India should move swiftly on closing the trade agreement with the European Union and address pending reforms especially in the labour sector, making regulations friendly and access to land at reasonable prices, said Arvind Panagariya, 16th Finance Commission chairman in an exclusive interview with Moneycontrol’s Shweta Punj.
Shweta Punj: What kind of reforms does the Bihar victory give impetus to?
Arvind Panagariya: The government’s reform agenda has been there, some reforms have been done recently. Income tax simplification has happened and a lot of exemptions that existed in the past have effectively gone away. You also have the GST reforms that took place. These are important reforms.
I have discussed many reforms which remain outstanding – labour laws is clearly one of them, we also have the issue of very expensive urban land, businesses to be competitive should be able to access land at reasonable prices. This is a very serious challenge.
We also have the pending agenda of public enterprises. The government had decided that public enterprises in non- strategic sectors will be privatised. There is a general issue for deregulation.
Our regulatory regime in the financial sector needs to be looked at. It is often the case that regulation in India is to deter the 3-5% who violate the regulations, rather than aim at the 95 percent who want to do business without violating regulations. When regulations become tight, economic activity suffers. We need to look at how to make regulations friendly for 95%, rather than replace regulation with enforcement. Regulatory regime must be looked at. RBI has to be an integral part of the that. Overregulation is a systemic issue.
Punj: What does India need to grow every year to become a developed nation by 2047?
Panagariya: It all depends on per capita income target. If you look at the World Bank Income classification, the World Bank’s classification of a high income country is an average per capita income of over $14,005. If you take that, then assuming 0.6% population growth, GDP growth at 7.9% is needed every year in constant dollars. (GDP growth in constant dollars is also referred to as real GDP growth- measures the increase in a country’s economic output after adjusting for inflation).
Punj: What’s your assessment of the current global environment? India is in the middle of negotiations with the United States and the EU. What are India’s vulnerabilities at this point?
Panagariya: I think we will weather this (the tariffs imposed by the US). We have already seen 50% tariff imposed on India, I think exporters are finding their way. I have always maintained sanctions imposed by a single country are not very effective. Trade finds its routes to get to a necessary destination. In 2018, global merchandise exports reached approximately $19 trillion, this was before Covid. During Covid, we all thought supply chains were so damaged that we will see massive decline. But in 2022-23- exports went up $25 trillion. Exporters are very determined lot, they are successful entrepreneurs, they learn to work their way around these challenges.
Whatever India needs to do is perhaps negotiated with the US. What I feel that India needs to do aggressively is India-EU agreement.
When the challenge with US arrived in April – to me it seems the obvious opportunity was to conclude the India-EU agreement. The European Union is largely an open market, this is where we ought to remain. Right now US is not an open market.
Punj: How should India’s trade strategy evolve? How should India navigate China and other parts of Asia?
Panagariya: Threat to security should be assessed in a rational way. In some way we can imagine threat everywhere. We have to see where Chinese goods are going and if a large number of countries are importing many of the Chinese products, in the end there is a trade off between how you react to the perception of threat and benefits of trade. Where the threat is clear we need to take necessary action.
There is a very nice trade map by Pravin Krishna (an economist who researches on international trade) – which shows where India’s exports are originating – this is largely the western half of India. What is lacking is that eastern side is not flourished in trade and exports -that’s what Pravin Krishna’s map shows. You have AP and Odisha which are coastal states on the eastern side- shrimp etc is being exported from this side. But in terms of intensity of exports, the eastern side is a little bit behind. We also have to strengthen the free trade agreement with ASEAN bloc.
This defensive posturing on ASEAN also needs a second look. This is a very large bloc – once we add up the population -in the end we ought to be suppliers of clothes and shoes to these regions.
There is no reason why Chinese markets should be off limits. China being a richer country -we ought to be their suppliers. US had stopped producing clothing after a point, something similar will happen to China, wage will become so high, they will become importers of these products. GDP of Asia exceeds EU, US - Asia is a large market. Andhra Pradesh and Odisha are coming up very nicely, they have good ports, CM Chandrababu Naidu is doing a lot. Odisha also did very well under Naveen Patnaik (the former chief minister). In per capita terms, Odisha has pulled ahead of West Bengal.
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