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Economic costs for India may be huge if COVID-19 fallout lasts 6 months: Arvind Panagariya

In an interview to ThePrint, former Niti Aayog vice-chairman Arvind Panagariya welcomes rupee depreciation as it will make Indian exports more competitive.

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New Delhi: The Indian economy will face large-scale adverse consequences if disruption in economic activity on account of the coronavirus outbreak lasts for over six months, former Niti Aayog vice-chairman Arvind Panagariya has said.

In a telephonic interview to ThePrint, Panagariya, who has recently authored a book titled India Unlimited, also said the sharp depreciation in the rupee, down to 76 per dollar, is a welcome move. He hoped that the Reserve Bank of India (RBI) will be able to keep the rupee at these levels to make the Indian exports competitive.

Panagariya, who is currently the professor of economics and Jagdish Bhagwati Professor of Indian political economy at Columbia University, also spoke about about how the time is right for the Narendra Modi government to bring in changes to the Land Acquisition Act. He also highlighted the need to encourage medium and large firms in labour intensive sectors.

Edited excerpts:

What kind of an economic impact COVID-19 will have on the Indian economy?

Arvind Panagariya: Immediately, at the external level, we are already observing a severe dislocation of trade and complete ban on travel. Internally, on the demand side, people are limiting purchases to only essential commodities and on the supply side work has been limited to what can be performed remotely plus essential services. So, economic activity all around has taken a big hit. If this only lasts one to two months, the damage will be limited. But if it lasts six months or more, in addition to the direct cost of dealing with the coronavirus, the indirect economic cost will be very large. But given the uncertainty of how severely and how long the virus will impact us, we are in very uncertain territory.

Also read: This recession will surely be as bad as 2008 global financial crisis, if not worse: IMF

Do you think international trade will get realigned now?

If the crisis is short-lived and the world comes out of it in say three to four months, the supply chains will quickly reestablish themselves. There will probably be some realignment away from China. But that realignment has already been under way for reasons of US-China trade war and rapidly rising wages in China.

Will India be able to capitalise on the shift away from China?

This will depend on how we bring about our capacity to implement economic reforms internally. We ought to be doing far better on the international trade front and export more even without the realignment away from China. Our share in global merchandise export trade is 1.7 per cent and in service exports around 3.5 per cent. Our merchandise exports need to be significantly larger as our economy grows. The share of India’s exports in global export pie has to rise to at least 4-5 per cent.

You talk about openness of economies to achieve high growth rates. But India has already withdrawn from the Regional Comprehensive Economic Partnership (RCEP) and is rethinking its free trade agreements.

I’m not sure where we exactly stand on RCEP. My understanding is that we pulled out because we felt that the deal on the table was not good enough. If we are trying to negotiate a good deal and then sign the agreement, then I am with the government decision. But having said that, on other fronts, we have been raising protection. Tariffs have been continuously rising. The latest round of custom duty increases in the (Union) budget has been doubly disconcerting for the reason that they apply to many labour-intensive products such as footwear and toys. These are sectors where we should have been competitive.

Many in the government seem to believe that import substitution promoted through increased import protection is the way to industrialise but that is something that we had tried for the first 40 plus years following independence and the policy utterly failed.

Also read: At current rate, India can see 30,000 COVID-19 deaths by May, no hospital bed by June: Data

You make a case for a manufacturing led growth model. But when many countries are favouring protectionism and an inward looking approach, is it feasible?

This is a cliché that everyone invokes to argue against an export led growth model. Another similar, commonly invoked cliché is automation. But if you look at the global export pie, it is continuing to grow. The total global export pie in 2018 was around $25 trillion — $19.5 trillion of merchandise exports and $5.5 trillion of service exports — and this has been growing. Even if something very drastic happens and the global merchandise export pie shrinks to $15 trillion, if India has a 5 per cent share, it will mean $750 billion in exports — a little more than 25 per cent of its current GDP. To be sure, even after the global financial crisis, the world merchandise exports fell from $16.2 trillion in 2008 to $12.6 trillion in 2009 and then bounced back to $15.3 trillion in 2010. If you are competitive, protectionism and automation cannot contain your exports.

But even with rupee at 75, exporters feel that they won’t be competitive.

It is because our manufacturers are basically not globally competitive and operate on a small scale under a protective wall. We are a nation of very small firms. According to the Periodic Labour Force Survey (PLFS), only 15 per cent of our workforce is known to be in firms with 20 or more workers. And firms up to 50 workers are considered small, not even medium. So, very few firms have the necessary scale, especially in labour-intensive industries, to be globally competitive.

