Substantive policy changes and a change in signalling is required if India truly wants to be an export-oriented and self-reliant economy according to Dr Arvind Panagariya Professor, Columbia University and Former Vice Chairman, NITI Aayog. With the COVID-19 pandemic adversely affecting the economy, Prime Minister Narendra Modi announced the Atmanirbhar Bharat campaign to use the slowdown as an opportunity to become economically self-reliant.
"We need to change the optics a bit. If we truly want to be an export-oriented economy, then there has to be signalling and substantive policy changes," Dr Panagariya told BOOM in an interview adding that South Korea's transition to an export-oriented economy in the 1960s can be used as a reference point in India.
Under President Park Chung-hee, South Korea set up an Export Promotion Subcommittee which mobilized support for exports. The EPSC included ministry officials, industry chambers, exporters and banking officials. The EPSC focused on examining problems faced by manufacturers and exporters and as a result influenced policy proposals of the Ministry of Commerce and Industry.
"We ought to do something like that. If there is review of that kind where even progress is assessed by the PM's committee, that sends a huge signal," Dr Panagariya said.
"When we also simultaneously say we'll do import substitution, which is what we have been doing, then the signal gets mixed up. Policy-wise also it doesn't help. The signal has to be very clear. I think our signals are still mixed in addition to the policy barriers we face," he added.
With the Atmanirbhar Bharat campaign, there is a danger of falling for the import substitution trap with domestic products given preference over foreign imports. Dr Panagariya has been a vocal opponent of the import substitution policy and believes that the policy goes against India's ambitions of being an export powerhouse.
"We cannot be an export powerhouse without being open to importing. The reason we fall into import substitution is that the producers often drive the policy. For the producers to capture a market, all they need to do is keep the imports out. As long as the imports are kept out, the market is there for the taking. That also seems plausible to the government.
"What we do not realize is that in doing so, we are effectively letting our less efficient producers to get into the market. These are typically not going to be global-sized manufacturers. We have done that in the last five-six years," Dr Panagariya said,
"When we do this, what we are doing is taking the resources out of the industries where we are much more competitive and into the ones where we are not. And generally, these are the export industries," he added.
Weaning Off China
The June 15 clash between Indian and Chinese soldiers at the Galwan valley which resulted in the deaths of 20 Indian soldiers was followed by a strong anti-China sentiment in the country. The skirmish led to calls for a boycott of Chinese goods and technology in India. However, with China accounting for 12% of India's imports, boycotting Chinese products will end up disrupting Indian supply lines. Dr Panagariya is of the opinion that a gradual decoupling is required while also looking at alternative markets for Indian goods.
"We should move away from China gradually and we can do that if we forge trade relations with large number of other countries. Within Asia-Pacific we've got Japan, South Korea, Australia and also a number of ASEAN countries."
Dr Panagariya also believes that forging a trade agreement with the European Union over the US will be more beneficial to India given the lack of conflicting trade interests like footwear, apparel and agriculture. However, India will need to open the market for European goods like automobiles and spirits.
"The UK is another market that we can have a free trade agreement with. Gradually if we do those two and maybe even Canada and Australia, confidence will be built up. We will then be ready for a similar agreement with the US. In that process, it also allows us to liberalise and that sends a signal that India wants to be an open economy," Dr Panagariya added.
The Shenzhen Model
Even though India aims to decrease its dependency on China, it could learn from its neighbour on how to maximize its manufacturing and trade potential. According to Dr Panagariya, The port city of Shenzhen can act as a blueprint for Autonomous Economic Zones in India which will help in achieving their aims under the Aatmanirbhar Abhiyan.
In the 1980s, the coastal city of Shenzhen was marked as a Special Economic Zone as an experiment to introduce market-oriented reforms. As an SEZ, Shenzhen had economic policies focusing on land use, foreign exchange and business autonomy framed specially drafted for it. This led to a growth in foreign investment and rapid development as a global technology hub.
"The model that I am influenced by is the Shenzhen model of China. Take two or three coastal areas where you have deep dredge ports like in Gujarat, Maharashtra, Andhra Pradesh and Odisha. Mark 300-500 sq/km of land and declare that as an autonomous employment zone. As in Shenzhen, empower the local administration to change the labour laws and land laws within that particular zone. Introduce that kind of flexibility and also allow easy movement of imports into the zone and exports out of the zone," Dr Panagariya said.
