We do not believe in doing hand-to-hand reciprocal action: NK Singh

NK Singh, economist and former MP

As a responsible growing power, India will have to calibrate its self-interest going forward, says NK Singh, economist and former MP. In a conversation with Shweta Punj from Moneycontrol, he says that India will have to rethink its approach with China and other Asian economies such as Indonesia, Vietnam. PM’s recent visit to Thailand is a step in that direction and as India forges ahead, Singh says, “we need not necessarily trust other countries".

Edited excerpts:

Is India ready to expose its domestic industry to fierce global competition? And according to you, what should India's response to this situation be?

I think that India's response will be measured and calibrated, designed to maximise opportunities. I'm not going into the rationale of these tariffs. That can be debated. But these tariffs now are a reality. And therefore, we need to address the situation to India's best advantage.

Leave aside this issue of the recent Trump phenomenon. You recall India's own tariff history, that there was a time when India had the stratospheric tariffs, very high rates of both tariff and non-tariff restrictions. Over time, to make our economy more competitive, we decided to significantly lower our tariff rates.

And you recall that three successive prime ministers, well, of course, finance ministers, did boast that our tariff rates now are aligned with the peer group countries, or average Asian rates. If you look at the old features, we said that we were approximating average Asian rates. And that was a direction which had commenced from the 80s, continued throughout the 90s.

Thereafter, various factors like the global financial crisis, played a very important role. The fact is that the excess capacity in China began to have far-reaching consequences beyond China. Most of the Asian countries which faced this, Vietnam, Malaysia, Indonesia, that actually had prompted us to protect our own interests in not becoming an active member of the RCEP, which we felt would not be a very fair way of allowing India the kind of flexibility in crafting its trade and economic policy structure.

But in overall terms, there is no doubt that India's tariff rates were misaligned with average Asian rates, misaligned with global averages. No doubt, we were in full conformity with our obligations in the WTO, where we had a bound rate. And then, there's an applied rate.

We never breached that WTO commitment. So, we were within the confines of our international framework on the WTO. But the fact remains that our tariff rates have crept up and our exports were becoming increasingly uncompetitive due to various factors, not only high tariffs, which would really mean that the cost of the inputs, imported inputs for very critical exports does undergo a disadvantage.

But -- and I think that in a certain sense, if we are being -- it is being suggested that we should look at the entire trade policy structure in a more holistic way to make India a comparative export destination, both a comparative investment destination and a comparative export destination to manage to make trade as an engine of growth. Countries that want to grow at 8% or so, recent contemporary history tells us that it's only countries which have had the advantage of trade acting as an engine of growth that you can achieve an 8%-plus rate of growth, which you want to achieve to become a developed economy by ‘47

So, we must set this in the Indian context. As far as Trump's action is concerned, President Trump's action, they are no doubt based on his assessment of what the U.S. interest lies. They are to some extent an abrogation of the framework of the World Trade Organization.

And therefore, I'm somewhat surprised that the statement of the DG of the WTO has been a somewhat muted one. And the fact remains that she must be lamenting what is happening, because this really makes the WTO more and more dysfunctional.

What does this imply for the WTO? What does it imply for the global trade order? Because from what we've seen since the tariffs were rolled out, that Japan, Korea, and China have said that they're going to work together to come back with a response to President Trump. EU has expressed their unhappiness over Trump tariffs. India has been very measured in its response. So how do we see this whole global trade order re-emerging post these tariffs?

Well, there are two ways of looking at it. One is that we are aware that for a very, very long time, the WTO became an ineffective body. It became an ineffective body because the enforcement arm, which is the dispute resolution mechanism, remained dysfunctional, because the US decided, not now, but for quite some time, not to nominate its nominees to be part of the WTO dispute settlement mechanism. Now, that robbed the enforcement wing of the WTO. So if countries act with impunity, there was no way the WTO could settle this in the dispute resolution mechanism.

That having been said, the WTO was a successor institution to the GATT, the General Agreement on Trade and Tariffs, of which we are also one of the founding members, I myself in the pre-WTO days, in the Commerce Ministry, had gone many a time in the negotiations of the GATT. That was replaced by the WTO. The WTO got off to a very critical start, but the WTO soon became dysfunctional.

So, that is one dimension, we must look at, what's the future of the WTO and their multilateral trading. Now, the nature abhors vacuum. So, now in the meantime, preferential trade agreements have come up. And as one of my very good friends, Professor Anne Kruger, who is a well-known trade economist, described the preferential trade agreements as a spaghetti bowl of mutually contradictory policies and coexistence as a spaghetti bowl. Be that as it may, preferential trade agreements have become the order of the day. And all countries are seeking to have bilateral or preferential limited trade agreements to deal with the current situation of how to use trade not in a destructive but in a mutually beneficial way.

