Former NITI Aayog vice-chairman (2015-17) and chairman of the Sixteenth Finance Commission of India (2023) Arvind Panagariya is the Jagadish Bhagwati Professor of Indian Political Economy at Columbia University, US. He has also authored multiple books. His latest book, 'India's Trade Policy: The 1990s and Beyond', is a compilation of his articles published in Indian newspapers between 1989 and 2023. In terms of topics, the articles range from free trade vs protectionism in the Indian context to import substitution, India's liberalization in 1991, India-US trade relations, India-China trade relations and what India could have done to promote industry and economic growth in the decades following Independence. In an email interview, Panagariya explained his position on some of these topics and whether these articles—published over three decades—still hold good in 2024:
Harper Business, 341 pages, Rs 599 (paperback).
You have made a case against protectionism and in favour of free trade in multiple articles. If you were to recontextualize the arguments for India in 2024, what would the key elements be?
The context does not change the fundamental economic case for free trade, which is based on the principle of comparative advantage. Products we export are those for which our production costs are lower than those of foreign producers, and products we import are those for which our production costs are higher. When we lower customs duties, we benefit by buying imports for a lower price than what it costs us to produce them at home and by selling exports at a higher price than what it costs us to produce them.
The popular idea that liberalization of imports leads to a net loss by allowing imports to replace similar domestically produced goods is false. To import more, we must earn foreign exchange to export more.
Liberalization, in effect, contracts sectors where our costs are high relative to the price of imports and expands sectors where our costs are lower than the price they fetch abroad. This is a net benefit, not a loss. In the current context, we need specialization along these lines more than ever before since the global marketplace has grown huge with merchandise trade at $23.5 trillion and services trade at $7 trillion in 2023.
Between 2020 and 2023, you revised your position on trade between India and China. What was the reason, and does pulling away from trade with China still seem like a good idea in 2024?
In practice, politics also plays an important role in our decisions on international trade. In the past, I have written multiple times arguing the case for India to join the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement (FTA) among 15 Asian countries, including China. The case for it was based on the benefits of trading freely within a large market, thus taking advantage of both competition and scale economies. However, the Galwan Valley incident persuaded me that China could no longer be fully trusted as a trading partner. Therefore, in writings since Galwan, I have argued for distancing our trade relationship from China but not by imposing barriers against imports from it since that will inflict on us a disproportionately large economic cost by denying our producers access to many critical inputs at competitive prices.
Instead, we should achieve this goal by getting closer to like-minded countries by forging free trade relationships with them. This means bringing the FTA with the United Kingdom to a quick conclusion and proceeding immediately to negotiate a similar agreement with the much larger European Union. This is beneficial economically as well as geopolitically: economically because it exposes our producers to greater competition while giving our consumers access to cheaper imports and geopolitically because it shifts our trade away from China towards friendlier countries.
You’ve written about the mistakes Jawaharlal Nehru made after Independence, to promote industry and self-sufficiency across sectors. If you could get a redo, what would you do differently and why?
First, adopt a managed exchange rate or allow the “fixed” exchange rate to adjust periodically to ensure that our goods remain competitive relative to foreign ones.
Second, maintain low barriers to trade relying principally on tariffs to restrict imports.
Third, do not discourage large-scale industry in labour-intensive sectors, especially textiles and clothing in which India already had a lead and where it stood to gain a substantial additional share in the global marketplace.
Fourth, let the public sector focus in public goods such as education, health, and infrastructure leaving manufacturing entirely to the private sector with no investment licensing.
Finally, frontload investment in school education, especially primary education.
The India-UK FTA was expected to be signed around Diwali 2022, but it is still under discussion. How important are these free-trade agreements for India and why?
Unless we are willing to roll back protection against all on a non-discriminatory basis, FTAs with the UK and EU are extremely important to promote competition and gain market access. There is an acute need to expose our producers to greater competition. We must not forget the lessons of the first wave of liberalization in the 1990s and early 2000s that put us on the high-growth trajectory beginning in the year 2003-04.
How do you see India’s place in regional trade alliances and in the Global South today compared with the early 2000s?
We are certainly moving in the right direction. We have signed FTAs with Australia and UAE and are close to completing the one with the UK. But we need to go faster and farther. That means forging an FTA with EU on our west and joining the CPTPP (Comprehensive and Progressive Trans Pacific Partnership) on our east. We must also strengthen out FTA with ASEAN (Association of Southeast Asian Nations).
Do you think India is on track to achieve USD 2 billion in exports by 2030? Are there any policy changes that can perhaps help India achieve this goal?
We have much work to do to achieve this goal. First, we must implement the four labour codes. Second, we must take the necessary steps (this is largely for states to do) to improve access to urban land for entrepreneurs at prices commensurate with our current income levels. Third, we must lower trade barriers by either lowering tariffs or forging FTAs or both. Finally, we must implement the Public Enterprise Policy which provides for privatization of all public sector enterprises in non-strategic sectors and limited public-sector presence in the strategic sectors.