"What we have tried are the Special Economic Zones which are small little operations of which many actually became land grabs. It's not a matter of every state having everything. Industry locates itself in a few states and then the workers move in. When they started Shenzhen had a population of 3 lakhs. Today, it is 12-13 million. So, workers have moved in. Once the signal goes out then a lot of the industry that is moving out of China would come into these zones," he added.
Highlights
- India can be influenced by the South Korean policies from the 1960s that helped it become an export-oriented economy
- Gradual decoupling from China and forging trade agreements with the European Union will be beneficial for India
- Establishment of Autonomous Economic Zones like Shenzhen will help India's development
Watch the video here.
The transcript of the interview can be read below
Govindraj Ethiraj: My guest for today has said that in thinking about the future we must keep India's historical, economic context in mind. Except for a gap of about 200 years, India has been a large contributor of global output. As recently as 1820, India contributed about 16% of global GDP. China was of course at 33%, but between the both of them they controlled half of the world global GDP or output. Let us cut to 2020 and Prime Minister Modi in his speech on Independence Day, he talked about Atmanirbhar Bharat or self-reliant India, of course. He also talked about 'vocal for local' and how we should use our resources for Make in India, but more importantly 'Make for the World'.
Making for the world would mean something that we are more export-oriented, may be do away with some of the import substitution themes that we have been talking about, or tend to gravitate to in the past. So how do we do this and what could be the path forward and how do we explain to someone who cannot understand whether can India become a global export power house, if it has to achieve some of its larger economic objectives? To discuss that I am joined by Arvind Panagariya, Professor of Economics and the Jagdish Bhagwati Professor of the Indian Political Economy at Columbia University and as many of you would know him as the first chairman of NITI Aayog from January 2015 to August 2017.
Arvind Panagariya: First of all you know, we need to change the optics a bit. That you know if we truly want to be an export-oriented economy, then there has to be signalling. Two things--one is signalling and the other is substantive policy changes. Both are important. I want to say something about signalling. A good example here is South Korea in the early 1960s. President Park Chung-hee, who really led the Korean revolution, as I would say. President Park Chung-hee was to South Korea what Lee Kuan Ywe was to Singapore. Although it is less well-known, we know a lot more about Lee Kuan Yew.
First thing, Park Chung-hee did was just take charge himself, created a committee which he chaired himself. And this was a committee that would meet every once in a month, and all export interest would come in there. His own ministries, industry chambers, exporters themselves, some of the academics and then they would say what do we need to do to capture the global markets. And every month they would review what progress has been happening, what bottlenecks are there and how those bottlenecks ought to be removed. I think that sends a huge signal and something like that we ought to do, even if it is not once a month, if it is too much, every three months let us say. If there is a review of that kind where the progress is assessed by the Prime Minister's committee, it sends a huge signal. That having said there are also issues of policy.
Govindraj Ethiraj: Many people would argue, even if you were to look at the last decade, a lot of industries which could have been here including for instance, garments have left India and gone to countries like Bangladesh and Vietnam and we have lost those opportunities even while they were within our grasp. So why would that change or how can that change?
Arvind Panagariya: That is why I think signalling is very important. That you know, we stand for globalisation, we stand for exports but are not afraid to import. We also simultaneously say we are going to do import substitution, which is what we have been saying and doing really, then the signal gets mixed up. That India wants to come to the global market as an exporter but it is not there as an importer. That just does not...policy-wise also it does not help. That is the first thing, signals have to be very clear. I think our signals have been very mixed in addition to the policy barrier that we face, to which we can come. Also policy wise, I would say, Vietnam and Bangladesh have done better than us in terms of labour markets, land markets, business friendliness, particularly in the sector that you just mentioned--apparel which is where we in fact need to capture that market at the global level. Vietnam and Bangladesh have been ahead of us.
Govindraj Ethiraj: You have argued several times in your book as well as in your article (recently published on July 22nd) that you know we should avoid the import substitution trap. In the book, you have provided the theory but in the article you have talked about why it is practically wrong. It is a trap nevertheless. I think you in your book have talked about how we tend to relapse into it because of bureaucratic thinking, history and how do we break out of that?
