New Delhi: Professor of economics and Jagdish Bhagwati professor of Indian political economy, department of international and public affairs, Columbia University, Arvind Panagariya has been advising the World Trade Organization on the Doha round. The Doha round of talks which began in late 2001 have struggled since their inception over differences between rich and poor countries on barriers to agricultural trade. In the capital to attend a policy forum Panagariya spoke to Mint on the Doha Round and India’s trade policies. Edited excerpts:
Do you see a revival of the Doha Round of trade talks?
At this stage there is a lull. Because of the preoccupation with Iraq, the US is not ready to move on with it. Given the demands it is making on India, Brazil and others, without putting on the table equivalent buffers of its own also makes me suspect that it is not ready (to move). Everybody wants to preserve the WTO; a formal failure of the round will weaken the institution and no member-country wants that. Maybe it will be revived in the next couple of years, when the US has a new administration and India too has its elections. Uruguay round (of talks, preceding the Doha Round) also took seven to eight years. This may take a little longer.
Is it true, as some economists say, that India has far to go on the tariffs front?
I disagree. India has opened up its markets massively, in industrial products and services. Top tariff rates have come down from 38.5% in 2001 to 10% now. The average rate is also 11-12%. Customs revenue as a proportion of GDP (gross domestic product) is down to 5% in 2005-06. Merchandise imports have grown 28-29% a year, and import-GDP ratio is up over the last four years from 10-11% to 17-18% in 2006-07. This is a very rapid expansion. So, saying India is still protectionist is certainly not correct.
So you think we have done enough on the tariff front?
China’s average tariff on industrial products is 7-8% and India’s around 11-12%, at most 13%, as reported by the latest WTO review. So the difference is not much. India’s liberalization also started much later than China’s. So we are more protected than China, yes, but one of the most protected economies in the world? No, I don’t think so.
Do you feel that we’ve done a great deal on external but not internal reforms?
Not a lot has happened in the last three years, and I don’t expect much else. The current shift to growth rates to 8-9% has a lot to do with what happened during the Vajpayee-(Yashwant) Sinha era. Just look at cellphones. Again there is no scientific study, but teledensity rose from 2.8% to 18% between 1999 and 2007—it must have added a lot to productivity gains. That’s just one example.
But this government is claiming to take a pause on reforms and focusing on inclusion, so that the high growth can reach the poor.
The NSS data gives extremely compelling evidence that poverty has been declining, so how can you say the poor have been left behind? Now that you have such growth—just look at the tax revenues—it should be easier for the government to redistribute, why is it not doing that? Virtually all the subsidies that are out there are not going to the poorest. Even procurement prices are going to farmers with surplus crop; the landless don’t get any subsidy. Why don’t you give them cash advances, now that biometric technology is available? The common man won’t protest if you give him cash advances. If there is no consensus on privatization now, how come it was there a few years before—the workers never came out to protest. There is no technical problem with cash advances, if the government really wants to do inclusion, it can do it.
Do you think special economic zones (SEZs)will really boost manufacturing and exports?
Ideally, we should apply those same policies that we are trying to put into SEZs to the entire country, that’s the first option. The SEZs is really the next best. The very first version of the bill, under the previous government, had provided for a waiver of chapter VB of the Industrial Disputes Act—that is, a flexible environment to business in terms of labour, and that would have been revolutionary.
Over time, hopefully, there will be credibility established among industry. If, ultimately, the SEZs do lead to the entry of labour-intensive industries in a big way, then I’d say the idea is worthwhile. As for the land controversy, as long as it is a commercial transaction, I have no problem. If there is lack of information, the government and non governmental organizations can offer assistance.
Our growth is led by investment, both local and foreign. Is this sustainable?
Most of our growth is out of savings, as I see it. If the current account deficit is around 1% of the GDP, there is no worry on the foreign capital flow. I suspect the savings rate will climb still further as corporate savings is still very low, about 7-8%.
The only problem is that RBI is finding it too hot to handle—raising cash-reserve ratio is an extremely harsh step. You can’t use monetary policy to protect the poor. You need different instruments for different purposes.
Is this what you say in your forthcoming book, India: An emerging giant?
Capital flows and investment won’t be enough, there will be costs. If we are don’t encourage labour-intensive growth, it will hurt the poor. And this momentum will be lost and show in lower growth.