Globalisation: Doing Business in a Flat World 

A. Mr. Kamalnath

You also talked about the very important need to include large chunks of population especially those involved in rural areas in agriculture and yet at the same time the voices we hear is that the developed world and USA is particular is very unlikely to flatten the agricultural produce subsidy level etc. How do you think you would cope with the situation in a country like India with so much of our population dependent on agriculture?

Mr. Kamalnath
When I was talking about structural flaws one of the greatest structural flaw in the world trade is agriculture and the flaw in agriculture is huge subsidies given by the European Union and the United States amounting to almost 1 billion dollar in a day.  Just Unites States has subsidies of 75 billion dollars to agriculture, that not only distorts prices but when those subsidies seek market access, as if of saying that if 45 percent of cotton is US subsidies on the prices of US cotton, what will farmers in Africa do ?  So India is fine, we import about half a billion dollar of cotton, so we can continue importing subsidized cotton, converted to yarn and garments in sell it back to the Unites States.  But at the same time there is subsidized the wheat, the rice, the meat, the Soya etc. and United States does have a political problem after all there is just 2 percent I think there is about 150,000 farmers versus 650 million people, it is a very contentious issues in the WTO.  On the other hand the European subsidies distort prices but Europe is not an offensive exporter so we are up against that this round- Doha round- doesn’t seek, doesn’t intend to eliminate subsidies but it seeks to substantially reduce these subsidies.  But unless that happens impasse will continue because in India certainly we cannot import subsidized products, which dislocate farmers because, is not trade flow but it will be subsidies flow.  It is argued that it is good for consumer as much as it is argued that buying very cheap stuffs in the United States is very good for the US consumers.  We have flaws in the multi-fibre agreement over textiles.  We all read in the newspaper how China flooded Europe with lingerie and there was more lingerie for women then there were women in the whole of Europe.  So they put an embargo and when the embargo was put it was lifted by the European Union because the retail industry there had a great lobby and they said what will happen to our shops, who is going to fill our shelves, we want these Chinese lingerie we will find the consumer let the European Union let it go and European Union had to then allow the import of that.  So there are two sides to it  but coming back to your question it is very clear that we do need to find a solution and the United States has to move forward in reducing its subsidies, not optically but how much subsidy is there going to be less US treasury because we find the Indian farmers not competing with US farmers, he is competing with the US treasury. You talked about the US being in the throws of almost unstoppable consumption that is absolutely true. You only have to visit shopping malls to see that.  But that consumption is also putting a huge loads on the sustainability of the planet and yet the most powerful nation in the world is unwilling to sign the Kyoto protocol.  At the same time they call for everyone else to curb their energy demands.  How do you think this played self out?+

A.  Mr. Clyde Prestowitz
Very good point and I think there is other element to which is even more daunting and challenging. It is true that the US account for about 5 percent of global population, account of about 30-33 percent of global consumption and the US is world’s biggest invader of greenhouse gases, biggest user of raw materials and so forth.  So,  you can look at that rightly and justly, question is the profligacy of these Americans and also point at the hypocrisy of these Americans who preach to everyone else but don’t practice what they preach, but having done all that, you are still left to the following problem.  No one in the world is asking the Americans to consume less because everybody wants to sell to the Americans.  The global economy is structured in such a way that the growth of China and India and the recovery of Japan and the recovery of Germany and some of the languishing European economies is all export lead and the center, the only net buyer in the world is the US, not quite sure, the UK is the net buyer, a small one.  But only major net buyer in the world is the USA, so I think the solution to the question you have raised is in fact a global solution. If the Americans said you are right, you are absolutely right we have been hypocritical, we have been profligate and we are going to change our ways.  We are going to cut consumption and begin running surpluses.  If the rest of the world did nothing, we will be in global financial crises, the global recession.  So, the only way this works is, if there is a deal and the deal the Americans begin to get their budget and their savings accounts comes under control and at the same time the rest of the world and this means basically Japan, China and EU begin to invest less, save less and spend more.  And lets look at what we are talking about, I was in Singapore recently and met with a former senior official in Singapore and, I said to him, Mr. Minister, Singapore has 300 billion dollars of reserves for 4 million people. Those are official reserves; unofficial reserves are about double than that.  I said Singapore has had a trade surplus, current account surplus every year for the past 35 years. You run a big, huge budget surplus.  Savings rate in Singapore is over 50 percent of the GDP.  I said Singapore have to have current account surplus every year.   And the answer was not just yes but it was yeeessss.  Very emphatically yes.  Well, the problem is that if everybody in East Asia thinks that they have to have a current account surplus, somebody has to buy and that’s what the Americans do.  So for this to get fixed, its a two way street. 

