects should have full indigenous content of solar cells and modules (only for a meagre 375 MW production during 2014 and 2015). The US has raised a huge outcry against India’s domestic content requirement, on the ground that it discriminates against US business and has threatened to drag India to the WTO. It may be noted that there is no such domestic content requirement for State Government projects, where most of the programmes are being implemented. The USA, China, Malaysia and Taiwan are dumping solar cells and modules in the Indian market. Following investigation, the Ministry of Commerce has recommended levying of anti-dumping duty, but the government (Ministry of Finance) did not approve. In the face of such unfair trade practices and blackmail how can the domestic solar industry come up? As is well known, solar energy is clean and can be supplied off grid and holds the key to the future of India’s huge energy requirement, particularly in the rural areas.

The US is upset with India’s laws facilitating the manufacture of generic drugs and India’s efforts to promote access to cheap healthcare. The Indian Supreme Court has ruled that Glivec, a cancer drug made by Navartis, can’t be granted patent under the Indian Patent Act, as it is merely a derivative of the known substance for treating cancer that did not enhance the efficacy and safety of the original version. Big Pharma and the US Government have been making repeated attempts to declare India as the worst IPR offender, that is, a Priority Foreign Country, which would allow the triggering of unilateral trade sanctions.

After a long period of intense investigation, whether India would be downgraded to the Priority Foreign Country category, the US Trade Representative (USTR) decided (May 2014) to let India stay put in the Priority Watch List (India has consistently featured on this list since 1979). Nevertheless, the USTR decided that it will be conducting an Out of Cycle Review (OCR) which is described as a ‘tool’ to encourage progress on IPR issues of concern but in reality, is a part of a larger coercive measure entailing periodic reviews of the IP policy of a country and mount pressure on the governments to make them toe the practices approved by the US. Special 301 is highly biased and meant for the promotion of US industry interests. The 301 programme was initiated by the US in the 1980s, much before the WTO came into existence but after the WTO formation with its dispute settlement mechanism, it has no business to exist. The Special 301 law is used as a bullying tactic by the US Government to pressurise India (and other countries) into becoming a better market for drugs, undermining indigenous efforts to increase access to affordable drugs.

While the US thwarts national self-reliance efforts of the developing countries, on the pretext of trade distortion, she herself violates the principle of free trade with impunity by giving massive export subsidy to boost the foreign sales of its products. Its 80-year-old Export-Import Bank provides loan, loan guarantees and credit insurance worth billions of dollars for every product, including jumbo jets made by Boeing. The Economist describes it as ‘one of the most pervasive and enduring instruments of mercantilism in the world trading system’. (July 5, 2014)

Need for Pragmatic Policy

India should recognise the reality of the world’s trading system and intelligently calibrate her policy to suit the nation’s vital economic interests. While India should pay lip-service to the doctrine of free trade, in practice it should provide strong protection to its domestic industry and agriculture and vigorously promote exports, as is being done by Western countries and the emerging power house, China. There is an old saying in Hindi, hathike do dant, ak khaneke, aur ak dhekhneke—an elephant has two teeth, one for show and another for eating. We should have a clear understanding that forces of globalisation and free trading regime prevent the building of an industrial base and a strong economy and seek to hoodwink developing countries like India, who are late starters on the industrialisation path.

 A huge trade imbalance, as we are currently having, implies that we are exporting jobs abroad, unable to create a competitive economy and employment opportunities in the country. Therefore serious national efforts are required to boost exports, reduce imports and generate trade surpluses, which will strengthen the rupee and make the economy strong and vibrant.


1. “ ‘Shamsung’ smartphones strain India-China Relations”, Nikkei, Asian Review, November 27, 2013; http://asia.nikkei.com/Business/Trends/Shamsung-smartphones-strain-IndiaChina-ties

2. Michael Barratt Brown, After Imperialism, London: Heinmann,1963, p. 52.

3. Noam Chomsky, Understanding Power, New Delhi: Penguin Books, 2003, pp 251-258.

4. Ha-Joon Chang, Things They Don’t Tell You About Capitalism, New York: Bloomsbury Press, 2011, p. 73.

5. D. Ravikanth, ‘WTO Upside Down—Trade Facilitation vs Agriculture’, Economic and Political Weekly, September 6, 2014, Vol XLIX No 36, pp 21-25.

6. ‘Support to agriculture rising after hitting historic low, OECD says’, http://www.oecd.org/newsroom/support-to-agriculture-rising-after-hitting-historic-lows-oecd-says.htm; ‘US violating norms but tries to reign in India’, The Times of India, December 8, 2013, p 8; OECD: Agriculture Policy Monitoring and Evaluation 2013.

7. Utsa Patnaik, ‘The Cost of Free Trade’ in The Republic of Hunger, Gurgaon: Three Essays Collective, 2007, pp. 17-50.

B.P. Mathur is a former Deputy Comptroller and Auditor General, and Director, National Institute of Financial Management. He has served in several Ministries of the Government of India, which included a stint as the Additional Secretary, Ministry of Steel and Mines. He holds a Ph.D and D.Litt in Economics, and has written a large number of articles and several books on economics, finance and governance related issues.