Washington: Finance minister Nirmala Sitharaman has said that India is determined to boost its domestic manufacturing capabilities, framing it is a part of a wider rethink on globalisation, and added that India will continue to pursue bilateral trading agreements even though New Delhi wishes the World Trade Organisation (WTO) was more progressive and heeded voices of the global south.
She has also said that while India will fulfilled its nationally determined commitments on climate, it can foresee that there are “friction points” ahead due to positions adopted by advanced economies on climate finance, per capita emissions, development funding and the mindset pushing additional tariffs on items such as steel.
While asserting that India was keen to carve its space in global supply chains and issuing a reminder about the perils of depending on one location, Sitharaman also acknowledged that it would be “unrealistic” to expect that all of manufacturing and investment interest will move out of China. “China and others will be a more realistic solution,” she said in the context of a reset of the supply chains.
The FM was speaking at the Peterson Institute of International Economics in Washington DC on Monday on the Indian economy where she was in conversation with the institute’s president, Adam Posen. She is in the city to attend the spring meetings of the World Bank and International Monetary Fund and chair the second G20 FM and central bank governors meeting under the Indian presidency.
Manufacturing push
When asked about the wider efforts at “de globalisation” and the trading system, and whether India saw opportunities opening or closing, Sitharaman said there were two ways of looking at the situation.
The first was that, for a long time, India had been keen to boost its ability to manufacture everyday consumer goods, but ended up importing the same products from elsewhere because it was cheaper. “But now we see there is an opportunity. One from a consumer point of view, even within India, there is enough purchasing power and many of these goods that can be produced in India will have a large consumer base in the country. Two, the phased manufacturing programmes we have come up with have identified several such goods that we will incentivise producing and selling within India and then move to a higher level of sophistication in the making of such goods.” The programme, she added later, would help given the “very very predatory pricing” that prevails in some exporting countries, a hint at China.
The other side of the story, Sitharaman said, was bringing value chains come to India — not just to produce in India, but produce in India for the world. She referred to the production-linked incentive scheme in 13 priority sectors. “By doing that, we hope to have production of many of these large, bulk manufactured goods that can go from India abroad to meet demands that exist outside.” The FM cited the mobile manufacturing boom in India over the last nine years as an example.
Asked if there was a tension in the economic system given the emphasis in domestic manufacturing in all countries, Sitharaman said India was acutely aware that this needed a calibrated response — and while producing goods, it would need raw materials and intermediate goods that it did not produce from outside.
But the FM also placed this trend within the wider rethink on globalisation. “India is not alone in doing this, particularly after the global view on China, after the pandemic and also after this changing perspective on what indeed is globalisation, how far globalisation, to what extent globalisation…India cannot be in isolation..it indicates to a dynamic position globally on globalisation itself.”
Trade
It was in this backdrop that Sitharaman was asked about global trading arrangements. The FM pointed out that India was already pursuing free trade agreements bilaterally and cited existing pacts. “We shall proceed on that road with the United Kingdom, European Union and Canada. All three are happening and negotiations are going on as we speak. Plurilateral, I am not sure where it going to begin and when it is going to begin.”
On WTO, the FM said she would like it to be “more progressive, listening to all countries, and fair to all members”. Recalling her work with WTO as commerce minister, she added, “It has to give more space to hear voices of countries which have something different to say — not just hear but heed. Today’s message to the WTO should be to have greater openness”. India’s messages to WTO have been met with “no movement”.
Sitharaman then cited United States trade representative, Katherine Tai, who referred the costs of market liberalisation for the US economy. “Many of the global south countries have the same feeling. What exactly is this? How far is liberalisation? To what extent tariff reductions?” India had already extended to least developed countries quota-free, tariff-free trading policy, and any country from Africa or Pacific Islands or were low-income could export to India without restrictions. “But at the same time, we need to look at how India has become demanufactured…how do you get your manufacturing back when you have to constantly liberate your market and say tariff reductions?”
The idea is not to reverse the benefits of globalisation, but to make globalisation more transparent, she added. She also pointed out how India was among the first countries to sign up to both the Indo-Pacific Economic Framework (IPEF) and the global taxation arrangement.
The China dimension
Responding to a suggestion that both India’s manufacturing push and arrangements such as IPEF are aimed rerouting the global supply chains away from China, and asked whether “mutual interest in reducing China’s power” will be enough or more is needed, Sitharaman said, “That is not going to be sufficient. You need more. However much we would think that supply chains will have to moved out of China, it may not be the case. China and others may be the possible realistic solution. Even as China is opening up back again after the zero tolerance, I would think there would be a lot of investment interests and manufacturing interests in going back to China. It would be unrealistic to think everything is going to get out of China.”
But she added that the shock that happened due to distortions in terms of supply chains justifies more than one location and countries such as India would be the best, in terms of skills, its young population and captive domestic market.
“It just sends a strong message that world didn’t notice earlier or didn’t want to choose earlier. Spreading your resource basket or supply chain is a far more prudent way of continuing in business however much the cost complications make it difficult in other places and cost benefit makes it possible to concentrate in one place.”
Climate
Sitharaman also spoke about the climate crisis and the fault lines that exist between advanced economies and the global south on the question. When Posen asked her about the potential of a carbon border adjustment mechanism in the form of tariffs or other barriers, how it will affect emerging markets, and what she would like the US and Europe to hear and heed, Sitharaman said she did have things she wanted them to hear.
The FM reminded the audience that India has come up with ambitious nationally determined commitments, and it has fulfilled its COP-21 commitments largely out of its funds. “So funding is there but not available; committed but not disbursed yet. So the 100 billion that we have talking about has not happened at all,” referring to the unfulfilled pledge of the advanced economies to provide climate finance.
But she said there are also “real time worries”. “What is the per capita emission that we are talking about? Isn’t there some element of justice when you are talking about per capita emission? Is it only today’s or is it going to be from the time that Industrial Revolution 1.0 happened? There are certain pain points that need to be addressed”.
Sitharaman said what also worries her, even as India plans to fulfill its NDCs, is the way in which instruments and tools through which countries are going to be questioned and bound by certain expectations such as funding of development projects. “For countries like India, which is proving repeatedly that we are complying with expectations and commitments, if funding for developmental activities come up in-built conditions — saying unless you use this element of steel or cement or get this mission to do it for you, this fund won’t be able to help your development goals — this is going to be a potential friction point.”
She then alluded to the border adjustment tariff that the moderator alluded to and cited the example of steel and the mindset in Europe governing it. “So any non-green steel coming into Europe is going to be burdened with a higher customs duty to make up for the fact that it is dirty steel. Yet, we will buy the dirty steel if you pay more. And why do we do that? Because we have dirty steel which has got to become clean steel. But for the cost, I need the money that is coming from the border adjustment tax.”
And then, once advanced economies get to a stage where they can engineer a green transition for their steel, the FM said that the world will decide that no non-green steel can be traded. “And the only green steel will be available you know where. That worries me. I wish that money is available to all of us who are producing steel and say you make your steel greener and we will see who is more cost effective and trade on that.” Questioning whether it was fair practice, the FM reiterated that there are worries about green issues are going to be carried forward and whether it would be fair to all.