Arvind Panagariya: That is where we have to be bold and understand the economics of globalisation. And there is that we cannot be an export powerhouse without also being open on the import side. Remember one thing, that you want to export only so that you can import more as well. Just imagine, if you were not importing anything, why would you export. That would be like taking products and dumping them in the harbour because you are not getting anything in return. The whole idea behind exports is that you can import things that you do not produce at a low cost. That is the basic point.
The reason we fall into import substitution is because producers often drive the policy, manufacturers, industry associations and so forth. And for the producers, it is a lot easy to say/see, we have potential for a billion mobiles so I will certainly….Indians are buying a few hundred million mobiles every year. And there is no risk for us and we can capture this market. All we need to do is that we can keep imports out, as long as imports are kept out, the market is there and there is no risk. As we can all assemble mobiles, let us do that. That sort of seems very plausible to the government.
What we do not realise is in doing so, particularly when we are doing this, through not policy reform but through import protection that is imposing tariffs on the foreigners, then we are encouraging our less efficient producers to get into the market. And these are not going to be global size kind of manufacturers, typically you know, ….and we have done that in the last 5-6 years, a lot of entry has happened of domestic manufacturers in mobiles. But in the end not one of them is going to be an export powerhouse. We have seen the prospect, it is only some of the larger ones, the multinationals who have entered, who in any case operate in the global market, could potentially be exporters.
So you see, and when we do this, move resources into the import competing products, products that we would otherwise be importing, we would be taking them out of somewhere. And generally these are the export industries. So what we are doing is taking resources from industries where we are much more competitive and into the ones that we are not competitive.
Govindraj Ethiraj: So the example that you used local mobile manufacturers not becoming competitive. Why does that happen? Or why did that happen?
Arvind Panagariya: Now we go back to the policy issues. Why is that from the very beginning we were not mobile producers or manufacturers, and by now major exporters like China became? That has to do with our overall policy regime. First of all, we started opening up in 1991. Our exports as a proportion of the GDP was only 7% at that time including goods and services. So we started, and we were very gradual to liberalise and so forth. So by the time the mobile revolution comes..., and also the phone manufacturer and everything was in the public sector in India. The private entry started in the mid-1990s but it really was not properly opened up till Prime Minister Vajpayee put in place the new telecom policy. But that telecom policy allowed the entry of private players but not for manufacturing.
So that revolution could actually happen because at that time we were open to importing mobiles. If we had not been open, because we had signed an agreement on International Technology Agreement at the World Trade Organisation under which we said that we will allow technology products to enter with zero tariffs, zero protection and so these mobiles would come in. And if you look at ….the usage of mobiles in India, the way it expanded it was phenomenal, it was truly exemplary.
We had not done our telephone production at that time was in the small scale industry reservation. We used to actually reserve a large number of products for exclusive manufacture by the small scale industry. Small scale industry never goes in with the export market in mind. So, as far as manufacturing was concerned, at that time, there was no chance that we could compete globally. And with zero tariffs, of course, imports came in quickly, thankfully because we could get the mobile revolution. So that is where we were. No small scale reservation is gone but labour markets are still a huge problem.
Govindraj Ethiraj: Let us keep the mobile and the newer industries on the side for a moment. If you were to look at traditional industries--garments, light engineering, including the toasters and ovens that China excelled in--all of which also happened in recent times, what is that we can do today, if we could and if we can, to start afresh?
Arvind Panagariya: First of all let us be very clear that we want to be an open economy. That signalling is very important. But policy wise, first of all, labour markets are very inflexible in India. If you are a company of 100 workers or more, then effectively it is impossible to lay off any of the workers. And that sort of deters firms in industries like apparel from becoming very large because then they have to deal with labour issues. It is not that entrepreneurs do not want to employ workers. The whole purpose is to employ workers, not to fire them. But sometimes there are some workers who vitiate the environment and in such circumstances you need to be able to lay off those workers, take them out so that the firm can operate properly.
Govindraj Ethiraj: You feel that is a critical component amongst the reasons as to why we are not able to move ahead in light engineering?
Arvind Panagariya: In my judgement it is. A lot of people contest that and I quite am willing to...I am eclectic in this matter...if others think that there are other barriers which, removal of which will lead to these outcomes, I am quite happy to listen to that as well. And I do not believe in one single reform, one single reform will not do it, but it is one of the critical ones. Also, I think for our large enterprises land markets have become inflexible and land has become very expensive today.
