'India Should Reduce Tariffs For All Countries'

'That way you're not hostage just to US exports to India.'

The United States imposing a 25 per cent tariff on India from August 1 plus a 25 per cent additional tariff for buying Russian oil should be viewed as a temporary punitive tariff and an attempt to coerce India into accepting US demands, Raghuram Rajan, finance professor at the University of Chicago Booth School of Business and former Reserve Bank of India governor, told Shreya Nandi/Business Standard in a video interview.

Dr Rajan suggested the need to be sensitive while deciding on global agreements, especially in the case of small dairy and agriculture producers.

India should address issues like regulatory unpredictability and tax uncertainty that are likely deterring foreign investments, he said.

The concluding segment of a two-part interview

• Part 1 of the Interview: 'India Can Convert Tariffs Into Win-Win Situation'

Do you think lifting restrictions on Chinese investments can boost FDI? Is it time?

The issue with China is very complicated. We have had a number of border conflicts with them that also needs to be taken into account.

So long as we're not overly dependent in any industry on Chinese production, especially if that Chinese production is in India rather than outside.

It's better that it be in India than it be outside.

In some areas, the Chinese are certainly at the frontiers of technology.

Take, for example, batteries, EVs. If we can learn from some of that, then I think that would be really good for our own industry, our own capabilities.

What is important is to invite Chinese FDI in a reasonable way. Treat them fairly, but also keep tabs on it so that you don't become overly dependent both on imports, but also on domestic production.

There is also more scope for joint ventures. That is something that we should explore more; that is, can we sort of bring in Chinese production and joint ventures so that they do benefit from the domestic market.

We have a sense of confidence that our own Indian producers are learning some along the way.

Again, it has to be that these are genuine joint ventures, not fronts. We should try a range of possibilities.

It is a shame that the world's second largest economy is at our doorstep, but if we limit ties to it and we don't learn from it, that would be a problem.

We need somewhere in between being totally untrusting to being totally trusting and that golden mean we need to find, maybe with some experimentation.

You have been a critic of the production linked incentive (PLI) scheme. While the government says it has attracted investments, but there have been implementation challenges.
Do you think there's a need for course correction?

The answer is none of us knows. I'm not even sure the government knows because the way these statistics are trotted out.

We have no idea what the starting point is, what the additionality is, and what the cost of it was.

What would be ideal for every government scheme in the country is transparency.

Here are the numbers, and you go work them out and see what makes sense, what doesn't.

Every once in a while, there's some announcement of numbers and we have no idea what they are.

I am a believer that, especially for large government schemes, we should have an evaluation process also.

Does it work? Did it do what was advertised when we started the scheme? What exactly has happened, in terms of value addition for the country. Is it successful? Is it not?

I have no idea what the data actually say. There's no clean study. By clean study, I mean having an independent academic institution.

Look at what the numbers say and make it appealable to everyone, so you don't have just your favorite economists running the numbers and telling you the answer that you want.

I'm sort of open to the idea that maybe some investment encouraged in certain areas may create some feedback effects, which create more investment.

I do worry that, for example, in cell phones, some of the biggest investment is coming from Apple, which really needs to diversify outside of China.

Is this a PLI scheme or is it China plus one that is at work here? We don't know.

I love the fact that Apple is producing more, but as you know, a lot of it is still assembly and it hasn't gone beyond that.

Apparently there are more efforts in this direction.

Do we really need the subsidies for it? Or do we need to make doing business in India easier? Apple would come anyway given the large Indian market as well as the need to diverge away from China.

Nobody is going to turn down a subsidy, but do we need it? Is it creating what we want? I think that we need to study better.

That said, I'm all for bringing whatever manufacturing jobs we can to this country.

I think we have to be really careful that what we absolutely need is a self-sustaining process.

Subsidies can temporarily be useful; longer term, they won't, because you can't keep subsidiSing your way to production.

