Not all actions need to be China-specific; we need a policy objective of maintaining the real exchange rate and reduce the cost of doing business
By Ajay Shankar
The Indian economy has been open to trade and investment. The Chinese have been gaining market share in manufactured goods globally; India is no exception.
Imports from China have risen from around a billion dollars in 2000-01 to over $65 billion in 2018-19. While India exports primary products, it imports manufactured goods from China. This mirrors India’s trade in the 19th century with industrialising England. Most of what we import from China was being made, is being made and can be made in India. Increasing trade with China has led to the relative decline of manufacturing in India as China has efficient and surplus manufacturing capacity. Our small and medium enterprises have been declining and our domestic consumer goods market has been practically taken over.
How to reverse this has now become critical for national security. There have been emotional calls for a boycott of Chinese goods following the killing of our soldiers. As India succeeds in Make in India and in Atmanirbhar Bharat, industrial growth rates, which have been modest in the last decade, would rise. Dependence on China would then begin to decline. The current anxiety should give added urgency to the process of getting our act together. If we do so, recovery from the recession would also be faster. What needs to be done?
First, RBI needs to have a policy objective of maintaining the real exchange rate and not letting it rise. Between 2008 and 2017, there was a real exchange rate appreciation of 19%. This had the same effect as an overall lowering of import duties by 19%. This meant having negative import duties on many items in real terms. That we still had some industrial growth in this period demonstrates the strength of our industrial entrepreneurship and huge potential. A strong currency means a strong economy is a myth that we need to outgrow at the earliest. The Chinese, following the Koreans who followed the Japanese, kept their currency artificially depreciated to catch up with the industrialised West till they came under pressure and had to stop doing so. There can, however, be no objection to preventing artificial appreciation. Producers and those to whom they would give new jobs gain by undoing real exchange rate appreciation. Consumers lose by having to pay more. And among consumers the wealthier would have to pay more for their holidays and children’s education abroad.
Secondly, the government needs to focus on reducing the cost of doing business. Costs include hard costs of land, capital, inputs and logistics, as well as soft costs of regulatory compliance and associated transaction costs. Both are still much too high in India. Ease of Doing Business is only a subset of actual costs. Real interest rates kept rising in India as inflation came down while nominal rates remained high. These are going down but they need to be lowered further and become comparable with those of our competitors. The state needs to provide to industry developed land with quality infrastructure at reasonable rates, including on lease at concessional rates which could be raised subsequently as the enterprise prospers. Transport costs need to come down substantially. The Western and Eastern Rail Freight corridors are nearing completion. The aim should be to provide customer-friendly services and to increase the share of goods movement by rail. Passenger movement should not be subsidised by goods transport. By bringing diesel into GST, the cost of road transport would come down. Electricity rates should reflect costs and industrial tariffs should not be kept high to provide cross-subsidy.
Reducing the regulatory burden and related transaction costs needs greater momentum. Keeping labour laws in abeyance for three years through the ordinance route is avoidable. A more meticulous transparent process of Regulatory Impact Assessment and reduction of the regulatory burden without compromising on human health, safety and the environment is the right way to proceed. Third-party certification is a process that foreign buyers use when sourcing garments to protect their brands from risks like the working conditions of labour and environment. This process could be extended for ensuring compliance with standards and regulations across the board. It has already been introduced for inspection and certification for boiler safety.
In parallel, special economic zones with quality infrastructure could be developed with a material difference. Sales to the domestic tariff area at the lowest applicable tariff with any trading partner may be permitted. With zero import duties on capital goods as well as inputs, this would lead to investment and job creation for serving the Indian market and help displace imports. Exemption from taxes on profits need not be given as investment decisions are taken on a rational expectation of good profits and not on exemption of taxes on these profits.
These actions are not China-specific and are essential for regaining growth momentum with job creation. These need to be pursued with a sense of urgency even if normalcy returns on the border. However, in some critical areas, a much harder view needs to be taken on whether we should seek to reduce dependence on China by a combination of finding other sources, albeit at a higher cost, and by trying to achieve self-reliance which will also entail a cost. A beginning has been made with APIs (active pharmaceutical ingredients) to reduce the vulnerability of our pharmaceutical industry. This needs to be completed in a time-bound mission mode. The more challenging areas are computer chips, electronic components, solar panels and electric storage batteries. Some creative policies and sustained commitment, including public money, would be needed. It should be possible to succeed. After all, China has done it. In 1991, the two countries were more or less at par in technology.
Chinese investment and technology in strategically sensitive sectors and participation in tenders of the government and its agencies need to be subjected to security scrutiny. Denial of further participation in the telecom sector is called for.
The author is former secretary, DIPP, GoI