Montek Singh Ahluwalia, former deputy chairman of the Planning Commission, and currently Distinguished Fellow at the Centre for Social and Economic Progress (CSEP), tells E Kumar Sharma that India needs to have a flexible approach for an early conclusion to the Bilateral Trade Agreement with the US, and FTAs with the EU and the UK. He also shares his thoughts on a range of other issues — from the challenges confronting the pharmaceutical industry, China’s push to move away from dollar-based settlement and whether there is a case for carbon taxation in India. Excerpts:
You have said that the way forward for India in global trade is to join regional blocs. In which of these do you see better prospects for India and how should it approach the negotiations?
The need to join trade blocs is a no-brainer. We have traditionally favoured liberalising trade through multilateral trade negotiations (MTNs) conducted under the aegis of the World Trade Organization (WTO), but most of the developed nations have now given up on MTNs. They found it very difficult to get agreement with all 194 countries but most importantly they also felt that negotiations in WTO focussed on tariff reductions whereas they were increasingly concerned about “behind the border” issues such as labour standards, phytosanitary standards, patent rights, environmental issues and investor protection. The result was a proliferation of plurilateral agreements which are typically “deeper” than the traditional free trade agreements (FTAs) because they include agreements on behind the border issues.
If we want to ensure access to these markets, we need to join these blocs. In this context, it is good that we are currently engaged in discussing a Bilateral Trade Agreement (BTA) with the US, and FTAs with the EU and the UK. But we must also realise that to succeed we will have to be more flexible.
First, we have to recognise that our tariffs are much higher than most other countries and we should reduce them in our own interest. We should also be open to agreeing on some of the behind the border issues. Obviously, we must protect our national interests, but we should consider carefully what is in our national interests. We should not use procedural arguments such as “we have always opposed including behind the border issues in trade agreements.” The EU has recently signed an FTA with Mercosur. It includes several non-tariff issues. If they can do it, why can’t we?
Pharmaceuticals exports to the US matter for India as do the supply of low-cost generics for the US. The Indian pharmaceutical industry has been pitching for building on this and aims to double the trade to $500 billion or the Mission 500, as it is being called. What is your view on the approach to negotiations here?
This is a very important area in which we have done well thus far. I hope the bilateral agreement will protect our interests in this area. We have strength in producing generics and high-quality generics are important for the US health system to keep costs down. The US pharma industry is very influential but many of its positions are anti-US consumer.
Going beyond the US, the market for low-cost drugs in developing countries is also very important. A very large number of drugs are going off patent and we are well placed to supply them. We need much stronger quality control domestically.
A key weakness in this area is that the production of active pharmaceutical ingredients has shifted to China. This shift is partly because China is able to produce on scale but also because its producers receive much more assistance from the government. We need to reduce the current high dependence on API imports from China. Imports from China can be discouraged by an anti-dumping duty. We should also have a well-designed PLI scheme in this area. By well designed, I mean a scheme with clarity on the terms on which assistance will be provided.
We also need a much more supportive policy regarding provision of land and meeting environmental concerns and pollution standards. For this the Centre should work with the states to set up API production zones where the Centre provides funds to build essential infrastructure, especially to facilitate effluent treatment, the states provide land at suitable locations, and the two together coordinate on pollution and environmental standards. Reliance on domestically supplied APIs may raise the cost of inputs for pharmaceuticals above what it would be if we continued to depend upon China, this is acceptable from a supply security point of view. However, it is also important to ensure that the higher costs are allowed by the Drugs Price Controller in the price control imposed on formulations. So, a lot of things have to come together.
Given the uncertainty in geopolitics, how can India try and ensure greater internationalisation of the rupee? Is there a case for it?
The idea of internationalisation of the rupee has public appeal because it is seen as a reflection of a strong economy but I personally do not think it is an important objective for us at this stage. True “internationalisation” of the rupee can only be achieved if the rupee is made fully convertible on capital account which means removing capital controls. We are not in a position to do that.
Even China, which has a much stronger economy, a much larger trade share, and huge foreign exchange reserves, has not made the remnimbi fully convertible on capital account. In that sense, the renmimbi is not an international currency even though it was included in the SDR.
We should concentrate on making the economy stronger and increasing our share in world trade. Internationalising the rupee can come later.
China has announced that six West Asian nations and 10 ASEAN countries have agreed to its digital RMB cross-border settlement system. This has an impact on close to 40% of global trade. What could the implications be for India and how should it respond?
This is in line with China’s publicly declared intention to challenge the dominance of the US militarily, technologically and economically. That would include challenging the dollar as an international currency.
The countries mentioned have extensive trade with China, which has considerable economic clout with them. However, China is not forcing these countries to use the digital RMB as the only settlement mechanism. They can continue to use the traditional systems of settlement in US dollars, but they now have an RMB alternative.
A shift away from dollar denomination and dollar settlement for trade is in some sense a logical consequence of the diminishing share of the US economy in world GDP and world trade. The share of the dollar in the currency composition of foreign exchange reserves has already been falling gradually. This has not happened to the same extent in the share of world trade denominated in dollars.
You have been engaged with the subject of sustainability for sometime now. Why do you think there is a case for carbon tax in India to achieve net zero emissions? How would you structure it?
The theoretical case for carbon taxation is very strong, but it is not a practical possibility as yet because no other major country has done it. The theoretical case is simply that using carbon to produce energy has external costs in the form of global warming and also air pollution, which is a very serious problem in India. Since these costs are not reflected in market prices, there is excessive use of carbon. Imposing a tax on carbon use would align market prices including the tax with real social cost and encourage a shift to non-carbon-based alternatives. The revenue from the taxes could be used to help the poor.
This is a very good theory but no major government in the world has imposed explicit carbon taxes. However, many countries are experimenting with a second-best alternative in the form of carbon credit trading systems. The finance minister has announced that such a system will be rolled out later this year and that is good.
The system will cover larger units in selected sectors and each of these will be given a fixed carbon entitlement. They must live within this limit and those who can’t will have to be penalised or buy carbon credits from those that emit less than they are entitled to. If the total emissions entitlements are steadily reduced over time, it could lead to a reduction in total emissions.
How effective this will be in practice depends on the detailed design of the system, which is not yet known. I hope the government will give an opportunity for experts and stakeholders concerned to comment before the system is notified. There is much to learn from international experience in this area and there will also be learning from our own experience. Whatever we introduce initially, we should take stock after three years to see how the system has functioned and how it can be improved.