A major IT company has announced it plans to lay off 12,000 employees. You had earlier said that India should focus more towards high-value manufacturing.
In an era of artificial intelligence (AI), what should be the way forward for India? What is the future of jobs?

I think that we need a multi-pronged strategy. For sure, at the higher end, we need to increase the skill base of our population, have more creative people who can sort of benefit from AI rather than get substituted by AI.

The lower end of programming will be and has been substituted by AI.

There are AI platforms which allow you to pick big chunks of code to do what you want.

Now you have to be the clever person who brings all that together in a package that you design to perform the task that you need.

That requires a higher order of skills than writing those programs. Those programs are now being sort of AI-ed away.

In every area, whether it's consulting, whether it's accounting, all these areas where we are now providing more services to the world, we need to constantly ensure that we are on top of AI, but we're also one step ahead in terms of having the skills to bring it together in a creative way.

I don't think that we'll substitute humans entirely but humans will have to know how to use all these.

That could help in expanding the role of those services.

At the same time, those services aren't going to create the jobs that we need, which is mass job creation.

We need to focus also on much more moderately skilled jobs, which are not going to be substituted by AI for the foreseeable future.

Plumbing, carpentry, construction. Construction is a big area where India has tremendous needs.

These are places where we can upskill our workers, more masons, more carpenters of higher quality.

I think the growing urbaniSation of India will create many, many jobs for all these people.

There are also very job-intensive industries like tourism, and we can attract many more tourists into India, which will happen if we can improve the tourist infrastructure, hotels in smaller places, airports, and attractive railway stations.

Those are the ways we will enhance those kinds of jobs.

The third would be, manufacturing, agri industry, where we can create more jobs, but we don't necessarily need to be the exporter to the world in each of those areas because we have a large domestic market.

I would try for jobs everywhere we can get them, but I would recognise there is a job sort of deficit in India today.

We need to work very hard on multiple fronts, both at the higher end, but also at the moderate and lower end to create the skill base to generate the jobs that we absolutely need.

India and the UK recently signed a trade agreement. India's average tariff will go down to 3 per cent once the trade deal kicks in.
Do you believe such tariff liberalisation is necessary across the board?

I do think that some of our greatest sense of success and expansion was when we opened up the economy in the late 1990s and early 2000s and it was under multiple regimes.

It was in the series of regimes that came after the Narasimha Rao government, coalition governments, and it came under the NDA under Prime Minister Vajpayee.

That was a time when Indian industry was subject to much more competition, but also felt a sense of confidence that it could compete with the rest of the world.

While being careful, the direction of travel has to be to not just increase tariffs, as we've seen in the last few years, but bring them down to subject our industry to more competition, but in a sense, allowing them to participate more in the globe and global supply chains, et cetera.

This is a much more difficult time to do it than the early 2000s because there's a sense that the world is closing up.

But if you become part of supply chains, if you can assure countries, they will also have foreign producers; they'll have access to growing Indian markets.

We have a $4 trillion plus economy. This could be a beneficial move for us.

Therefore, don't restrict your tariff reductions just to the US. Work on making it available to everyone.

That way you're not hostage just to US sort of exports to India.

You've opened up to everyone else. As we said earlier, also explore how you can benefit from being next to the second largest economy in the world.

Being diversified can be a source of national strength also. Now that every country wants to exert its nationalism, being diversified across countries can be quite helpful.

I also wanted to get your perspective on the state of the economy. So policymakers are saying that private players are not investing enough. What could be the possible reason for this, and can be done about this?

Well, this is an old puzzle. In 2014-2015, when I was in the RBI, we wondered about why private investment wasn't picking up.

Now it's 10 years later, and still we don't see private investment picking up, and it hasn't really picked up over this whole period.

One argument is private investors are getting far more efficient and able to do more with the same capital that they had. Maybe.

How do we grow at 6 per cent a year without significant additional investment? It may also be that they are just under-confident; they worry in the same way as foreign investors, the same reason that foreign investment is not coming.

They worry about changes in policy, changes in tariff structures.