Govindraj Ethiraj: If you were now to start in a clean state in some ways, how would we do it. Let us keep policy aside for a moment, what would give entreprepreneurs the confidence, particularly in the industries that you genuinely feel you have lost the boat or missed the boat? If you look at China, in your book you say China exports 186 billion dollars of clothes, almost 782 billion dollars of electronics and electricals...this is 2014, obviously the figures are much higher now, over a trillion...So where do we start and even if we start do we stand a chance?
Arvind Panagariya: You never missed the boat. The boat is always there. It is a matter of whether we get on to it. In fact now China is getting off the boat in many products, and we are the natural ones. Who has got the 500 million strong workforce? Only India, nobody comes close. So I still personally think that it is purely a matter of policy and the sooner we begin to give proper signals while also changing policies. I have one suggestion that I have written in the book as well. That the model I am very influenced by is the Shenzhen Model of China.
Take two or three coastal areas, where you have deep dredge ports --you have them in Gujarat, Andhra, Maharashtra, Orissa--somewhere near there and take out a land area that is at least 300 kms ( ideally at least 500 square kms) and declare that as an autonomous employment zone and as in Shenzhen empower the local administration to change the labour laws, change the land laws within at least that particular zone. And introduce a kind of flexibility and allow easy movement of imports into the zone, and exports out of the zone. So facilitate trade as well. I do not require any export subsidies, or export requirements. If they want to sell domestically that is fine. If they want to sell abroad that is fine, but fix your domestic laws nicely in three or four of those zones and see what happens.
Govindraj Ethiraj: We have tried that in a way, but that has not quite worked…
Arvind Panagariya: You see because the model has always been wrong. What we have tried are the special economic zones, these are small little operations, many of which became land grabs. The whole approach that we take that every state has to have a SEZ. I remember in the NITI Aayog once even the proposals coming in, " Oh you know, in such and such area, SEZ is supposed to be 10000 acres. But small states cannot have it. So let us make it 1000 acres."
But that is not the way. You see, it is not a matter of every state having everything. Industry locates itself in a few states and then the workers move in. Shenzhen when they started, had a population...these were a bunch of fishing villages, had a population of three hundred thousand, 3 lakhs. Today you have 12 or 13 million. So workers have moved in. Local language is Cantonese, everybody speaks Mandarin because they come from the rest of China. So people will move in, industry will move in. And once the signal goes out a lot of the industry that is moving out of China would come into these zones. And once that happens, we can begin to showcase that both to the outside world and the domestic constituencies and [say] look this liberalisation is a good thing. We can then extend across the country.
Govindraj Ethiraj: One of your premises for economic growth overall is that we should have an export-led economy which in turn means a strong manufacturing-led economy. I will not get into that discussion right now. You did use the example of South Korea, and how they with focus turned themselves into an export powerhouse. But in India the argument would be that we are a large domestic economy. We have 1.3 billion people, we have enough to create for, produce for, and sell to within the country…
Arvind Panagariya: That is a huge strength and I do not dispute that. We are now also a reasonable size economy, close to three trillion dollars, we are getting there. It is a good size market. But there is no comparison with the global market. Number one, the global market is way bigger. Your manufacturing alone would be multi-trillion. I mean the goods export market today in the global economy is 17 trillion, and we are 3 trillion total with goods, services, agriculture and everything. So it is still a very large market. But that is not the only reason. The much more important reason to be out there in the global marketplace is, that is where the technological improvements happen, innovation happens. And if you are absent from there, you will not learn those things.
I like to use this analogy with cricket. Why do we have such fantastic cricket players coming one after the other. You have Saurav Ganguly, Yuvraj Singh, Tendulkar, Virat Kohli, MS Dhoni who has just retired….so that is happening because we are playing test/latest cricket of every kind. International cricket we have been there in the forefront. Makes a big huge difference. That is where your mettle is tested as well. You also learn from other players but you also get tested there. You really have to work hard.
We academics whether we are operating in the market place here, which is global or we are operating within a small little country; if my peer group is my local competitors only, I know I can be laid back. I can do one or two articles every year and still be a Rajah. But i cannot survive here. I am just here by what I did in the last year. Whatever stock you created in the last forty years that is history. Nobody is….we know that...What did you do in the last year, that is the standard by which we get judged. That is exactly what happens in the global marketplace.
