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Seize the Moment

The visit of a galaxy of heads of states to India is an opportunity for the UPA government to set the agenda on issues of national and global importance, argues Arvind Panagariya.

Arvind Panagariya        Print Edition: October 31, 2010

The heads of arguably the three most important countries from three different continents will soon be visiting India. They are US President Barack Obama, French President Nicolas Sarkozy, and Chinese Premier Wen Jiabao.

Coming on the heels of the Commonwealth Games, this is an unusual concentration of the top world leaders in New Delhi. While the answer to why this is happening is almost obvious - no self-interested nation can afford to ignore a rising democratic power that is expected to grow into a $5-trillion economy from $1.5 trillion in the next 15 years - it is less clear what these visits might accomplish, especially in the economic field. For, in the end, economic relations largely grow out of business-to-business and business-to-customer contacts. These visits, though, could promote bilateral economic relations by renewing a genuine commitment to open markets.

Protectionist actions, not just rhetoric, have been resurgent in the United States under President Obama recently, with Indian information technology majors becoming their direct targets. President Sarkozy, too, has been the leading proponent of carbon tariffs on countries such as India and China, if they do not adopt mitigation programmes similar to those embraced by France and other European countries.

Symmetrically, China and India have gone on to initiate anti-dumping actions against their trading partners on a rather large scale following the global financial crisis. These developments do not bode well for free international flow of trade in goods, services and ideas. They threaten smooth functioning of business-to-business and business-to-customer contacts. India would do well if it could use the forthcoming visits to place a lid on such protectionist sentiments and actions.

The issue of climate change and what the countries are willing to do is bound to be on the agenda of virtually all the visiting heads of states and of India. Here India will need to make clear to the US and France that while it wishes to be an active partner in fighting climate change, its greatest and immediate vulnerability is to vagaries of the nature that are already there. Then with nearly 40 per cent of its households without even an electricity connection, it cannot contribute to positive reductions in emissions until 2040.

As regards China, India must avoid forming an alliance with it on the climate change issue. By forming such an alliance, India only risks reinforcing in a major way the widespread erroneous belief that India is virtually as large a contributor to global emissions as China. Nothing could be farther from the truth. It is also probable that President Obama will press Prime Minister Manmohan Singh to join in pressing China to revalue its currency. Here Singh must avoid joining hands with the US. For one, as Professor Ronald McKinnon of Stanford University has persuasively argued, it is far from clear that even a 20 per cent revaluation of the Chinese currency will substantially correct the deficit in the US current account.

Additionally, India itself will need to let the rupee depreciate in the near future to reduce (though not altogether eliminate) its existing large current account deficit. If it joins such a war against China today, it may have to face the same war against itself tomorrow. Finally, India has far too many political problems with China. This requires cooperation rather than confrontation with China.

In terms of positive actions, higher education, science and technology, and modest cooperation on global financial regulations are promising areas. Once again, government-level actions facilitating cooperation in education are limited, but what the bilateral talks do will have some signalling value. For example, the provision of more fellowships for faculty and student exchanges than currently available would give some impetus to exchange of faculty and students.

It may eventually lead to enhanced university-to-university interactions and even setting up of campuses by foreign universities on Indian soil. In so far as minimal international cooperation is essential to devising effective regulations for international financial flows, bilateral talks between major players can pave the way for wider future talks. The author is Professor of Economics at Columbia University

PANAGARIYA'S TAKE

ON TRADE

  • Push for an FTA in services with the US
  • Need for greater nuclear trade with France

ON CURRENCY

  • Resist US pressure to lobby with the Chinese for yuan revaluation
  • Make a case for rupee depreciation in the long term to give a fi llip to domestic exports

ON OUTSOURCING

  • Express concern over growing US resistance to outsourcing
  • Make it clear that clampdown on outsourcing could invite retaliatory action

ON INFRASTRUCTURE

  • Court US infrastructure companies for greater FDI in the sector
  • Show-case India's streamlined regulatory framework in infrastructure for greater investments

ON ENVIRONMENT

  • De-hyphenate India from China. Its emission levels are much more than India's
  • Make it clear to the French that carbon tariffs on India would invite retaliatory measures

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