India must return to more liberal trade policy regime, ink FTAs with UK, EU: Arvind Panagariya


Former Niti Aayog Vice Chairman Arvind Panagariya on Friday said that India has begun to reverse the process of liberalisation in recent years and instead of raising tariffs, should lower them for the Association of South East Asian Nations (Asean) countries. Cautioning against industrial promotion on the “crutches of protection”, he said it would be a mistake to downplay the damage that creeping import substitution can do to India’s growth and jobs ambitions.

Stating that India must return to its previous ambition of bringing tariffs down to levels prevailing in member countries of the Asean, Panagariya said: “Success in export markets requires first and foremost an open trade regime. Rather than raise tariffs, India must lower them”.

At present, Panagariya is Professor of Economics and the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University.


He also said along with a low corporate profit tax rate, labour law reforms, Goods and Services tax and modern bankruptcy law, a massive privatization programme on the anvil, and measures to de-stress the financial sector under way, a more liberal trade regime will aid India take on to global markets in a major way as he pitched for Free Trade Agreements (FTA) with the country’s large trading partners.

“There is no doubt that given the reforms already in place and those proposed, India can count on growing at 8% rate annually in the two post Covid-19 decades,” he said at India Exim Bank’s flagship event ‘Commencement Day Annual Lecture’.

“A more liberal trade regime carries the promise of pushing this growth rate into double-digit range,” he said.

Panagariya pitched for FTAs with its major trading partners starting with the United Kingdom and the European Union, stating that their agricultural sectors pose no threat to the livelihood of India’s farmers. He said with some flexibility on liberalising the imports of products such as automobiles and spirits and dropping the insistence on the opening up of their labor market for Indian workers, India can “successfully negotiate duty-free access for its exports to these large markets”.

“Agriculture is a sensitive subject for India so I will not suggest FTA with the US,” he said.

Panagariya said though he had favoured India going ahead with the Regional Comprehensive Economic Partnership agreement earlier but he doesn’t do that now because of China.

“We need to disengage with China,” he said.

On Indian agriculture, he said eventually India will transform its predominantly traditional rural economy into a modern, urban and industrial one with no more than 10% of its workforce in agriculture.

Panagariya said India’s open foreign direct investment (FDI) regime has been particularly instrumental in liberalising trade in services and even while raising tariffs, the present government has relaxed the FDI cap on insurance first from 26% to 49% and then to 74%.

Though a sector such as automobile, which is protected by 100% plus custom duties, foreign investment flows freely but despite 70 years of autarky-level protection, it is yet to acquire even 1% share in the world automobile market, he pointed out.

Import substitution

Panagariya said a more liberal trade regime carries the promise of pushing this growth rate into double-digit range and despite undisputable evidence of benefits of trade openness, India has begun to reverse the process of liberalisation in recent years.

“A big rollback has happened in terms of trade liberalisation,” he said, adding that import substitution can have “deleterious effect” on growth in labour-intensive manufactures and associated expansion of well-paid jobs for India’s vast workforce that “has at best limited skills”.

However, he said, unlike pre-1991 India, policy regime today is free of its most restrictive instrument, import licensing.

“Whereas a near ban had existed on the imports of all consumer goods till as late as March 2001, no such restriction exists today,” he said.

China antidumping, tariffs

Panagariya said China is the country that receives almost all the attention for ‘dumping’ its products on the Indian market but it is hardly the only one facing the wrath of the Directorate General of Trade Remedies.

“Of the 98 cases initiated by India from July 1, 2019 to June 30, 2020, China was the target of investigation in only 18. The remaining 80 cases targeted other countries,” he said.

Simple average of industrial tariffs in 2020-21 were 11.1% compared to 126% in 1990-91 but the proportion of tariff lines with rates exceeding 15% was 96.6% in 1997-98 compared to 25.4% in 2020-21.

He said the trend of rising tariffs has continued in 2021-22, with the latest budget proposing to raise the custom duties on numerous products.

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