Also read: If India has to control coronavirus pandemic, it must contain 4 other contagions as well

Does India provide sufficient incentives for firms to grow big? Nearly all incentives being announced seem mainly for MSMEs. Be it regulatory forbearance or compliance relaxations.

Even our incentive system, which relies on subsidies and import protection, encourages firms to stay small. Barriers to trade, inflexible labour markets and extreme difficulty of procuring large pieces of land to establish large firms all work against scaling up. These factors work particularly against labour intensive industries such as apparel, footwear, day-to-day furniture, kitchenware and numerous other light manufactures where with our 500-million strong workforce we should have had a comparative advantage. It is crucial that we reform land and labour markets and open up to international trade to create an environment in which medium and large enterprises can flourish, especially in labour-intensive manufacturing.

But changes in land and labour laws are politically sensitive issues.

This is a cop-out, I think. In 2014, Rajasthan undertook some modest labour law reform and one saw hardly any street protests. Gujarat had introduced more far-reaching labour-law reforms as applied in the special zones as far back as 2004 and hardly anyone even knows about it. As for land, as an example, I doubt that farmers who own agricultural land on the peripheries of our cities would object to the conversion of their land for non-agricultural use if they are allowed to capture the increase in value that would result from such conversion. The vast majority of them will be much too happy to have the windfall from the conversion.

Also read: 10 steps Modi govt should take to manage economic fall-out of coronavirus: SC Garg

The Narendra Modi government has also not tried to revive the amendments to the land acquisition act despite a clear majority.

PM Modi, to his credit, tried to amend the Land Acquisition Act in 2015. Because this required support from the states, we had even called a meeting of the Niti Aayog Governing Council, which included state chief ministers. But at the end of the day, the effort failed because many chief ministers who had once wanted the amendment chose to change their minds. The government lacked votes in the Rajya Sabha. Therefore, the amendment, though passed by Lok Sabha, failed to clear the Rajya Sabha. Today, the situation is different and the government may be able to mobilise enough numbers in Rajya Sabha to succeed. This is why it is a good time to reignite the conversation on the reform of the Land Acquisition Act.

Also read: Indian business leaders want big rate cut to survive coronavirus damage

You mention in your book how a strong rupee has gained currency in the current government. Do you think the rupee is overvalued?

Overvaluation must be defined relative to some benchmark exchange rate. There can be many views on what that benchmark exchange rate is. Therefore, this is a tricky question to answer. But it is easier to speak in terms of appreciation and depreciation, which are well defined. We know that between 2014 and 2019, rupee had appreciated nearly 15 per cent in real terms relative to our competitors in the global economy. Such a large appreciation worked to make our goods less competitive vis-à-vis goods of the latter. Therefore, the recent depreciation of the rupee in nominal terms is a very welcome change. I hope the RBI will keep it there. I think this will greatly help spur the exports of our labour-intensive products, which operate on super-low margins. For them, a 7-8 per cent depreciation of the rupee can be a major boost to profitability.

You also talk about the need to shift the focus of Make in India from “fancy capital-intensive, hi-tech and high-end products” to the “less flashy but employment-friendly sectors”. Do you think the Modi government erred in its approach of designing the programme?

The government largely chose where it saw industry would want (to) do (business)… Today, if you go to any industry body and ask what industries should the government be thinking of when seeking to promote ‘Make in India’, you will find hardly anyone picking footwear, clothing, furniture or other light manufactures. Instead, they are likely to point to steel, automobiles, petroleum refining, pharmaceuticals and defence.

For historical reasons, our entrepreneurs themselves have what I call a ‘Brahmanical’ attitude whereby they want to be in fancy, capital-intensive and hi-tech products but not something as ordinary as stitching clothes or making shoes. But while continuing to exploit the expertise we have developed in the fancy sectors, we also need to enter in a much bigger way in clothing, footwear and other light manufactures to create good jobs for those with limited skills.

Do you think India has seen a decline of the economic bureaucrats in India? You have alluded to the preference for generalised skills rather than specialised skills, and the large and complex nature of the Indian economy.

Yes. In the early 2000s, the Indian Economic Services (IES) staff pleaded to the government that just as it had cadred ‘secretary’ level positions for the Indian Administrative Service (IAS), it should cadre ‘economic adviser positions’ for the IES. The government acquiesced to that demand and ‘economic adviser’ positions except those of ‘principal’ and ‘chief economic advisers’ in the finance ministry became unavailable to outside economists. Economic adviser positions in various ministries had been the avenue through which nearly all past economic bureaucrats such as I.G. Patel, Manmohan Singh, Montek Singh Ahluwalia, Shankar Acharya and Rakesh Mohan had entered the government. They joined when relatively young and eventually rose to the top positions.

When PM Modi came to office in 2014, there were no economic bureaucrats left in the system.

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