From the infrastructure perspective, they should be investing more given the tremendous increase in spending.

They make promises we will invest every time investment is coming next quarter, next year.

When you look at the numbers, it doesn't show this generalised increase in investment.

With the uncertainty coming down, once this tariff structure is renegotiated, it might make sense for the government to try and create more credibility about both the rules of the game as well as the tariff structures going forward and urge industry to invest more, but unfortunately, I don't see any silver bullet here.

I think given all that, liberalising to the extent possible and focusing constantly on simplifying doing business in India and encouraging more small and medium industries to come up, all of which can help in perhaps increasing the level of investment.

I don't think there's any button that I think is obvious to push at this point.

We are seeing a rise in agriculture non-performing assets. Do you think NPAs in agriculture loans are a ticking time bomb?

I haven't studied this. I do think that NPAs don't necessarily stay down once you've brought them down.

As you bring them down, the risk tolerance of lenders goes up. Their search for new areas to lend to goes up.

Sometimes they make the old mistakes, but sometimes they make new ones. This is the history of lending, right?

You made bad loans to infrastructure projects, you cut back on infrastructure, and your NPAs came down, but then you start making retail loans, which you don't have as much sort of knowledge and experience with.

Then you overlend to retail, and then you find that those loans start going bad.

The reality is we need eternal vigilance on the quality of lending and risk management has to be a constant process.

I think you're seeing some concerns in NBFCs in some of the banks on NPAs going up, not just to agriculture, but to other areas also.

And I think we can't afford to reduce our vigilance here.

It's one of those where I think you need to understand where it's coming from and why it's coming before acting with a heavy hand, because we also don't want to constrain growth significantly and credit is a part of growth.

I would think the RBI is certainly looking at this very carefully.

The US has passed legislation on cryptocurrency. However, India has not been very clear about its stance on crypto. As a former RBI governor, what's your stand on crypto?

I think the use case for cryptos, the socially useful use case, is still up in the air.

I can see countries with an iffy currency, a currency that the local people don't trust, where cryptos, stablecoins, are replacing that currency.

India doesn't have that problem. Fortunately, the rupee is a trusted currency, both domestically and increasingly internationally, now that we have managed to contain inflation at a reasonable level.

Given all that, using cryptos or stablecoins as a substitute for the currency because you don't trust the domestic fiat currency, that's not an issue in India.

There is legitimate worry that, in the absence of a use case, a lot of cryptos are based on the speculation of being an asset.

We see the price go up, we think it'll go up indefinitely, and people buy into it, often youth with modest means, sometimes borrowing to invest in those assets. So that becomes a source of worry.

I think being cautious is not a bad thing. That said, there are genuinely interesting technologies emerging in these areas which facilitate transactions.

The US has passed the Stablecoin Bill. You can argue about the details and whether it's fully appropriate, and it has to, over time, be revisited in the light of experience.

It does allow for the possibility of greater transactions using crypto media.

This is different from cryptocurrency as a speculative asset.

Stablecoins as a means of payment, and maybe it can be faster, smarter than existing means of payment.

I would say the use case is still not fully established, but certainly the use of Stablecoins within the crypto domain has certainly increased.

I think it's important for India to keep abreast of these technologies. To certainly be part of the central bank digital currency movements that are happening across the world.

At the Bank of International Settlements in Basel, there's a working group.

There are working groups focused on this. India has to be part of that because it doesn't want to be left out.

How much it has to move and when it has to move, it can decide that.

I would say, don't ban all these activities. Contain them in a way that you feel comfortable, but allow for technological progress to happen because you don't want to be left out.

There are a number of Indian entities that are actually participating in creating the infrastructure for all this. That's a development that we should welcome.

It has to be more nuanced than ban or fully accept. It's a careful understanding of what we can benefit from and where Indians are actually participating in a way that creates more capabilities in this country.

I would just take a more nuanced view.

Feature Presentation: Aslam Hunani/Rediff