Chairman -
Yes, off-course, perhaps could be one addition solution, which could be based on the principle that industry generally follows money and perhaps the US government and other governments could use fiscal instruments like, high taxation to disincentivised gas-guzzlers and subsidies to promote hybrid cause.  But perhaps this may be a good moment to turn to the house and ask for questions from the audience, Are there any questions?

Vineet Choudhary
Here today on this forum we are talking of free trade and my question is to the respected Minister.  While you have been road-showing India all across the world with the sprit of exporting from India.  Here, back home the government industry, which is the public sector, is, I would say, until this stage close to imports.  What is your opinion on this?

India is not a merely an exporter, that was 1991 when we were looking for generating foreign exchange.  Today with our huge reserve of foreign exchange, India is a major importer and if we look at statistics within our states, our imports are going up at the rate of 35 percent and our exports are going up by 20-25 percent. India is today a very big importer and when you say the public sector is not importing, I really do not get it, as to in what context you are saying that, but public sector today, there is no prohibition on the public sector, its again competitiveness, in fact we are grappling with a situation where the manufacturing industries in India are saying  that you are making it difficult for us to sell in India.  When there is a global tender and this for Public Sector Corporation.  They say when they import is cheaper to them, when a public sector company has to buy from India they are finding that its more expensive because of the Indian taxes, because of the transactional costs, because of levies at even a state government level which are not refunded to them and when they are importing. So they say its better for us to import.  Its a classic case where the manufacturers in India say it is better to export to Srilanka and from Srilanka to import it back to India.  We will find ourselves more competitive that way.  So there is, no embargo on public sector imports and gradually as we brought out tariffs down in the last budget a fortnight ago we brought down our peak rates of tariffs from 10 percent and if we look at capital goods our tariffs structure is 5 to 7.5 percent and 10 percent, except in certain areas such as textiles, in automobiles and in things like wines and sprits where our tariffs are high but otherwise across the board with low tariffs again it’s a question of competitiveness, if competitiveness, we are seeing great a problem in investment also,  where India is competing for investment with Vietnam as Mr. Prestowitz said that now with capital grant, with tax breaks for setting up industries in other countries in East Asia.  In India we are not doing what Vietnam is doing, what Cambodia is doing, what Philippines is doing, what Indonesia is doing.  In incentivizing incentives, it’s a big challenge for us to grapple with this.  At the same time competitiveness is now dictating, where will you buy?

You have discussed issues from imports-export policy and strategic point of view but reality grass route is- if you look at 50 percent of global tenders, they say companies from International communities, who have been supplying in the past two X, Y,Z….. which is Indian public sector undertakings, when you put such a pre qualification conditions really speaking no new entrant can enter that system. 

Mr. Kamal Nath
You are talking about price preferences, which is given. 

No, in pre qualification.  If for example I name Coal India, tender after tender they say they will say in pre qualification, if you have supplied to Coal India, ACCL, NCL or other government coal subsidiaries only then you pre qualify otherwise you don’t qualify, which means they really block you to enter.  It is the mindset of our public sector. 

