The Indian Agarbatti exports case study - effect of import control

What happens if we restrict cheap imports coming into the country in an employment intensive sector? While a free trade economist would squirm in agony, policymakers are faced with such choices on daily basis. Navigating multilaterally agreed rules in order to create space for domestic industry to fight and survive is a tight balancing act. I present a case study where the policymakers made a choice under similar circumstances. 

Agarbatti (Incense sticks) industry in India is small in terms of turnover at around Rs 7000 crores (under USD 1 Billion). However,  it is large in terms of employment per Rupee it generates. It employs close to 400,000 people, around 80 percent of whom are women (https://bit.ly/3oyNysO). Agarbatti industry also exports a significant amount of production and maintains leadership position in the world market. The leading competitor is China. 

Agarbatti manufacturing needs raw material - a premix powder popularly known as 'masala' - and bamboo sticks. Over a period of time, India lost competitiveness in making masala at industrial scale due to cheap imports from China and Vietnam. Vietnam exported Agarbattis to India by taking advantage of the free trade agreement under Indo-ASEAN FTA. China was pushing the products without an FTA. 

Due to the cheap imports, Agarbatti industries started downing shutters. Almost 25% of the small scale units closed down as per an estimate (https://bit.ly/3b7Qzxb), hurting domestic employment. 

The government and the policymakers had to make a choice. Restricting imports were risky. It was believed that stopping imports of cheap masala and bamboo might hurt exports. 

After consultations, the government decided to restrict the imports of agarbattis and masala. A notification was issued on 31 August 2019. Also the duty on Bamboo imports, another key ingredient for Agarbattis, was increased. 

I will let the figures tell the rest of the story. Here's the yearly (Jan-Dec) figures for imports of Agarbatti by leading importing countries of the world. India was the leading importer country till 2019. Then the ban kicked in. 

The imports fell drastically after the ban, from around 84 million USD to around 1 million USD.

The apprehension was that this decrease in imports would affect India's ability to export to the world. However, the figures tell another story. The exports to the world, by various countries over years, are as follows: 

The exports increased after the ban! By more than 50% over the two year period, despite the pandemic.

What explains this? 

- Indian exporters were capable of ramping up. They did so on the back of some policy support such as 'Atmanirbhar allowance' under the Income Tax Act, and other timely incentives. (https://bit.ly/3oyNysO)

- India started sourcing domestic Bamboo from north eastern states, benefitting states such as Tripura (https://bit.ly/3vi61gO). 

- Many units re-opened, providing employment to women and low-skilled labor thus increasing production and exports. 

On a good day, this is bad for free-trade. We don't know how much the prices of agarbattis went up and how much did such price rise impact the consumers. Consumers are usually the losers in any trade restrictive policy regime. Going by the volume of exports, it doesn't appear that there was significant price rise in Agarbattis. Secondly, what if every country resorts to retaliatory protectionism. We all would end up losers in the long run. 

However, on a bad-day, the policymakers worry more about domestic job losses and poverty. In a developing economy context, free trade advocated by suave economists and UChicago trained bureaucrats would lose the round against those who seek votes every five years.