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Leading economist Arvind Panagariya, who is also the chairman of the 16th Finance Commission, has pitched a strong case for allowing Chinese investments in India, provided they do not pose security threats.
Talking to the newspaper, The Economic Times, Panagariya argued that permitting such investments could enhance India’s strategic leverage against China.
On June 29, 2020, amidst escalating tensions at the India-China border, the Indian government banned TikTok and 58 other Chinese apps in response to the deteriorating relations between the two nations. Despite numerous rounds of diplomatic talks, the underlying geopolitical conflict between the two Asian giants remains unresolved.
“Beyond that (security risks), we may allow Chinese investments. Remember that we also acquire leverage against China when a sizeable investment by that country is on our soil,” Panagariya stated.
Panagariya, talking about India’s economic output, dismissed fears of India falling into a middle-income trap, predicting that the country could sustain growth rates of over 7% if it avoids past economic mistakes.
Commenting on the Economic Survey’s cautious stance towards foreign direct investment (FDI) from China, Panagariya acknowledged the importance of security concerns but advocated for broader Chinese investments. According to him, substantial Chinese investments in India could provide the country with valuable strategic advantages.
Discussing the global trend of rising protectionism, Panagariya highlighted its impact on FDI and technology transfers. He explained that “tariff-jumping” FDI, where companies establish production facilities within a country to avoid tariffs, could paradoxically increase FDI even in a protectionist environment. He attributed the current slowdown in FDI more to high interest rates in the West than to protectionism.
“The FDI slowdown is largely due to the high interest rates in the US and other Western nations. Once these rates start to decline, we can expect FDI to pick up again,” Panagariya stated.
On the subject of free trade agreements (FTAs), Panagariya noted that while existing agreements with smaller partners have been somewhat beneficial, a major FTA with the European Union or joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) would have a far greater impact. He emphasized that ensuring uninterrupted access to inputs and markets is essential for attracting multinational companies.
Regarding potential trade agreements with the US, Panagariya suggested that while a comprehensive FTA might be a long way off, negotiating a limited trade deal could be advantageous, given the US’s expected role as a key trading partner.
Panagariya also critiqued the strategy of import substitution, acknowledging that while protectionist policies can nurture certain industries, they may not lead to broad, sustained growth in manufacturing. He advocated for strengthening the World Trade Organization (WTO) and reducing tariffs across the board, arguing that such measures could diminish the need for FTAs. However, in the absence of WTO reforms, he sees FTAs as a viable alternative.
In light of recent developments, Chinese investment in India has been cautiously resuming after a period of heightened scrutiny following a border clash four years ago. Indian industries, particularly in electronics manufacturing, are pushing for easing restrictions. A recent inter-ministerial panel has approved several investment proposals, including those from China. Indian officials are also considering offering fiscal incentives to attract technical expertise not only from China but also from Taiwan, Korea, and Japan.