A bellwether of economic nationalism

A recent court dispute between two Indian aluminum giants might not turn many heads outside the narrow circle of metals experts. After all, between the upcoming Indian general elections, the flaring up of tensions in Kashmir, and the longstanding geopolitical rivalry with China, commercial disputes of this nature amount to little more than a storm in a teacup. But this case is, in fact, a perfect microcosm of all the problems caused by Modi’s protectionist economic policy. Let’s dig in.

On March 26, the Odisha High Court gave the green light to metals company Vedanta to participate in a tender for surplus alumina floated by the country’s National Aluminium Company (Nalco). Remarkably, Nalco had attempted to restrict the tender to overseas buyers, since it’s currently more lucrative for Indian producers to export primary aluminum abroad than to serve the country’s domestic market. As a result, Vedanta was forced to import the white powder from Australia and Indonesia to keep its plants running – and even then, they were unable to operate at full capacity.

It takes a special kind of economic setup for a company to decide it’s more advantageous to sell on foreign markets than to fulfill domestic demand. This peculiar situation is the product of India’s protectionist trade policy that, instead of allowing market forces to dictate, is playing favorites within supply chains, pitting producers and consumers against each other.

And while courts can act as a corrective force, they can only do so much. The result of hamstringing competition has been punishing for India’s economy: manufacturing growth has slumped to a six-month lows, while job creation is plumbing an eight-month nadir. Against this backdrop, it’s unlikely that plans aiming to boost manufacturing’s share of the country’s GDP to 25% by 2022 will come to pass without a serious policy rethink.

How did this happen?

The Vedanta v. Nalco case is emblematic of Modi’s wider political challenges and lays bare the negative impact of India’s ongoing lurch towards protectionism – a retrograde step which is particularly surprising as New Delhi should have been acutely aware of the disadvantages of this economic approach. In the decades following India’s independence, the country’s economy stalled at the hand of dirigiste policies that kept market forces at bay: development was state-led and the public sector expanded at rapid pace. The country’s trade regime was so repressive that the share of non-oil, non-cereals imports in GDP fell from an already minimal 7% in 1958 to a startlingly low 3% in 1976.

Hard-fought economic reforms ushered in the 1990s a new market-based era and put India on a trajectory of steady liberalisation and growth which, early in his premiership, Modi seemed set to continue. The prime minister famously declared at Davos that India was “open for business,” even comparing protectionism to terrorism. Modi’s apparent dedication to a globalized India was warmly welcomed by Indian entrepreneurs and foreign investors alike.

But the nationalist temptation eventually subdued New Delhi. After a number of key economic advisers – who had been educated in the US and espoused liberal principles – left his government, Modi took a sharp – and worrying – turn towards economic nationalism. By the summer of 2018, government officials, policy advisers and members of the ruling Bharatiya Janata Party (BJP) were warning that the country’s economic reins had been handed over to a bevy of right-wing nationalist economists.

This shift in influence has been accompanied by a corresponding evolution in trade policy: last year, India raised import duties on more than 40 items ranging from auto parts to toys to furniture – ostensibly in an effort to protect smaller firms, to bolster Modi’s flagship “Make in India” initiative, and to shore up jobs in labor-intensive industries.

It’s no wonder the United States decided in March to eject India from the Generalized System of Preferences (GSP) due to “significant tariff and nontariff barriers that impede imports of US products into India.” But bad news usually comes in threes. The Asian Development Bank cut India’s growth forecast last week, and the Nikkei India Manufacturing Purchasing Managers’ Index is teetering dangerously close to contraction.

Aluminum litmus test

For the aluminum industry, this nationalist dynamic has already thrown sand in the gears of trade. Being the second most used metal in the world after steel, with an annual global consumption of roughly 60 million tonnes, the aluminum sector has the potential to be an integral part of India’s industrial growth. Current trends have shown that the domestic demand in India is expected to double by 2023, thanks to aluminum’s unique properties.

But those growth estimates do not factor in Modi’s protectionist dynamic that is starving the consumers of access to the metal. Indeed, if the Aluminium Association of India (AAI), the representative body of primary aluminum producers, has its way, things are about to get worse. AAI is riding the government’s tariff raising wave and wants import duties on aluminum raised to 10% – a move which has drawn sharp protests from small and medium downstream players.

As Kishore Rajpurohit of the secondary aluminum industry group Metal Recycling Association of India (MRAI) emphasized, “[A duty hike] will have an adverse effect on small and medium players of the sector […] it will shoot up their input cost.” Downstream companies are already struggling to inexpensively source the aluminum they need – both because some types of specialty aluminum are not produced domestically and because companies like Nalco are exclusively selling abroad.

The scale of the adverse effect a duty hike would bring is quite substantial: Rajpurohit suggested that as many as 2.5 million people who work in the downstream industry could lose their jobs following such an increase in tariffs. A loss of so many jobs would be a serious enough problem – particularly at a time when India is coping with its highest unemployment rate in 45 years.

Raising additional barriers in key industries like the aluminum sector will only accelerate India’s economic slowdown and further alienate the country’s trade partners. If the Modi administration is serious about promoting Indian manufacturing, stripping away countless SME’s competitive edge by imposing prohibitive tariffs on the materials they need is not the way to go.