Arvind Subramanian’s admiration for the noted economist and free trade proponent Jagdish Bhagwati finds resonance in his views too. Like Bhagwati, Subramanian, a senior fellow at the Washington-based Peterson Institute of International Economics, too supports free trade and argues against capital account convertibility in India.
After the release of his latest book, India’s Turn, he spoke with John Samuel Raja D on a wide range of topics. Excerpts:
What is your view on inflation and do you think it’s likely to come down with the softening in commodity prices?
Inflation is a global problem with demand exceeding supply in commodities. The first concern is that relative price increase might become a generalised inflation. The US and China, the two largest economies in the world, are still running a very loose monetary policy and fiscal policy.
In the US, the monetary policy has been very weak because of domestic concerns. China pegs its exchange rate. If you look at the world as a whole, all economies that peg their currency to the US dollar have loose monetary policy. The inflation scare has by no means gone away. The US and China are free riding because other countries have taken tough action.
With the Indian government trying to micro-manage the rise in prices, did the Reserve Bank of India react late to the threat?
I think when the inflation scare appeared, we saw it as a micro problem. That’s why we imposed price controls and export restrictions. But, we soon realised that it’s not a micro problem. I think there is some delay in accepting that.
Subsequently, monetary policy responded and it was a right response. With oil prices going up, the fiscal deficit also goes up. I call it ‘automatic de-stabilisers’. This means that the government is unable to bring fiscal policy into play, so the only lever left is monetary policy.
With countries imposing export restrictions, you have advocated that reverse mercantilism should be brought under the World Trade Organization (WTO).
If you look at the agriculture sector, when conditions are good, we see a lot of protection like interest subsidy and higher tariffs. When prices go up, it’s completely the opposite and the export protection goes up.
What we need is multilateral rules in the WTO that will address both. That’s the ideal world. If you don’t have those, from any country’s point of view, if prices go up, the natural thing to do is put import and export restrictions.
If we had better mechanism for protecting the weaker sections, we would not have had export restrictions. Export restrictions impose a cost because the farmers are not getting the benefit of price rise.
Second thing is that export restrictions are individually rational but collectively irrational. Price will go up when one country imposes restriction to insulate itself. If every country imposes restrictions, prices will go up further, undermining individual efforts. That’s the logic behind rules for export restriction.
How realistic is to bring this into the WTO agenda?
I think the trading system should go back to the drawing board and see what the Doha Round did or did not do. My view is that Doha is a sideshow, an irrelevant sideshow. Big issues that require to be put on multilateral cooperation were not there.
Doha Round would have achieved very little liberalisation. Countries around the world are liberalising individually, so the private sector is not interested in these talks because it is getting what it wants from individual countries. That’s one of the reasons why there was very little private sector interest in the Doha Round.
Your recent book said the turnaround in growth in the 1980s was because the government adopted a pro-business approach. Apart from this, how much did government spending contribute to the growth in the eighties?
If we look at growth numbers and plot it in a graph, the disjoint change (referring to higher growth rate) happened in the 1980s. There is no dispute about that, but what people dispute now is that whether the 1980s’ growth was sustainable and healthy.
The main criticism was that the 1980s’ expansion was all because of fiscal expansion, which is unsustainable and therefore led to the crisis. From numbers, we found that the government spending contributed not a huge amount.
The unexplained part is the nature of reforms, which were pro-business and it seemed to have worked at that stage. In the 1980s, a lot of political changes took place and political power became decentralised.
So, politicians became pro-business by doing domestic decontrol but without reducing international tariffs. Domestic industries were able to get cheaper access to capital and technology but restrictions (import tariffs) were not eased. That’s why reforms at that time were pro-business and not pro-competition.
