Arvind Panagariya interview: India can’t become an export powerhouse unless it’s open to imports

India should send the signal that “we stand for globalisation, we stand for exports but are not afraid to import” if we want to grow exports, said Arvind Panagariya, professor of economics and the Jagdish Bhagwati Professor of Indian political economy at Columbia University.

Except for a gap of about 200 years, India has been a large contributor to global output, Panagriya wrote in his book India Unlimited: Reclaiming the Lost Glory. In 1820, India contributed about 16% of global gross domestic product. China – with about 33% of world GDP – and India together controlled half of the world’s GDP.

Currently, India’s exports lag behind China’s, and southeastern countries such as Vietnam and Bangladesh have become competitors, especially in the textile sector.

In his Independence Day speech, Prime Minister Narendra Modi spoke about Atmanirbhar Bharat or self-reliant India. He also spoke about being “vocal for local”, “Make in India”, and “Make for the World”, which would mean increasing exports.

Panagariya, who was the first vice chairperson of the NITI Aayog, the Centre’s policy think-tank, from January 2015 to August 2017, spoke to IndiaSpend about how India can become a global export powerhouse, how it needs to change policy and how companies on the ground can be supported.

Excerpts from the interview:

Making for the world means that we become more export-oriented. How do we do that?
First of all, we need to change the optics a bit. If we truly want to be an export-oriented economy, then there has to be signalling. Two things – one is signalling and the other is substantive policy changes. Both are important.

A good example of signalling is South Korea in the early 1960s. President Park Chung-hee, who led the Korean revolution, was to South Korea what Lee Kuan Yew was to Singapore. First thing Park Chung-hee did was just take charge himself, create a committee which he chaired himself.

This was a committee that would meet once in a month, and all export interests would come in there – his own ministries, industry chambers, exporters themselves, some of the academics – [and] would then say what they need to do to capture global markets. And every month they would review the progress, bottlenecks and how those bottlenecks ought to be removed.

I think that sends a huge signal and we ought to do something like that. Even if it is not once a month, [we could do it] every three months. If there is a review of that kind where the progress is assessed by the Prime Minister’s committee, it sends a huge signal.

If you were to look at the last decade, many people would argue that a lot of industries which could have been here – including, for instance, garments – have left India and gone to countries such as Bangladesh and Vietnam. Why would that change or how can that change?
That is why I think signalling is very important – that we stand for globalisation, we stand for exports, but are not afraid to import. When we also simultaneously say we are going to do import substitution, which is what we have been saying and doing really, then the signal gets mixed up, that India wants to come to the global market as an exporter but it is not there as an importer.

Policy-wise, it does not help. That is the first thing, signals have to be very clear.

I think our signals have been very mixed in addition to the policy barriers that we face. Vietnam and Bangladesh have done better than us in terms of labour markets, land markets, business friendliness, particularly in the apparel sector, which is where we need to capture that market at the global level. Vietnam and Bangladesh have been ahead of us.

You have argued several times in your book, as well as in your article published on July 22, that we should avoid the import substitution trap. How do we break out of that?
That is where we have to be bold and understand the economics of globalisation. We cannot be an export powerhouse without also being open on the import side. Remember, you want to export only so that you can import more as well.

Just imagine, if you were not importing anything, why would you export? That would be like taking products and dumping them in the harbour because you are not getting anything in return. The whole idea behind exports is that you can import things that you do not produce at a low cost. That is the basic point.

The reason we fall into import substitution is because producers often drive the policy –the manufacturers, industry associations and so forth. And for the producers, it is a lot easy to say, “We have the potential for a billion mobiles. Indians are buying a few hundred million mobiles every year. And there is no risk for us and we can capture this market. As long as imports are kept out, the market is there and there is no risk. As we can all assemble mobiles, let us do that.”

That seems very plausible to the government. What we do not realise is in doing so, particularly when we are doing this through not policy reform but through import protection – that is imposing tariffs on the foreigners – then we are encouraging our less efficient producers to get into the market. And these are not going to be global size kind of manufacturers.

We have done that in the last five years to six years, a lot of entry has happened of domestic manufacturers in mobiles. But in the end, not one of them is going to be an export powerhouse. We have seen the prospect; it is only some of the larger ones, the multinationals who have entered – who in any case operate in the global market – who could potentially be exporters. So what we are doing is taking resources from industries where we are much more competitive and into the ones that we are not competitive.

The example that you used of local mobile manufacturers not becoming competitive, why does that happen? Or why did that happen?
Now we go back to policy issues. Why is it that from the very beginning, we were not mobile producers or manufacturers, and by now major exporters, like China? That has to do with our overall policy regime.

