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Rahul Khullar | Trade deficit is still worrying

Rahul Khullar | Trade deficit is still worrying
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First Published: Wed, Feb 16 2011. 12 30 AM IST
Updated: Wed, Feb 16 2011. 06 18 PM IST
New Delhi: Commerce secretary Rahul Khullar said in an interview that he expects India to pare its current account deficit to as low as 2.5% of the gross domestic product in the current fiscal from 4.1% at the end of last year. India’s exports have surged, boosted by an economic recovery in the US, the nation’s third-largest trading partner after the United Arab Emirates and China.
This week, India plans to sign bilateral trade agreements with Japan and Malaysia to reduce barriers and increase trade even as the World Trade Organization’s Doha round of trade talks make little progress. Edited excerpts:
Now that exports are growing at 30%, how long do you think exporters will need incentives from the government?
I don’t think exporters are doing well because of incentives. I think there is an intrinsic competitive edge and they have found (new) markets. A small incentive of 2-3% hardly makes a dent on margins. On the other hand, from a fiscal perspective, yes I agree, there will be no additional sops available. If you are trying to do fiscal consolidation, the first expenditure that is easy to cut, are subsidies. The softer subsidies to cut are export subsidies. So if you are asking me from a pure North Block perspective, we are a soft target and I will not be surprised if somebody says “sorry, your exports are doing pretty damn well, therefore no additional sops.” There may be some clawback too which I know is going to happen. But that is part of the game.
So our exports markets have distinctly shifted...
I am almost certain. Shifting markets is not an overnight operation, it takes a year, two years to sink in. Why do I want to set up costs of trying to explore markets in Brazil, Argentina, Colombia or large parts of West Africa or East Africa? If there is a payoff to that, once I establish myself and prove myself as a reliable supplier of good quality goods, I am up easy street. My guess is when I get the numbers in three, four months, I am almost certain that you will see this diversification -- diversification across destinations and across commodity baskets. You look at what engineering exports were five years ago and what it is today. The world for Indian industry has completely changed.
How much of a problem is the burgeoning trade deficit?
Trade deficit was extremely worrisome last year. Trade deficit on the merchandise account was less than one percentage (of GDP) in 2004. That grew to 10% of GDP in 2008-09. By 2009-10, you brought it down a little (8.5% of GDP), because essentially what was happening in 2009-10 was that exports and imports all crashed. Six months ago, you were looking conservatively at a trade deficit of $135 billion and that would have been huge. Fortunately for us, exports have picked up in the last couple of months, which is why you are now looking at (a trade deficit of) about $100-110 billion. Even that is going to be 7%-7.5% of GDP.
So how do you fix it?
The current account deficit is offset by essentially two things: service exports and remittances. The point is you cannot allow the merchandise account to go out of control because how long you are going to bank on people sending money home as remittances. Remittances may grow far slower even as the current account deficit increases dramatically. Secondly, on the services account, there is huge growth and surplus. But with this paranoia about jobs being Bangalored, there is increasingly this wave against service exports from India. So I need to fix the merchandise deficit quickly. We want to come out with this strategy paper which says within three years I have to fix that problem.
What is a safe range for the merchandise deficit?
I think safe is 3-5% (of GDP). That much you can manage. Ten percent (of GDP) is very unsafe. My guess is if exports continue to do as they are, you will end up with a current account deficit 2.5-3% of GDP this year which is manageable.
But with India signing so many free trade agreements (FTAs), are you concerned that trade deficit may widen further in the coming years?
No, why do you only want to look at it from that perspective? Why can’t you look at the perspective that signing of the FTAs will also open export markets? I am not signing deals without seeing some semblance of balance. Even the ones that we are signing next week -- Japan and Malaysia -- yes, maybe I need some space on import of merchandise goods, but I get some space back in terms of export of my goods. Whether they may be pharma, engineering goods or other labour-intensive goods and most definitely services.
Despite so much of noise being made at the G-20 level, why do you think no perceptible progress has been made at the Doha round of WTO talks?
