There is protectionism in the air. This year marks the centenary of a committee that recommended the first tariff hike to protect Indian industry, but at a time when India was a poor colony rather than an independent country with the fifth largest economy in the world. This column is a good queue for one of its periodic excursions in financial history.
The Indian Fiscal Commission began its work in November 1921 and submitted its report the following year. Its chairman is Ibrahim Rahimtoola, vice president of John Maynard Keynes. Keynes did not come to India to make any meaningful contribution. The commission consisted of seven Indians and five Englishmen. Rahim Tula, along with others like Gohal Krishna Gokhale and Madan Mohan Malaviya, have fought hard over the past decade to support the colonial government for Indian industrialization as well as economic autonomy.
The British had two main reasons for accepting their demands. First, they are trying to neutralize the growing opposition to their rule by accepting the nationalist argument that India-led industrialization is necessary to break out of the labor division of the colonies. Second, there is also the toy of selfish interests, the recent World War showing how the most important colony in the British Empire lacked the strategic depth to deal with economic disruptions.
The report of the Finance Commission of India is yet to be read. It called for the protection of selected industries based on three criteria. First, there must be natural benefits in the industry that India needs to protect. Second, the industry may not develop fast enough or be without such protection. Third, the defense must be ready to face global competition in the end once it is eliminated.
There are a few other principles as well. Defense should not place a heavy burden on domestic consumers through high prices. Raw materials and capital goods should be imported without any protection tariffs. Semi-manufactured goods used in Indian industry – or intermediate goods in modern terms – should be taxed as easily as possible. There should be no tax on exports. Most importantly, a permanent tariff board should be set up to advise the legislature on various industry claims for protection.
The Commission examined the issue of import tariffs from two perspectives, namely, protection of child industries and diversification of Indian industrial structure. However, despite the overall support for the defense, the Commission also examined in detail relevant issues such as productivity, wages, inflation, monopoly profits, government revenues, foreign capital and free trade agreements in the British Empire. ). Protection should be temporary, as it imposes long-term financial costs.
Five of the seven Indian members added a lengthy dissent note to the main report, arguing that its arguments for defense were too provisional. There are a lot of overall recommendations with a mainstream nationalist perspective that some government intervention is needed to provide a primary push for countries like India which are late in the process of industrialization. Indian nationalists have studied the examples of countries like Germany, Russia, and Japan.
There were few free traders in the Indian mainstream at that time. One of the rare exceptions is the historian Jadunath Sarkar. History Men: Jadunath Sarkar, GS Sardesai and Raghubir Singh, a great book on three great historians, wrote about how TCA Raghavan Sarkar took a contradictory position. “Defense becomes a premium on inefficiency and increases lethal intolerance,” Sarkar wrote in his 1911 book on the economics of British India. He also criticized the Swadeshi movement.
The Finance Commission of India was one of the three milestones in Indian industrial policy at that time. The Industrial Commission of India report in 1918 on how to accelerate industrialization. In 1927, the Royal Commission on Indian Currency and Finance submitted recommendations on the exchange rate of the rupee as well as the requirements for the establishment of a Central Bank in India. I have written in these pages about these two reports, especially the note of powerful disagreement between the former Malawian and the masterly submissions of BR Ambedkar.
The circumstances that led to the formation of the Finance Commission of India are not relevant today. However, this report is still valuable not only as a source of Indian economic history, but also as a way of thinking about the advantages and disadvantages of defense, identifying support for industries, assessing broader economic consequences, and considering differential treatment for raw materials. , Capital goods, intermediate goods and consumer goods. The structure of global production is now very different, with the intermediate goods business dominating the consumer goods trade, thanks to the intricate web of global supply chains.
These are the lessons to be remembered when the Government of India increased import tariffs on nearly 3,500 items since 2014 in a clear effort towards protectionism.
Niranjan Rajadhyaksha Meghnad Desai Member of the Academic Board of the Academy of Economics