So it is very important. And then if you can get the global companies to come in, they get their capital, bring in their management, their links to the world markets, their technology...what we supply is good workers. It is a perfect complementarity. Japanese, look at that ….they have extra capital, but they do not have enough workers there to work on that capital. Let that capital come into India. We have the workers, Japanese capital, Indian labour, we can kind of cooperate together.
Govindraj Ethiraj: India and China...and even before India and China, the US was always weaning off, post Trump because of trade because of which a lot of manufacturing left China or began to leave China, moved to other parts of South East Asia, or even moved back to America or Europe for that matter. And India currently has tensions on the border and that is playing out...essentially what we do want to do is to take advantage of that situation, economically. What would be your prescription?
Arvind Panagariya: I have said that...For a long time, I was very much for the RCEP (Regional Comprehensive Economic Partnership), which included 16 Asian countries, India and China among those 16 countries. But post Galwan, I have really changed my mind, I do not think we can really trust China in the longer run and we very much need to decouple….but I am very much opposed to doing this decoupling by starting a trade war with China. Some of the things that directly go into security like Huawei equipment or some of the things that directly impacts security....fine, there we have to take an action based on security considerations but otherwise we should move away from China gradually.
We can do that if we forge trade relationships with a large number of other countries. Within Asia we have Japan, South Korea, we have Australia, we got even a number of Asean countries, so they are there. That is within Asia. But I would start actually with a Free Trade Agreement with the European Union. That is a large market. I think we do not have a serious conflict in forging a Free Trade Agreement with the Europeans because they will not push hard on issues of labor standards, intellectual property etc which the US will. Likewise on agriculture, Europeans do not have huge export interests. With the Americans, the export interest of American farmers will come in conflict with our own willingness to liberalize our agricultural market. So for that reason, start with the European Union.
We have to be bold, we have to be willing to open our market for automobiles, our market for spirits and so forth which are export interests for the Europeans. So we have to be prepared for that if we want large...it is 14 odd billion dollars worth of apparel and footwear to the Europeans, then we have to be willing to open our own markets as well. Then the big one, I will start with the United Kingdom is another good market where we can have a Free Trade Agreement. Gradually we do those...even Canada and Australia, even confidence will be built up, we can then be ready to forge similar agreements for the US. So that should be our roadmap and in that process also allow us to liberalise our own, and that sends the signal that India really wants to be an open economy.
Govindraj Ethiraj: Suppose you were to go back to the clean slate question, what are the two or three things that you would like to see from a policy point of view, but also bottom up...lot of entrepreneurs today want to start tech companies, something in the technology space. They may not want to start garments, they may not expand existing garments ...or Tatas may not want to get into garments, a point that you touched upon in an earlier interview I did with you. What should the two or three things we could do, or should be done to show that we get this off the ground both from the top end, which you have touched upon also equally from a bottom up point of view?
Arvind Panagariya: I would very much pitch for the autonomous employment zones, if we do that that sends out a huge signal and that would also solve within those zones, the policy problems with the respect to labour and land laws and that I think is one very important thing. Second, I would also say, the first thing that I started, the Prime Minister has to give a very clear signal by bringing in some of these labour-intensive product exporters. But also within that fold we need to bring in foreign manufacturers.
What has been missing very badly, especially in this labour-intensive sector, are medium and large enterprises in India. I think we are populated by very very small enterprises particularly apparel and footwear etc. These very small enterprises, like 20 shop with 20 tailors. They are not your big exporters. There are two or three big manufacturers and them you should consult, you have Arvind and so forth. So there are two or three big ones, consult them on what more needs to be done.
So if the Prime Minister's office takes that kind of initiative it will send a huge signal. Then I think the states will follow, some of the labour, land reforms, states can do. Karnataka, for example, on land especially has done very very good reforms. They are trying to allow the conversion of land around the cities, from agricultural to non agricultural uses and so forth. And that I think is a very very important reform because that is where the industry has to expand, in the periphery of the cities. That sort of things. These are things that states will begin to do themselves.
If we do these two things: autonomous employment zones and the Prime Minister really showing very centralised focused interest in export of labour intensive products by both domestic firms and multinationals abroad.