Modi’s trade restrictions are illogical unless there is a political reason behind them

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According to conventional wisdom, economic policy must be consistent and predictable. U-turns do not bode well for broader economic growth.

In mid-April, Union Trade Minister Piyush Goel outlined Prime Minister Narendra Modi’s vision of creating an “export-driven economy”, with India having recorded $670 billion in exports of goods and services for 2021-22. But within a month, the Union government imposed export restrictions on wheat, cotton, sugar and steel. Rice exports may also be capped. The government appears spooked by the sudden rise in inflation and Modi may fear its political fallout.

But critics ask, why such a knee-jerk reaction when India’s inflation rate is nowhere near as high as that of the US or Europe?

The steel industry was unpleasantly surprised by the brutally imposed duty on steel exports. Majors like Tata Steel and JSW had recently announced plans to create new capacity worth Rs 1 trillion with an export focus, and duty was a shock absorber. The steel capacity expansion plan was seen as an important new investment for the economy, which faced a dearth of private investment during Modi’s eight-year rule.

The steel industry was among the first to declare new capacity creations to stimulate exports. Indeed, capacity utilization remains quite modest at around 75%, due to a lack of domestic demand for several years. But the export tax prompted a review.

Similarly, India has been a major exporter of agricultural products in recent years, with $50 billion in 2021-22. India was among the largest exporters of rice ($10 billion) and sugar ($4.5 billion), cotton ($6 billion), wheat ($2.5 billion) and sugar ($2.7 billion). The government imposed export restrictions on most of these items to contain inflation. He says it’s temporary, but exporters say India’s credibility suffers when sudden restrictions are introduced, as importing countries want stable supplies.

“If they don’t trust you in terms of supply consistency, they can move on. Your credibility as a supplier is important,” said Gurnam Arora, managing director of leading rice exporter Kohinoor Foods. That credibility suffered because wheat export contracts were canceled after the government abruptly banned exports on May 13.

So how does Prime Minister Modi’s vision of creating an export-led economy square with such sudden export restrictions in the name of fighting inflation? India’s total trade (imports plus exports of goods and services) now accounts for almost 50% of GDP, so it is an important driver of growth.

This also has a serious impact on our external sector and the value of the rupee.

Surprisingly, export restrictions have been introduced in a cavalier manner as the rupiah is also under heavy pressure. The restrictions are more focused on agricultural products, raising questions about the government’s commitment to increasing farm incomes. Farmers experience price hikes every 5-6 years and denying them their due is bad policy. If the government publicly claims India’s inflation spike is not half as bad as the US or Europe, how can it justify such export restrictions? The US and EU have not imposed restrictions on such a wide range of items. Even former Niti Aayog chief Arvind Panagariya, a well-known trade economist, admits that the government has regressed on trade policy reforms over the years. The imposition of export restrictions reinforces this trend.

The main reason the PM is imposing such sweeping export restrictions is political – the Bharatiya Janata Party has established inflation control as a key differentiator between the National Democratic Alliance under Modi and the United Progressive Alliance under Manmohan Singh. The BJP never tires of saying that renowned economist Manmohan Singh couldn’t tame inflation but Modinomics did wonders.

The Prime Minister now seems to be rapidly losing this advantage.

Low to moderate inflation was perhaps the only bright spot Modi could claim so far, and that differentiator is fading. On most other points ― GDP growth, employment, private investment, informal sector income ― Modi’s eight years have very little to show. This may explain why the Union government is so desperate to control inflation via export restrictions. But he could shoot himself in the foot.