I think they are trying to make an effort now. My guess is that, provided they engage more constructively henceforth and actually start grappling with the issues which need narrowing of differences, then you might look at a deal this year. But up to this point of time, the US has not been serious about engaging. And to be fair to the Americans, I do not think they had the political space. I think it is a combination of factors -- politics, economics -- that prevented them from committing anything. We have now received assurances that President Obama is committed to getting it done. Now that commitment needs to be translated into actual negotiations, which means please stop all this nonsense about technical discussions. For example, in cotton, the text is not even in brackets, which means it is undisputed, which requires the Americans (TO MAKE??) an 82% cut in their cotton subsidies. There is no way they can do it. But at least they must come to the table and start talking about how we narrow it down. Negotiation is being able to say, “I am willing to do this, will you meet me half way?” But there cannot be a negotiation if you say “I do not want to talk about it.”
But the US is insisting that advanced developing countries such as India and China should bear more responsibility given their new economic status?
I find that argument simplistic and specious at the same time. For the last 10 years, while Doha was being negotiated, India has unilaterally reduced its tariffs and has provided market access not only to America but to the rest of the world. That is to be ignored, is it? We have not made our contribution to the rest of the world, is it? This is rhetoric which negotiators use, you should discount it. If they wish to push some others, they are welcome to do so. But on India, I think they have no cause for complaint. And if they do, I am sorry, they are not going to get anything out of us.
Existing import duties are already less than the maximum tariff that countries can impose on products under the WTO’s Doha negotiations. If the accord does not happen this year, next year being an election year for many key countries, what is the benefit we are going to get out of this agreement after 2012?
That is the question that not only India but many countries are asking. Our exports are doing well. We are importing more from the world and we are doing it in today’s tariff regime. So if Doha does not happen, what is the big deal? Many people have asked this question. This is an incorrect way of looking at this issue. It is important to conclude Doha not because I stand to gain something specifically for myself. I think it is very important to conclude Doha to save multilateralism. Suppose you did not conclude Doha, what faith will ever be reposed in the WTO?
Yes, it will affect what is called the “water in the tariff”, which means some will have far less cushion to raise tariffs and some will get hurt because the newly bound tariffs will be lower than the current applied tariffs. We will have a few lines like that, I know, and that will pose a problem for us. We will come to that problem when that comes.
The way to look at Doha is not necessarily what I am gaining or what I am getting out of it. Why are you so concerned about what one country individually gains or loses. In previous rounds there have been disproportionate gains to developed countries. Now it is very convenient to forget history. It is time for statesmen to show that they are statesmen.
One of the issues is sectorals (sectors in which countries need to bring down the tariff to zero), where the US wants countries like India to be more flexible. But don’t you think it is time to tell our industry that you had tariff protection for a long time and now it is time to open up?
The domestic industry has seen, from 1990 to 2010, tariffs go down from over 100%-200% to barely 7.5%, so I don’t want to be unfair to the domestic industry. Let’s separate the two issues. One, on sectorals, our position has always been that yes, we are willing to participate in sectorals but on a voluntary basis. You can’t put a gun to my head and say you will do this. The real problem is that the American perspective on sectorals is that this is a must have for us and they cannot go back to their constituency without something to show. As long as you are saying it is mandatory, nobody is going to put anything on the table. I think that realism is dawning. The American ambassador in Geneva, Michael Punke, recently said that we agree this is a voluntary approach and that is good sign.
On industry, domestic industry for the large part is okay, there are certain segments of industry which are not okay. For example, we have still high tariffs on autos. Those tariffs have to come down. I think the way forward is to engage industry and work out a five-year plan like we did for other industries and start implementing it.
There are some other sectors like chemicals for example, where the rest of the world wants to have access and they are hugely competitive. There I cannot ignore what domestic industry is telling me. By and large, most of the industries have accepted and wherever it is possible for them to voluntarily contribute, they will.
Are we signing a raft of FTAs because of the stalemate in WTO talks?
We are not breaking the rules of the WTO, but we are trying to expand our horizon. However, please understand, bilateral trade agreements are not pure economic animals. There are reasons to sign an economic partnership agreement which can be strategic and political. You do not weigh (trade agreements) in dollars and cents. You look at things (through) a different lens.
