India Has Few Bargaining Chips Against US: Economist Ajay Shah

There are relatively few bargaining chips that the Indian state has against the US. There is a deep connection between the two countries in the form of the presence of Indians in the US, students studying in the US, the role of technology made in the US in powering India's achievements, the role of American corporations in India and the place of the US in Indian finance and exports. But none of this lends itself to Donald Trump style threats and bullying.

Yes. There are many advanced economies in the world who continue to adhere to the old ways of decency, open trade, globalisation and fair play. The Indian state should embrace these nations, which are basically the OECD members [other than the US], Taiwan and a few others.

The world economy can be roughly broken up into four groups. The US accounts for about 27% of world GDP. Russia, China, Iran, North Korea and Hong Kong together make up about 20%. Advanced, successful, prosperous democracies contribute roughly 32%, while everyone else—which includes India—accounts for about 22%. The right strategy for Indian firms, as well as for the Indian state, is to place emphasis on building closer ties with the advanced prosperous democracies that make up the 32%.

FTAs are important and they help in two ways. First, they improve Indian firms' access into the 32% countries mentioned above. Second, by removing Indian protectionism, they reduce the cost of production in India. The gains from both these aspects are quite large.

As an example, cloth in India is expensive because of customs duties. By removing barriers, such as against the import of cotton, cloth becomes cheaper in India, which is good for the domestic consumer and it also enables exports of cloth and garments from India.

The big agenda that has always remained with us is the problems of the domestic policy framework. In India we have too much central planning and too little rule of law. Much careful hard work is required to solve these things. These are sadly not things that get done through a quick stroke of the pen. Doing this requires intellectual leadership and teams that are steeped in knowledge. The Indian intellectual community needs to grapple with these questions and develop the detailed solutions that will make progress. 

This kind of work is required in many fields. India needs to remove tariff and non-tariff barriers against goods and services as well as foreign corporations operating in the country. The Indian state has often been prickly about the way in which advanced economies work, but there is room for much more normal participation by India in globalisation. Alongside this, the movement of money across borders must be freed up, and the legal system strengthened.

The regulators of India have become an important site of difficulties, with central planning and weak rule of law. A deep programme of problem solving here is required, one that can draw upon the Financial Sector Legislative Reforms Commission, which has already developed a general framework for how regulators should work. At the same time, the electricity sector and India’s decarbonisation strategy are becoming increasingly important, both in terms of the energy consumed by firms and the implications of carbon border taxes being introduced by advanced democracies.

Finance is the brain of the economy, for Indian firms to compete globally, a more efficient and deeper financial system is required. The indirect tax system also needs correction, as it interferes with the core principle “ you do not tax foreigners.” All taxes incurred at every stage of production by an exported good or service should be fully refunded by the Indian state, but this is presently not the case.

Equally important is preparing for bad times through macroeconomic stability. This requires clear inflation targeting, a floating exchange rate, and greater fiscal prudence. Finally, all globalised production ultimately happens in cities. For India to rise to global competitiveness, much more needs to happen with the emergence of strong city governments, capable of delivering high-quality urban environments.

No. Fundamentally the global game is about Dollar and Euro. We need to remove the frictions which the Indian state has brought, that interfere with the people doing their own life in currencies other than the Rupee.

For the rupee to become globally important — as it was all the way till the 1940s — we need to grow a two-generation track record of trusted well respected rupee, with capital account openness and trusted low inflation. Families all over the world should feel comfortable holding ₹10,000 currency notes and rupee-denominated bank balances for decades.