‘Need FTAs with rich nations, tax reforms’

Arvind Virmani, Niti Aayog member and former chief economic adviser in the finance ministry (Mint)
Arvind Virmani, Niti Aayog member and former chief economic adviser in the finance ministry (Mint)


In an interview, Arvind Virmani said an FTA with the EU will let India overcome a tariff disadvantage of about 12% while exporting to the EU

NEW DELHI : Signing free trade agreements (FTAs) with developed economies such as the EU and simplification of three streams of taxation—direct taxes, GST and customs duty—are essential for India to step up manufacturing and boost growth, said Arvind Virmani, Niti Aayog member and former chief economic adviser in the finance ministry. In an interview, Virmani said an FTA with the EU will let India overcome a tariff disadvantage of about 12% while exporting to the EU. Edited excerpts:

We have been trying to increase the share of manufacturing in the economy with some success stories, but a lot more needs to be achieved. Do you think we will be able to pull this off given that there are several competing Asian nations?

There are two issues here. One is competing on labour-intensive supply chains and the other is in skill-intensive sectors. Surprisingly, people don’t recognize the simple fact that even the so-called high-tech exports of China are basically labour-intensive. The label on the final product may categorize it as high-tech, but the exports are labour-intensive. So, the big challenge is about attracting the labour-intensive supply chain where, as everybody knows, some of the initial stuff is going to countries like Vietnam and the skill-intensive production to countries like Thailand and Malaysia because of their long association with multinational companies. They are kind of our competitors. On labour-intensive manufacturing, I have looked very carefully at the Vietnam case. Because of Vietnam’s FTA with the EU, it gets something like a 12-12 1/2% tariff advantage (over exports to EU from other countries without an FTA). It is that high. So, straight away, the solution is very clear. We need an FTA with the EU. Most of the competitive disadvantage vis-a-vis Vietnam will be gone. Vietnam and other countries that are less competitive have FTAs with the EU.

Roughly 12% is the tariff on EU imports of certain things like garments and electronics. If you have an FTA, it becomes zero. Also, with the tariff disadvantage (for India), MNCs tend to go to Vietnam (for manufacturing). It is a competitive disadvantage for us. So, we urgently need FTAs.

The government is focusing a lot (on this) and that is the right approach, and I have supported it from the beginning on FTAs with the developed countries. We already have with Australia and are discussing with the UK, Canada and the EU. These are going to be very important. But the strategy is clear that we need to remove this basic disadvantage. Our pace of infrastructure building has accelerated.

Another aspect is that, globally, much of the trade in manufacturing sector has shifted to MNCs and we were just doing small-scale exports, and we did not get into the global supply chain. We are now making a huge effort again. This is a big change in the last, let us say, three years or so, because we have a huge gap to catch up with.

On skill-intensive sectors, we have an advantage. Most global companies have their global innovation centres in India now, and more are coming. Services are connected with software on which we have a big advantage. Where we are still stuck is the distribution of electricity because of states’ hold over the sector.

What are the structural reforms that are needed to achieve consistent growth?

One of the difficult areas of reform, I believe, is tax reform which I think we need to do if we are thinking 10-15 years ahead. We need to reform and simplify all three taxes. That doesn’t mean we’ve not done well. The corporate tax has been reformed; in income tax, there have been simplifications. But even in that case, I think the advantages of having a simplified tax code are perhaps not well appreciated. I do not blame anybody. It is just conceptually very difficult as it involves a lot of indirect effects. The whole issue of tax reform is a macro reform.

You mean reforms in direct tax, GST and customs duty?

Yes, all three —GST, direct tax code and custom duty reforms. Another difficult reform at state level is in the electricity distribution sector. States which can reform the power distribution system by eliminating this cross-subsidy are going to attract more industry and more jobs.

Some state governments have decided to go back to old pension scheme, which can add to their fiscal pressures. Do you approve of that?

I am completely against that, personally, as an economist. I was involved in introducing the new scheme—the New Pension System (NPS). I still remember when we took the last few meetings and every economist agreed with it. I think it would be a big betrayal if any economist says we should go back (to old pension scheme). Unless an economist has become politicized, I don’t think any economist can support abandonment of that scheme. That should not mean that we can’t make some adjustments to take care of genuine problems.

There is one problem I see. That has been exposed by the pandemic. When you have a real disaster which you cannot foresee, equity markets will go down temporarily. So, some thinking can be done on that matter to provide some kind of a safety net. For example, you could have something saying if the GDP declines by more than 5% or more than 10%, then for that year or two, the government can supplement that system. But that is an extreme, unpredictable (situation). The authority should be smart enough to manage the pension scheme during other fluctuations. You just have to have good managers there. Yes, but in extreme circumstances, some kind of a safety net is possible. That is completely different from abandoning it. And the second point I would make is abandoning that scheme (NPS) and going back implies that government servants have some superior claim over resources than the public. It is an absurd notion in my view, absolutely absurd. Resources come from the public. As an economist and somebody who worked on public policy for 30 years, I think its wrong.

India is predicted to be the most populous nation by the middle of this year with 1.4 billion people, 69% of which will be people below the age of 24 years. Educating and skilling them is a big challenge, is it not?

I don’t think there’s any disagreement that job skills are critical. Everybody, including the government recognizes that and there are a lot of schemes. But one point I have emphasized for decades is that you have to have a focus on basic education and then, employment skills. The devil is in the details. At a higher level, there is no disagreement. The government is doing a lot of schemes. But I think it is very important to understand that the base of it is basic education. It is absolutely critical for 50-75% of the youth population. Too often, when we talk about education, we immediately jump to higher levels. That may be relevant for the top 25% (of the youth). I do not think people in the education and skilling (sectors) really give as much emphasis or understand how critical basic education is. The second point is the education of the self-employed. For example, we could think of the skills needed for people who run household enterprises. The male member in the family may be doing the formal work and the women may be assisting them. You could think of training the women on marketing skills. She could become a manger of the household enterprise. I generally divide job skills into three -- low, medium and high. Again, the tendency is to think of the high. The low and medium skills are very important. For example, the skilled construction workers needed for a large construction company. Employment and skilling are two sides of the same coin. There is no job without a skill and there is no skill which is not related to a job. The problem in basic education is not one of resources, but one of imagination. If there are not enough quality teachers available in rural areas, we can use connectivity and e-education. Quality depends on using new techniques and training teachers. We already have a Bharat net program which is trying to get connectivity to every village and panchayat.

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