Chinese investments In India it should be allowed, except for those who carry security riskssaid noted economist Arvind Panagariya, chairman of the 16th Finance Commission. This will also give India leverage against China, he told Deepshikha Sikarwar in an interview. In his latest book, India’s Trade Policy, a collection of writings on trade policy, Panagariya has made a strong case against import substitutionEdited excerpts.
The World Bank, in a recent report, spoke of the risk of middle-income trap faced by many countries, including India…
At the moment, I do not see such a threat. I expect that we will grow at a sustained rate of more than 7% for the foreseeable future. As long as we do not repeat the mistakes of the past, this growth will be sustained for a longer period. This is not mere speculation: we repeated some of the mistakes between 2009 and 2014 and paid dearly for them. If we undertake further reforms, we can boost the growth rate even further.
He Economic survey defends the possibility of allowing foreign direct investment (FDI) from China. What is your opinion?
I am not a security expert, but those who are should be able to tell us what types of investments carry security risks. Beyond that, we can allow Chinese investments. Remember that we also gain leverage vis-à-vis China when a significant investment from that country is made on our territory.
Do you think that rising protectionism will lead to a slowdown in FDI and technology transfers?
There is a large body of literature on tariff-jumping FDI which says that when market access is denied through a tariff, potential exporters jump that barrier by locating production within the country. FDI in the automobile industry in India is substantially of this nature. Thus, paradoxically, protectionism may increase rather than reduce FDI. Perhaps your question was prompted by the current correlation between rising protectionist sentiment and a slowdown in FDI. If so, I dare say that this is a spurious correlation. Most likely, the slowdown in FDI has its root in high interest rates in the US and other Western countries. As soon as interest rates start coming down, we will see FDI accelerating.
You argue that free trade agreements Free trade agreements (FTAs) will lead to increased foreign investment in India. Has this story played out as expected?
So far we have seen free trade agreements with relatively small trading partners. For a noticeable effect to emerge, we will need a free trade agreement with a large market like the European Union. Joining the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) on our eastern side will also help. Having unhindered access to inputs for production and markets for sales is a major attraction for multinationals when it comes to locating their production units.
There has been talk of an FTA with the US, but what groundwork should India be doing on issues like e-commerce?
An FTA with the United States is a long way off. We must first have one with the European Union. But we may be able to engage the United States in a limited trade agreement, as it is likely to be our largest trading partner for many years to come.
Your book has made a strong case against import substitution. How does that square with India’s success in manufacturing telecom equipment and mobile phones?
I have never questioned the claim that protection can give rise to an industry. Even during the era of licensing and permitting, we created numerous industries behind a very high protective wall. To measure success, we must look at the manufacturing industry as a whole: has import substitution led to faster growth of the manufacturing industry as a whole over a sustained period?
Why are they pushing for more FTAs and moving away from trade agreements? World Trade Organization (WTO)?
I will be the last person to advocate leaving the WTO. In fact, we need to strengthen the WTO by reviving the dispute settlement body. At the national level, if we were to reduce tariffs in a non-discriminatory manner, the need for free trade agreements would be greatly reduced. Since we are not moving in that direction, free trade agreements become the fallback option.
The World Bank, in a recent report, spoke of the risk of middle-income trap faced by many countries, including India…
At the moment, I do not see such a threat. I expect that we will grow at a sustained rate of more than 7% for the foreseeable future. As long as we do not repeat the mistakes of the past, this growth will be sustained for a longer period. This is not mere speculation: we repeated some of the mistakes between 2009 and 2014 and paid dearly for them. If we undertake further reforms, we can boost the growth rate even further.
He Economic survey defends the possibility of allowing foreign direct investment (FDI) from China. What is your opinion?
I am not a security expert, but those who are should be able to tell us what types of investments carry security risks. Beyond that, we can allow Chinese investments. Remember that we also gain leverage vis-à-vis China when a significant investment from that country is made on our territory.
Do you think that rising protectionism will lead to a slowdown in FDI and technology transfers?
There is a large body of literature on tariff-jumping FDI which says that when market access is denied through a tariff, potential exporters jump that barrier by locating production within the country. FDI in the automobile industry in India is substantially of this nature. Thus, paradoxically, protectionism may increase rather than reduce FDI. Perhaps your question was prompted by the current correlation between rising protectionist sentiment and a slowdown in FDI. If so, I dare say that this is a spurious correlation. Most likely, the slowdown in FDI has its root in high interest rates in the US and other Western countries. As soon as interest rates start coming down, we will see FDI accelerating.
You argue that free trade agreements Free trade agreements (FTAs) will lead to increased foreign investment in India. Has this story played out as expected?
So far we have seen free trade agreements with relatively small trading partners. For a noticeable effect to emerge, we will need a free trade agreement with a large market like the European Union. Joining the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) on our eastern side will also help. Having unhindered access to inputs for production and markets for sales is a major attraction for multinationals when it comes to locating their production units.
There has been talk of an FTA with the US, but what groundwork should India be doing on issues like e-commerce?
An FTA with the United States is a long way off. We must first have one with the European Union. But we may be able to engage the United States in a limited trade agreement, as it is likely to be our largest trading partner for many years to come.
Your book has made a strong case against import substitution. How does that square with India’s success in manufacturing telecom equipment and mobile phones?
I have never questioned the claim that protection can give rise to an industry. Even during the era of licensing and permitting, we created numerous industries behind a very high protective wall. To measure success, we must look at the manufacturing industry as a whole: has import substitution led to faster growth of the manufacturing industry as a whole over a sustained period?
Why are they pushing for more FTAs and moving away from trade agreements? World Trade Organization (WTO)?
I will be the last person to advocate leaving the WTO. In fact, we need to strengthen the WTO by reviving the dispute settlement body. At the national level, if we were to reduce tariffs in a non-discriminatory manner, the need for free trade agreements would be greatly reduced. Since we are not moving in that direction, free trade agreements become the fallback option.
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