By Arvind PanagariyaSince the second UPA government, India has come a long way on the road to reforms. Insolvency and Bankruptcy Act (IBC), goods and services tax (GST), direct benefit transfers (DBT), National Medical Commission (NMC) Act, Ayushman Bharat Yojana, slashing of corporate profit tax, commercial mining in coal and agricultural marketing reforms are some key examples.The pipeline of reforms to come includes such major measures as the National Higher Education Commission Act, public enterprise policy and electricity reforms.Sadly, however, the scope of benefits of these reforms is being considerably limited by our policy mistakes in one important area: international trade.Here, we are deviating from the road of steady liberalisation that we had adopted in 1991. We travelled on this road till 2007, stopped, and have now taken a U-turn to begin travelling in the reverse direction.Do It Fast, Do It WellI have no doubt that eventually India will transform itself into a modern urban industrial economy. The critical question is whether we want to do it in 100 years or more as nearly all western industrial economies did, or in 2-3 decades, as the economies of East Asia have done? If the latter, we need to reconsider our trade policy.Empirically speaking, there is no country that has achieved rapid transformation by being inward-looking, as opposed to outward-oriented. Governments of rapid transformers may have intervened here and there, but the broad fact remains that those interventions did not interfere with their expanding trade in any substantive way.Moreover, those interventions slowed down rather than accelerate growth. I have documented these trends at length in my recent book, Free Trade and Prosperity.A key advantage of maintaining an open trade regime is that it benchmarks our firms against the best in the world. A commitment to openness forces us to ask what changes to domestic policies we must make to remove the disabilities that handicap our firms vis-à-vis the best in the world. But when we give up openness and use import protection to help our firms withstand foreign competition, we are not addressing the fundamental source of the disability. Such a policy may enable our firms to compete in the domestic market. But with fundamental sources of disability left unaddressed, it will not make them competitive in the global economy.Import protection as the path to global competitiveness is a non-starter. We need look no further than our own automobile industry that punishes our consumers and — despite a prohibitive wall of protection for 70 years — remains dependent on the same crutches.The reason why import substitution looks so attractive to many is that they only see what is visible to the naked eye: the addition of output in the protected sector. They do not see what requires deeper vision: output subtraction in other sectors.One simple way to see the subtracted output is to recognise that a nation’s resources at any point in time are limited. When a protected sector, such as auto, expands, it takes away resources from other sectors. Its expansion is not a positive-sum activity.Even more concretely, take the volume of investible resources available at any point in time. By definition, these are given by the nation’s own savings, plus the current account deficit (CAD).The latter determines the volume by which foreign capital complements domestic savings. With the domestic savings rate a given and CAD held at some target level (often 1-2% of GDP) by the Reserve Bank of India (RBI), the total investible resources in any year are fixed.Do It for the WorldTherefore, if protection allows the auto industry to expand by investing more, it leaves less investible resources for some other sectors. There is no free lunch.An alternative way to see the same point is that RBI manages the exchange rate to maintain CAD at some target level. Therefore, any effort to curtail the imports of one product through import substitution would either expand imports of another set of products, or contract exports.Once we recognise that the notion that we can add to GDP by simply replacing imports by domestic output is a fallacy, we can come back to look at productivity effects of import substitution versus export orientation. Import substitution typically attracts inefficient firms by creating quick rents.Domestic firms that enter the market have no plans to eventually capture the world markets. They see an assured, almost risk-free market behind a protective wall. Our own experience in the electronics industry in the past six years illustrates this point.During this period, not a single domestic firm that promised to turn into an export powerhouse has entered the market. And the pace of expansion this sector has shown — even inclusive of foreign multinationals — places us closer to the time-path followed by western industrial nations rather than East Asian ones.If we want to capitalise on the vast benefits our numerous reforms promise, it is critical that we conduct a course correction on trade policy. To use an analogy from our favourite sport, could we have produced the long stream of world-class cricket players such as Sachin Tendulkar, Virat Kohli, Yuvraj Singh, Sourav Ganguly and the just retired Mahendra Singh Dhoni without playing Test cricket? The same goes for world-class firms.The writer is professor of economics, Columbia University, US