Arvind Panagariya is known for his nearly unqualified allegiance to free trade, and constant “fight against protectionism.” In his latest book — India’s Trade Policy-The 1990s and Beyond —the chairman of the 16th Finance Commission renews the pitch for liberalised world trade, though it seems the multilateral route for this is closed, and even mature economies would routinely resort to protectionism. A highlight of the book, which compiles his newspaper articles over decades, is its lamentation of the episodes of reversal of India’s (1991-born) trade liberalisation process, the sharpest and most recent being in 2018-19 and thenceforth. Excerpts from an interview with KG Narendranath and Prasanta Sahu, ahead of the book release:
Gains of trade liberalisition can’t be gainsaid, but are episodes of easing of trade in goods and services, and capital flows among countries invariably “win-win bargains”?
If you look at India’s own experience with liberalisation, we had 40 years of very protected trade regime since Independence till the 1991 watershed moment. Even after that start of liberalisation, there remained a high level of protection. Even in 2001, consumer goods imports were still subject to licensing. By 2007-08, the top tariff rate (peak Customs duty) came down to about 10%, and import licensing was gotten rid of. People who say we did not benefit from this (trade liberalisation), look at the imbalance, that is, the trade deficit in absolute terms. But in absolute terms, everything has grown (faster), including exports and imports, the GDP.
India’s initial FTAs didn’t produce net trade gains for the country vis-à-vis the partners…
There was a long period when FTAs were emerging, and bit of a challenge was faced by the multilateral trading system. I was very much on the multilateral side of the debate then. Many look at the bilateral trade imbalance in terms of absolute rupee or dollar but overlook the rapid growth in both exports and imports. Merchandise exports between 2002 and 2011 grew from $50 billion to $330 billion, a six-times jump.Bilateral trade deficit as a percentage of the total trade deficit of the country is a better measure (to gauge FTA impact). That way, the bilateral trade deficit (with FTA partners) may not be that high. In any case, trade balance is not a good yardstick to assess FTA.
Wasn’t there the question of preparedness (for trade liberalisation)?
We had been protected for more than 50 years across the board. We have to look at the progress. How long has the duty been there and have we made some progress (in domestic capacity)? There ought to be some sort of time-bound assessment (of the result of protection). The (protective) duty has to be cut after 4-5 years gradually. The idea of infant industry protection shouldn’t allowed to stick.
What is your outlook on the level of protectionism in the world now?
In spite of all the rhetoric, the protective actions the US took, and the US-China trade war, the world market remains very open. Global trade has been continuously expanding. The recent contraction is small and is also because of rapid expansion earlier , after the Covid. Before the pandemic, the (world trade) peak was $18-19 trillion for merchandise and $6 trillion for services. By 2022, goods trade itself went up to $25 trillion, and services to $7 trillion. So, the total trade surged from $25 trillion to $32 trillion in the period. However, while in terms of outcomes markets remained open, there has clearly been a setback in the progress of liberalisation. Large-scale liberalisation happened as a result of the Uruguay Round (WTO), but the Doha Round did not succeed, and is pretty much dead now.
What is your forecast about further liberalisation of world trade?
Right now, we are in a difficult patch, and I’m not very optimistic that further liberalisation will happen. There is also problem at the WTO itself with the dispute settlement body (being largely dysfunctional). That also puts the implementation of the existing agreements under cloud. There are no major kind of violations, but certainly, we are in a bad patch right now.
You have written how “heavy” anti-dumping duties are a problem, citing such duties on man-made fibres (MMF), which hit downstream textile and clothing industry badly. These duties have over years been brought down, but we are still losing out to Bangladesh and Vietnam, and exports are falling…
The MMF fabric is still subject to high customs duty. In India textile exports, there is an overdependence on cotton, whereas other countries like China have become major players in MMF. The big revolution is happening in the MMF sector, which is more than half (of trade) already and growing faster than cotton. So, India needs to move in there. From the user industries’ point of view, there’s still a problem, as Customs duties are still high on viscose fibre, etc. Fabrics has to be freed up from (high customs duty).
India’s peak customs duty has come down to 10% in 2007-08 and remained there. Where should it settle?
Quite the reverse has happened. Tariff lines that are subject to duty of 15% or more have shot up to over half of the total after 2018-19. In fact, over 42% of all tariff lines went up in the year, with the average of all customs duties rising from 13.7% to 17.7%.
Have these duty hikes been because of revenue considerations or deliberate (protectionist)?
My hypothesis is that since the GST revenue had fallen, revenue became a consideration. Had it been for strategic planning, a few sectors would have been picked up (rather than a lot of them). Political economy of these things is that once a tariff is put in place, the revenue department would like to (retain it). It’s very hard to bring them down again. We should start liberalising now as GST revenues are lately showing good growth.
How do you see the unexpected return of import licensing (the moves on colour TV, laptop)?
It’s a blunt instrument. If you have indeed got to protect a certain industry for some reason, you should rather use Custom duties. The WTO explicitly discourages countries from using these non tariff measures including licensing. Luckily, for laptop, the plan wasn’t implemented.
How critical is the role of exchange rate in trade libetralisation?
We aren’t yet ready for free float of rupee. The managed-float policy we follow ought to allow the currency to depreciate over longer periods just enough so that our goods don’t become uncompetitive.
Do you think India should have joined RCEP (China-led Regional Comprehensive Economic Partnership)?
At the time it was signed, I was very much for it. However, after the Galwan incident, I changed my mind, as geopolitics trumped economics. The economics was clear : a large Asian market and you’ve got to be part of that. We also needed to open up our economy, and this (RCEP) was (seen as) a major avenue. It was felt if you could face China in competition, you could face anybody. After Galwan, it became clear that you can’t trust China, including in other economic areas. I endorse the government’s policy which is to try to move away from China.
A number of FTAs are being lined up…
These are fantastic times for us. Our own liberalisation is the most important thing. In addition, if we can complement that with FTAs with some major countries, (it would have wholesome benefits). FTAs with like-minded countries like Australia, UAE and EFTA matter. However, the two most important FTAs we are planning and must clinch are the ones with the UK and EU.
Now that we wouldn’t want to join RCEP, within Asia, what is available other than FTA is the CP-TPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). As part of the Asia strategy, we need much stronger ties with Asean because while we have “kind of an FTA” with them, there are still a lot of barriers. Once we have FTA with the EU, Asean and and (embrace) CP-TPP, then automatically India’s coastal (and port-led) development will get a boost.