But should trade agreements be signed for political reasons?
When you negotiate the commercial parts, no. But only commercial considerations should not be the basis for signing such agreements. Negotiations for every trade deal are cleared by a committee called the Trade and Economic Relations Committee headed by the Prime Minister. Now the deliberations there are not entirely always economic. There may be other good reasons why you may want to make commitments. But once that political decision is taken, then it is my job to negotiate on the best possible commercial terms.
It is said that our trade policy is now driven by what China is doing. If China has a trade agreement with a country or regional bloc, then do we also follow suit?
I disagree completely. Why am I in bilateral negotiations with New Zealand, with Canada, with Europe or with Israel? Please understand the decisions. Where to engage and how to engage are taken at the highest political level and these are not taken on whimsical grounds. I think it is unfair to characterise our trade policy being driven by some external country. As far as I know, whether it is China, the US or Brazil, nobody has established a beach-head in Europe as yet. So what am I so terrified about?
How do we deal with a country like China which is our second-largest trading partner, a global competitor and one with which we have a huge trade deficit?
Very carefully, I guess. The huge merchandise trade deficit could be addressed when Chinese companies start manufacturing in India and China opens up its markets for my exports. Many of my exporters have told me that the markets there are effectively closed through a ‘nod-nod, wink-wink’ type of arrangement. That needs to be sorted out. I think the Chinese government understands this. In the recent visit of their premier (Wen Jiabao), this message was clearly conveyed. If I cannot sustain a $100 billion trade deficit, how do I sustain $20 billion trade deficit with just one country. It isn’t possible.
Where do the negotiations for a comprehensive trade agreement with the EU stand and when will it be signed? There is a feeling now that both sides will settle for a less ambitious trade agreement than previously envisaged.
Let me disagree with the second part. The ambition levels will be preserved. The bulk of the deal is actually in place. The remaining issues are what I call the last-mile negotiations--some tariff lines in goods, something in services, some stuff in intellectual property rights, something on government procurement and something on sustainable development. These are the five last-mile issues which are getting sorted out. All the last-mile issues are the hardest to negotiate. I am trying to do the deal by April. If it slips a month or two, I am not going to break out in a cold sweat. My guess is that in many of these cases, we are one negotiation or two negotiations away from closure.
EU officials have gone on record saying that data exclusivity issue is very much on the table, while the impression one gets from the joint statement issued by both sides after the December summit is the opposite?
Go and ask them. I am not going to tell you what I am negotiating with the EU. They can keep saying what they want to. I assure you our understanding on these issues is very good and we know exactly what we are doing.
We are increasingly getting demands from our negotiating partners in trade deals to open up the government procurement market. There is also an increasing feeling within the country that by protecting this market from outside competition, we are actually encouraging inefficiency.
A lot of this is misplaced due to two reasons. One is, whenever anything is above a certain threshold, say a Rs50 crore or Rs100 crore contract, it is all international competitive bidding. Anybody can bid. So where is the exclusivity, where is inefficiency? The problem is this: India never signed the Government Procurement Agreement (under WTO). India is a huge market. So everybody thinks if you get a government procurement agreement with India, you will get a big deal. The problem is you already have that market. Whether it is a railway tender, a power equipment tender, a petroleum refinery tender, or an oil drill tender, who wins these tenders? Merely because we did not sign the procurement agreement does not mean we do not have a transparent system.
How are special economic zones (SEZ) going to affected if the Direct Tax Code (DTC) is implemented?
I think DTC needs to be debated more carefully. The grandfathering provisions are good. What is not done is the prospective tax regime. If you create a tax regime which effectively kills all future SEZs, essentially what you are saying is what happened up till now is fine and henceforth no more SEZs. That I think will be wrong as an export policy. While I am sympathetic to the levy of minimum alternative tax, the rate at which it is pitched for SEZs is a bit too high. It has to be different than what it is for the domestic tariff area. After the budget is over, when the Parliamentary standing committee on finance meets and discusses DTC, that is the time we will take up the issue.
asit.m@livemint.com
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First Published: Wed, Feb 16 2011. 12 30 AM IST