Leading economist and chairman of the 16th Finance Commission, Arvind Panagariya, has strongly pitched for allowing Chinese investments in India, provided they do not pose any security risks. In an exclusive interview with  the Economic Times, he highlighted that permitting such investments could enhance India's leverage against its neighbour. His latest book, India’s Trade Policy, presents a compelling argument against import substitution.

Panagariya dismissed concerns about a middle-income trap, predicting sustained growth of over 7 percent for India if past mistakes are avoided. He emphasised that further reforms are crucial for maintaining this growth trajectory.

Addressing the Economic Survey's stance on foreign direct investment (FDI) from China, Panagariya acknowledged that while security experts should identify risky investments, he advocates for broader Chinese investments. He argues that significant Chinese investments on Indian soil could provide strategic leverage.

Panagariya also discussed the impact of rising protectionism on FDI and technology transfers. He pointed out that tariff-jumping FDI—where companies set up production facilities within the country to bypass levies—can paradoxically increase FDI, despite protectionist policies. He attributes the current slowdown in FDI more to high interest rates in the West than to protectionist sentiment.

"The slowdown in FDI is rooted in the high interest rates in the US and other Western countries. As soon as interest rates begin declining, we will see FDI accelerate," he said.

Regarding free trade agreements (FTAs), Panagariya noted that while current agreements with smaller partners have shown some benefit, a major FTA with the European Union or joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) would be more impactful. He stressed the need for unhindered access to production inputs and markets to attract multinational companies.

On the topic of FTAs with the US, Panagariya suggested that while a full agreement is distant, engaging in a limited trade deal could be beneficial, given the US's anticipated role as a major trading partner.

Panagariya’s critique of import substitution underscores its mixed results. He acknowledges that protectionist policies can foster certain industries but questions whether they lead to broader, sustained growth in manufacturing.

Story continues below AdvertisementRemove Ad

He advocates for strengthening the World Trade Organization (WTO) and lowering tariffs on a non-discriminatory basis, arguing that this would reduce the need for FTAs. In the absence of such reforms, FTAs remain a viable alternative.

In the context of recent developments, Chinese investment in India is resuming slowly after a period of stringent scrutiny following a border clash four years ago. Indian industries, particularly electronics manufacturing, is pushing for relaxed restrictions. A recent inter-ministerial panel has approved several investment proposals, including those from China. Indian officials are also considering fiscal incentives to attract technical know-how from not just China but also from Taiwan, Korea and Japan.