Protectionism has surely played a role in spurring manufacturing in some sectors in some countries. But it does not come without side effects. And it does not work for all sectors.
As Goldar Bishwanath and Saleem N. Hasheem point out:
"In the literature on India's trade policy regime, it has been recognised that while protection has succeeded in creating a large and highly diversified industrial base, it has led to inefficiency in the use of resources. The inefficiencies have taken various forms: inefficient allocation of resources among industries, rent-seeking, x-inefficiency, and lack of technological dynamism."
Moreover, protectionism works only when other conditions to enable manufacturing are in place. In case of medical technology devices, it could work for those devices where a high level of import substitution of an acceptable quality has been obtained or can be obtained quickly by virtue of the technological and financial ecosystems being already in place. However, where import substitution is still far away, increasing import duties—the protectionist measure usually employed— is just taxing consumers to subsidise domestic production. This is bad economics. Furthermore, in big ticket items e.g. MRI where, since January 2016 custom duties have increased by ₹70 lakh per machine, it can hurt availability and access; hospitals may defer purchases for want of funds.
Increasing import duties—the protectionist measure usually employed— is just taxing consumers to subsidise domestic production. This is bad economics.
Additionally, since the custom duty regime in neighbouring countries like Nepal, Bangladesh, Sri Lanka, Bhutan, Pakistan & Maldives is now much lower than in India, the differential in duties created is likely to lead to the smuggling of many of the low-bulk-high-value devices. As that happens not only will the government lose revenue but the patient will be forced to rely on products without adequate legal and service guarantees.
In India, the import duties on medical devices and equipment have already been increased almost across the board by 7.3% in January 2016. Since most of the items affected were falling in the 11.6% range, which has gone to 18.9% now, it means an effective duty increase of 62.7%.
There is an urgent need to do a micro-analysis of the subsectors to know the requirements. Wherever import substitution of an acceptable quality level is not on the anvil, a duty roll back to previous levels should be made. Where such substitution can happen, the duties can be kept at the levels where they are, since they have had a disproportionately high climb last year, and these can be then gradually increased after a couple of years provided the duty level does not go way beyond what is there in neighbouring countries, and if quality-deficient manufacturers don't find their way into the market. In the absence of any immediate remedy, we will clearly find mortality traps gaping at us.
Through custom duty increases, which are almost all passed on to the end users, we will only tax the patients to subsidise manufacturing.
I deduce that it will be a process of incentivisation (including lowest possible tariffs on raw materials and components), research & development, skill development, greater health expenditure or better insurance coverage, low regulatory costs, assurance of predictable policy, which will benefit the cause of Make in India rather than custom duty increase. Through custom duty increases, which are almost all passed on to the end users, we will only tax the patients to subsidise manufacturing.