Mr. Kamal Nath
Well, that is the biggest problem we have.  We can change your laws, sometimes we can change your constitution, how do we change your mindset?  I am not saying it light heartedly. How do you change your attitude?  When we talk of reforms, when we talk of everything, of change, the most difficult thing is to change your attitude.  When people come to me and they said this in your policy and when we go to your officer, he says OK, policy is there I must tell you what happen when we computerized import and export, and put it on the net its all IT connected. Somebody was saying that why have it IT connected. Because the custom officers tell us that listen this all is very well but I need to see the face of that importer.  Until, I see his face, what will this net do?  And again it is attitude.  So, I think that attitudinal change is taking place.  All I can say is that. And specific thing of coal, I can tell you; I will have a look at that why it is so.  There must be some rational in it.  Is it because inhibition of import or inhibition about something other, which I can’t tell you right now. 

Clyde Prestowitz
The structure of Indian Trade and the profile of India’s account are entirely different from those of East Asia. India is not running a trade policy aimed at accumulating current account surpluses.  I don’t know about the specifics of openness in particular industries but generally speaking India presents the profile of a pretty much market open economy.  I do believe that India is being disadvantaged by the policies of East Asia.  I believe, the currency management of East Asia and the investment incentives that are being offered by many countries around the world are to the  detriment of India.

Mr. Kamal Nath
I would really add to that very briefly by saying that ‘currency calibration’ is what really, when he said that Hang Paulson is going around.  I fully back Hang Paulson in getting China to reform its currency calibration, which they do because your competitiveness is driven by currency calibration, which is being done very largely by China, and as Mr. Prestowitz said that India’s growth is domestic market driven.  China’s growth is export market driven. 

Mr. Ravinder Aggarwal
Mr. Prestowitz just said that USA is consuming more and producing less that’s why they are the net consumers. As a result the world should think in the manner that they are net consumers.  Well, sir, let me know, whether this consumption is competitive driven, is it not more profitable for USA to produce less and consume from outside world.  Because, then they can have that resources available for their technological driven growth. As in India, we are also net importers, and we are having fewer exports, but it is for our GDP growth and for the growth of economy. How do you say that, just because America is a net consumer the world should think in those terms, otherwise the consumption will reduce?  

Mr. Prestowitz
Good question.  Two quick responses, one, an economy needs consumers and producers.  You cant have an economy where there is no consumption, no production. So you have got to have both.  The difficulty I see in the world economy today is that there is a kind of lack of consumers.  USA’s is net consumer, India is net consumer but there are not enough net consumers in the world. You make the point OK, but this could be profitable, and in that regard, I think, there is a big difference between India and the US. India is running a current account deficit and covering that with inflow of capital and domestic savings and investing in new productive facilities, which will enhance productivity in the future.  In the US, there are no savings; we are financing our consumption by importing foreign capital, which is not being invested in productive facilities.  So, effectively Americans are mortgaging their future or the future of their children.  And, we have seen just in the last couple of weeks, a little scare when Shanghai market failed, unraveling of the carriage trade from Japan.  All of these send shivers to the world economy because what the Americans economy is doing is not sustainable. 

USA is having more borrowing today, like, if an individual borrows more he can become bankrupt. The same happens with corporate, if it borrows substantially more, they can go for bankruptcy and US also is doing the same at the moment.  What happens now, if East Asia doesn’t politically support USA and they continue to manage their currency, it may so happen that ultimately the dollar will get devalued and, if dollar gets devalued then I think India, which, is very open and transparent might suffer because then our exports will suffer in India and there could be imbalance in the world.  Where do you see this imbalance because if Unites States manages everything politically, it will not be able to manage China, Japan and Korea? What will happen? Will there be imbalance in the world?

Yes, two points, one is; Paul Walker; the former Chairman of the federal reserve, made a statement recently, in which he predicted a 75 percent chance of a global financial crisis within the next four years. I believe that the dollar will devalue between 50 and 70 percent on a traded basis, sometime within the next 5-7 years.  I don’t know exactly what the timing is.  I believe that there has to be big dollar devaluation and I can already see a move away from dollar. Many smaller central banks are limiting, their dollar reserves anew, moving into Euros, or Canadian dollars and other assets.  China as you know is putting together an investment fund in an order to begin investing its reserves in something other than USA treasures.  There is already an understanding that just buying USA treasuries is not a good path for the future.  And all of that suggests to me, an eventual move away from dollar.