The bilateral trade agreement that India is negotiating with the United States, what are the levers, according to you, that India can accelerate on and the areas where there is room for us to lower tariffs to make it a more balanced trade agreement?

I don't want to get into the granularity of what the current negotiations are, but the one broad fact which remains is no other market, is exhibiting high rates of economic growth, coupled with macroeconomic stability and coupled with a large growing market. India, therefore, in a certain sense, is unparalleled. Any country which seeks a market which is unsaturated with the purchasing power going up significantly, coupled with structural reforms and the increasing opening up for investment as a preferred investment destination, India has huge opportunities which it has to offer.

And I think that it is this opportunity which will drive the dynamics of the trade agreement, whose first version we will get in the autumn of this year. We will, of course, undoubtedly lower tariffs on many areas where we think it is not going to hurt our core interest very substantially. As I told you that our tariff rates have crept up and it will be no serious injury to us.

There are other areas which we need to trade with caution, particularly the agricultural sector. And in the agricultural sector, we need to balance. There are some agricultural areas where the options may be somewhat easier to exercise.

I think to give an example, walnuts, pistachios and various other kinds of -- but there are these issues of what do you deal with wheat and rice and how do you restructure your agricultural practices to align yourself. I think that you must have followed the literature on how to align India's agricultural practices to the requirements of global warming and climate change.

Prime Minister Modi has repeatedly said that we need to look to changes in what he calls life, which is agricultural practices, which is not so energy dependent and with changing food habits, it is more in consonance with sustainable environment and climate change. So anyway, I think a restructure of India's agricultural approach inevitably had to undergo changes as consumer preferences also move away from wheat and rice to eating vegetables, fruits, lentils, fisheries. The current agricultural practices are too much fossil fuel dependent.

What do I mean by fossil fuel dependent? You look at the amount of water which is consumed in the cultivation of rice. How many times – how much water does it require and what does water mean? Water is dependent on use of groundwater aquifers and you are using energy which is embedded in your agricultural practices. Anyway, the restructure of India's agriculture was long overdue and maybe this will give some thoughts and encouragement of how to align not only the global scenario, but to maximise our opportunities in consonance with our shared national agenda.

What are your thoughts on the implications of these tariff wars, trade wars on the US economy. And does this imply that going forward from here, the dominance of the United States could actually take a backseat? Could we see the rise of the Asian tigers? Are we looking at a completely changed economic dynamics shaping the world?

So, I think that's a very good question. The one dominant feature, which is an overarching feature, is uncertainty. Uncertainty of the unknown, but the unknown unknowns, as I have said. We don't know. We don't know what the next moves will be. We don't know what – how other countries would react by way of taking countervailing measures, retaliatory steps, or seeking in some way to try and seek a degree of arrangement, which is more coherent and orderly. So, we don't know. So, the first dominant feature is the uncertainty. So, we must not act with a knee-jerk reaction. And as we are doing, we’ll calibrate our practices.

Now, your question is a deeper question. Namely, does it mean a restructuring of the First World War, global financial and trade architecture? What does it do to the future of globalization, as we have understood in the post-second world war period? Now, that's all on the drawing board, because we do not know what this means to the contemporary understanding of what globalisation means, which means basically the efficient value added chain for global prosperity to the use of -- maximizing the use of the global commons, as we call it. So, issues of environment and irrespective of whether President Trump believes in environment or not, environmental and issues of fossil fuel are very much a part of the reality we are experiencing itself in multiple ways in India.

And I think that in our own interest, India remains committed, Prime Minister has said, remains committed to a nationally determined contribution. We are an integral part of the Paris Pact. We have no intentions of quitting the Paris Pact. So, I think if you look at this, is certainly to give you a two-line reply, yes, it means a fundamental restructuring of the post-second world war global order. And Trump has made it repeatedly clear that this post-second world war global order has not served the United States well. He believes that the world has got much more out of the United States than the other way around.

And therefore, he does not recognize many of these things and want to restructure it in what he believes are consistent with the objective of MAGA. Now, this is a number of consequences. It means how do you reshape the multilateral development banks, which you know, there is a huge amount of uncertainty.

What about the International Monetary Fund? What about the other multilateral development banks, which is an important source of financial resources for these countries? This is all in the ferment. But remember two things, and I'm sure the US is deeply conscious, or would be conscious. They may or may not care.

One is, as I said earlier, nature abhors vacuum. So the US wants its leadership on these issues to be in the retreat. Well, others have an important role to play, including India. India can play an important role and should play an important role as a rising Asian power and filling up this vacuum. There will be other countries which will want to play a more important role. And I think in some way, a new equilibrium will be found.