First of all, we started opening up in 1991. Our exports as a proportion of the GDP was only 7% at that time including goods and services. We started, and we were very gradual to liberalise. By the time the mobile revolution comes, everything, including phone manufacturing, was in the public sector in India.

The private entry started in the mid-1990s but it really was not properly opened up till Prime Minister [Atal Bihari] Vajpayee put in place the new telecom policy. That telecom policy allowed the entry of private players, but not for manufacturing.

So that revolution could actually happen because at that time we were open to importing mobiles.

We had signed the International Technology Agreement at the World Trade Organization under which we said that we will allow technology products to enter with zero tariffs, zero protection and so these mobiles would come in. And if you look at the usage of mobiles in India, the way it expanded was phenomenal. It was truly exemplary.

Our telephone production at that time was in small scale industries. We used to actually reserve a large number of products for exclusive manufacture by the small scale industry, which never goes in with the export market in mind.

So, as far as manufacturing was concerned, at that time, there was no chance that we could compete globally. And with zero tariffs, of course, imports came in quickly. Thankfully so, because we could get the mobile revolution. Now, small scale reservation is gone, but labour markets are still a huge problem.

If you were to look at traditional industries – garments, light engineering, including the toasters and ovens that China excelled in – all of which also happened in recent times, what is that we can do today if we could?
First of all, let us be very clear that we want to be an open economy. That signalling is very important. But policy-wise, labour markets are very inflexible in India.

If you are a company of 100 workers or more, then it is effectively impossible to lay off any of the workers. And that deters firms in industries like apparel from becoming very large because then they have to deal with labour issues.

It is not that entrepreneurs do not want to employ workers. The whole purpose is to employ workers, not to fire them. But sometimes there are some workers who vitiate the environment and in such circumstances, you need to be able to lay off those workers, take them out so that the firm can operate properly.

Do you feel that is a critical component amongst the reasons as to why we are not able to move ahead in light engineering?
In my judgement, it is. A lot of people contest that and I am eclectic in this matter. If others think that there are other barriers the removal of which will lead to these outcomes, I am quite happy to listen to that as well.

And I do not believe in one single reform. One single reform will not do it, but it is one of the critical ones. Also, I think, for our large enterprises, land markets have become inflexible and land has become very expensive today.

If you were now to start with a clean slate, how would we do it? What would give entrepreneurs the confidence, particularly in the industries that you genuinely feel you have missed the boat? You say in your book that in 2014, China exported $186 billion of clothes, almost $782 billion of electronics and electricals. The figures are much higher now, over $1 trillion. Where do we start and even if we start do we stand a chance?
You never missed the boat. The boat is always there. It is a matter of whether we get on to it. In fact, now China is getting off the boat in many products, and we are the natural ones [to take its place]. Who has got the 500-million strong workforce? Only India, nobody comes close. So I still personally think that it is purely a matter of policy, and we [need to] begin to give proper signals while also changing policies.

I have one suggestion that I have written in the book as well. The model I am very influenced by is the Shenzhen model of China. Take two or three coastal areas, where you have ports – you have them in Gujarat, Andhra, Maharashtra, Orissa – and take out a land area that is at least 300-500 sq km and declare that as an autonomous employment zone.

And as in Shenzhen, empower the local administration to change the labour laws within at least that particular zone. Introduce a kind of flexibility and allow easy movement of imports into the zone, and exports out of the zone.

So, facilitate trade as well. It does not require any export subsidies or export requirements. If they want to sell domestically that is fine. If they want to sell abroad that is fine. But fix your domestic laws nicely in three or four of those zones and see what happens.

We have tried that but that has not quite worked in the past.
Because the model has always been wrong. What we have tried are the special economic zones. These are small little operations, many of which became land grabs. The whole approach that we take – that every state has to have an SEZ – [is wrong].

I remember in the NITI Aayog, the proposals coming in – “In such and such area, SEZ is supposed to be 10,000 acres. But small states cannot have it. So let us make it 1,000 acres.” But that is not the way.

It is not a matter of every state having everything. Industry locates itself in a few states and then the workers move in. Shenzhen, when they started, had a bunch of fishing villages, a population of 3,00,000. Today, you have 12 or 13 million. So workers have moved in.

The local language is Cantonese, everybody speaks Mandarin because they come from the rest of China. So people will move in, the industry will move in.

And once the signal goes out, a lot of the industry that is moving out of China would come into these zones. And once that happens, we can begin to showcase that both to the outside world, and the domestic constituencies that this liberalisation is a good thing. We can then extend across the country.

One of your premises for economic growth overall is that we should have an export-led economy, which in turn means a strong manufacturing-led economy. In India, the argument would be that we are a large domestic economy. We have 1.3 billion people, we have enough to create for, produce for, and sell to within the country. Your thoughts?
That is a huge strength and I do not dispute that. We are now also a reasonable size economy, close to $3 trillion, we are getting there. It is a good size market. But there is no comparison with the global market.

