5 Reasons India Should Review Its Current Protectionist Policy

Five reasons India should review its current protectionist policy

- Arvind Panagariya

In view of India’s turn to import substitution and protection, it is worth asking why economists view trade openness as one of the most critical elements in a country’s development policy. There are at least five sources through which free trade contributes to a country’s development.

• First, we have the conventional trade theory rooted in the principle of comparative advantage. Freeing up trade moves a country towards specialisation in products in which its production costs in terms of output foregone of other products are the lowest and away from products in which its production costs are the highest compared to its trading partners. It then exchanges a part of its output of low-cost products for high-cost products. This brings gains from efficient specialisation and exchange.

• Second, we have the insights from the New Trade Theory for which economist Paul Krugman was awarded the Nobel Prize in Economic Sciences in 2008. When production activity is subject to economies of scale, trade allows each country to specialize in a handful of products. In doing so, it allows each country to take advantage of scale economies and lower the costs of production of products it continues to produce. It can then benefit by selling a part of the output of these products for those it ceases to produce.