I found, for instance, that a gentleman who came to see me just five days ago, after attending the last meeting of the China Development Forum, Lord Nicholas mentioned that there's a lot of conversation that if the US wants to reduce its exposure to these multilateral institutions, other countries could play a role of filling up this kind of thing. But it does mean that we need to look at the new emerging global order, economics, on financial architecture, and on trade, much of which currently is beset with uncertainty. As I said, India does not believe in acting with a knee-jerk reaction.

We do not believe in doing hand-to-hand reciprocal action. We need, as a responsible growing power, to calibrate our interest in self-interest to go forward. We need not necessarily trust other countries.

Trust is -- someone told me jocularly, ah, what trust are you talking about, NK? Trust is a bourgeois concept, only for the elites. What is important is not trust, but mutual interest, and mutuality of interest, sometimes bring asymmetric countries together for limited action.

Also, the US is using these tariffs as a geopolitical tool to achieve their domestic objectives. So, if you could just help us understand that how can the new policies undermine international cooperation and economic interdependence as we have known it, as we have seen it? And we spoke about trust, we spoke about aligning with countries with mutual interest. Do you think now is a good time for India to do a rethink on how it has been working with China the past few years?

Well, I say that, yes, that's an issue on the drawing board. But not only India, with many other developing countries in the South, with countries in the South, some certainly in Asia, with Indonesia, Vietnam, Prime Minister's recent visit to Thailand, forging alliances with Japan, and all that with the Quad remaining a relevant force. With Latin America, large parts of African countries, who are going to be much more adversely affected by what is happening to the multilateral financial architecture. I mean, we may be better placed, but having been the co-chair of the -- forming the multilateral development bank, I realize and I feel deeply, what about large parts of sub-Saharan Africa? I mean, spare a thought. They are very, very, very large demography which exists there, who are continuously being neglected and overlooked. I do not know where this current dialogue leaves large parts of Africa as an important part of humanity. So, I think it would have to be a multilateral response.

I also do not know how the current dialogue on the future of the MDBs, which goes beyond World Bank and IMF, it must include the Asian Development Bank. Two important banks, AIIB, of which we are an important member in China, and the New Development Bank, also in China. With the African Development Bank, these constellation of multilateral development banks, what is their future? Are they going to engage? They have somewhat a varied shareholder. The most important shareholder, for instance, of the Asian Development Bank is Japan.

The African Development Banks have a different shareholder. So, one is this. The second important aspect is the aspect of what about the International Monetary Fund? Leaving aside the development aspects, which is the IBRD or the World Bank, the multilateral development banks, issues of international financial stability is core to the charter and Article 1 of the International Monetary Fund.

How is the International Monetary Fund going to adjust? What about, for instance, the special drawing rights, which is a very important aspect of the IMF, particularly when it comes to address SDRs that have been used as a poverty alleviation fund, part of the fund, climate resilience and trust fund of the IMF. What's the future of an entity like the International Monetary Fund? And finally then on the trade and trade policy and last but not the least, what kind of economic partnerships are we seeking to forge beyond these issues. And before I end this, I'd say India's own interests. We must introspect and we are introspecting how to make India increasingly more and more competitive in terms of comparative advantages. I think that the fact that abundance of labour gives us comparative advantages. We have not even fully harvested our labour-intensive manufacturing, garment, leather.

So, many of the areas, what kind of changes in laws, rules, regulations and a different kind of central state compact would be necessary to make us a more important export destination. And, but not the least, that as countries inevitably compete for investment, how to make India an important competitive investment destination. All this is necessary as we must strive 8% plus rate over the coming decades to move away from a lower middle-income country to a middle-middle income and eventually into a developed economy by 2047.

Do you see export-led growth taking a hit? Do we see unemployment rising? Because this is going to have a direct impact on some of our very employment-intensive sectors such as gems and jewellery. So, what's your sense in the short term, the kind of pain that India could see?

So, let me put it this way to you. Yes, there are issues of needs and lags. I think that Trump would be sagacious enough to realise that even if imported goods become expensive, the US factories won't come up tomorrow. It will take a little while.

In the meantime, the US consumers would be faced with the disadvantage of somewhat higher imported inflation as goods and services are expensive. When it comes to India, the mixed bag. Do not forget that tariffs have been imposed on, let us say, government, but tariffs are steeper in, let us say, governments in Vietnam, in Bangladesh. So, we have that differential advantage and we should work on areas where differential advantage in labour-intensive manufacturing sector can be used by us, even in the short term, because it will not require massive capital investments to improve our overall productivity and become an important exporter of these items. So, I think that we need to rebalance our export basket consistent with the challenges, but also equally the new opportunities.

You can watch the full interview here