The global market is way bigger. Your manufacturing alone would be multi-trillion. The goods export market today in the global economy is $17 trillion, and we are $3 trillion total – with goods, services, agriculture and everything. So it is still a very large market.

But that is not the only reason. The much more important reason to be out there is that the global marketplace is where the technological improvements and innovation happen. If you are absent from there, you will not learn those things.

I like to use this analogy with cricket. Why do we have such fantastic cricket players coming one after the other? You have Saurav Ganguly, Yuvraj Singh, [Sachin] Tendulkar, Virat Kohli, MS Dhoni who has just retired. This is happening because we are playing cricket of every kind. We have been at the forefront of international cricket – [it] makes a huge difference. That is where your mettle is tested as well. You also learn from other players but you also get tested there. You really have to work hard.

We academics, whether we are operating in the market place here, which is global, or we are operating within a small little country, if my peer group is my local competitors only, I know I can be laid back. I can do one or two articles every year and still be a raja [king]. But I cannot survive here [globally]. I am just here by what I did in the last year. Whatever stock you created in the last 40 years is history. What did you do in the last year, that is the standard by which we get judged. That is exactly what happens in the global marketplace. So it is very important.

If you can get the global companies to come in, they bring their capital, bring in their management, their links to the world markets, their technology and what we supply is good workers. It is a perfect complementarity. The Japanese have extra capital, but they do not have enough workers there to work on that capital. Let that capital come into India. We have the workers – Japanese capital, Indian labour, we can kind of cooperate together.

Post Trump, a lot of manufacturing left China or began to leave China and moved to other parts of Southeast Asia, or even moved back to America or Europe for that matter. India currently has tensions on the India-China border. What would be your prescription to take advantage of that situation, economically?
For a long time, I was very much for the RCEP [Regional Comprehensive Economic Partnership], which included 16 Asian countries, India and China among those.

But post Galwan [valley, which saw a violent face-off in June], I have really changed my mind.

I do not think we can really trust China in the long run and we need to decouple. I am very much opposed to doing this decoupling by starting a trade war with China.

Some of the things that directly go into security like Huawei equipment or some of the things that directly impact security, fine, there we have to take action based on security considerations.

But otherwise, we should move away from China gradually. And we can do that if we forge trade relationships with a large number of other countries. Within Asia, we have Japan, South Korea, we have Australia, we even have a number of ASEAN countries.

I would actually start with a free trade agreement with the European Union. That is a large market. I think we do not have a serious conflict in forging a free trade agreement with the Europeans because they will not push hard on issues of labour standards, intellectual property etc., which the United States will.

Likewise on agriculture, Europeans do not have huge export interests. With the Americans, the export interests of American farmers will come in conflict with our own willingness to liberalise our agricultural market. So for that reason, start with the European Union

We have to be bold, we have to be willing to open our market for automobiles, spirits and so forth, which are export interests for the Europeans. We have to be prepared for that if we want the large market – $14 billion-odd worth of apparel and footwear to the Europeans.

We have to be willing to open our own markets as well. The United Kingdom is another good market where we can have a free trade agreement. Gradually, if we do those – even Canada and Australia – confidence will be built up, we can then be ready to forge similar agreements with the US. That should be our roadmap. That process also allows us to liberalise our own, and that sends the signal that India really wants to be an open economy.

What are the two or three things we could do to ensure that we get this off the ground both from the top end, which you have touched upon in terms of the policy, but also equally from a bottom-up point of view, from the perspective of companies?
I would very much pitch for the autonomous employment zones. It sends out a huge signal and would also solve, within those zones, the policy problems with respect to labour and land laws.

Second, the Prime Minister has to give a very clear signal by bringing in some of these labour-intensive product exporters. Also within that fold, we need to bring in foreign manufacturers. What has been missing very badly, especially in these labour-intensive sectors, are medium and large enterprises in India. I think we are populated by very small enterprises, particularly in apparel, footwear etc.

These very small enterprises – shops with 20 tailors – are not your big exporters. There are two or three big manufacturers, consult them on what more needs to be done. If the Prime Minister’s Office takes that kind of initiative, it will send a huge signal. I think the states will then follow; some of the labour, land reforms, states can do.

Karnataka, for example, on land, has done very good reforms. They are trying to allow the conversion of land around the cities, from agricultural to non-agricultural uses and so forth. And that I think is a very important reform because that is where the industry has to expand–in the periphery of the cities.

If we do these two things – autonomous employment zones and the Prime Minister really showing very centralised, focused interest in export of labour-intensive products by both domestic firms and multinationals abroad, states will follow.

This article first appeared on IndiaSpend, a data-driven and public-interest journalism non-profit.