Explained: Why former Niti Aayog VC said India needs to open trade to reach 9-10% growth

How is protectionism holding back economic growth?

Panagariya, a professor of economics at Columbia University, predicted that India’s GDP could grow at 7-8 per cent in the next decade, but that India would have to become open to benefit fully from reforms such as the Insolvency and Bankruptcy Code, labour law reforms, GST and the corporate tax cut.

“I do not know if this will happen or not. But, you know, ultimately, this lesson has to be understood that when you restrict imports you also restrict exports,” Panagariya said.

Panagariay explained that modern supply chains were constituted of large firms specialising in single activities done on a global scale and participation in such supply chains was hampered by even 5 per cent tariff as these goods moved through multiple countries.

“Protection hurts you a lot more today than it did in the past because inputs have to cross many borders. So even if it’s five per cent direct (tariff) at the border, each time it crosses any country from one to the other, five per cent gets added,” Panagariya said noting that most major supply chains in Asia were in countries with Free Trade Agreements (FTAs) with goods moving without barriers.

The former NITI Aayog vice-chairman did say, however, that he did not see a rollback of trade protections under the present government.

“I still don’t see that we will roll back protection with the present government, it doesn’t look to me like there is any constituency within the government to rollback the tariff protection,” Panagariya said, noting that one opening that had happened was the government’s push for FTAs. India has recently concluded an FTA with the UAE and is currently negotiating trade agreements with Australia, Canada, the UK, EU and Israel.

What are other key economic concerns?

Panagariya also noted that a historical preference towards investments in heavy industries with significant global competition over labour intensive sectors had slowed down India’s growth. “…why do we go for the most capital intensive industries if you look at PLI (Production Linked Incentive), for example, largely capital intensive industries… even till today, and whether it is the policymakers or whether this is the bureaucrats or whether it is industrialists mean even industrialists actually are very averse to investing in anything that’s labour intensive,” Panagariya said.

The Rs 1.97 lakh crore PLI scheme is aimed at boosting domestic manufacturing across sectors including mobiles and electronics, pharmaceuticals, solar PV modules, specialty steel and textile products.

Panagariya noted that to get more investment in labour intensive manufacturing the government would have to make sure that industry does not have to procure electricity at punishing rates, noting that electricity was one of the key inputs for low margin, labour intensive industries such as textiles. Industrial consumers in India cross-subsidise rural and agricultural consumers by paying higher tariffs for power.

Panagariya also said that some states would have to take the lead to allow “hire and fire” for large factories. The new labour codes passed by the Centre allows industrial establishments with up to 300 workers to layoff workers without government permission up from a threshold of 100 workers earlier. The codes do allow states to raise this threshold as per their requirements. “Whichever state wants to take a lead has to say, okay, I waive all limits. It is allowed in the law. Whatever size enterprise you are, you have the full powers to hire and fire your workers,” Panagariya said.

Panagariya said that the cost of land had become so prohibitive that it had limited even the government’s ability to finance projects.

“Your ability to finance these projects has become limited… three-fourths or more of the cost today in these linear projects, in road and railways is that of land acquisition, and on top how long it takes to acquire land,” Pangariya said adding that he thought the land acquisition act needs to be revisited to address this issue.

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