India’s Endless Struggles Against China’s Exports Dominance with Ila Patnaik
In this episode, Puja Mehra talks to economist Ila Patnaik about the complex challenges India faces as it strives to...2 Sept 2024 3:00 PM IST
In this episode, Puja Mehra talks to economist Ila Patnaik about the complex challenges India faces as it strives to compete with China's export dominance. They talk about the uncompetitive infrastructure, higher labor and energy costs, and irrational tariff structures that hinder India’s manufacturing sector. Patnaik discusses the impact of China's post-COVID economic slowdown, its focus on exports, and the implications for India. She argues that India must address its internal economic issues before considering protectionist measures, and emphasises the need for a comprehensive strategy to counter China's export-driven model.
ABOUT ILA PATNAIK
Dr Ila Patnaik is the Chief Economist at the Aditya Birla Group. In 2014 she was the Principal Economic Advisor to the Government of India. Her research interests include international macroeconomics, finance and emerging economy business cycles and she has been published in journals such as the Journal of International Money and Finance, the World Bank Economic Review, International Finance, and in collected volumes. She has also been a regular columnist with The Print and co-authored (with Bhupender Yadav) the book The Rise of the BJP: The Making of the World's Largest Political Party.
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TRANSCRIPT
Puja Mehra: Hello, I'm Puja Mehra. If we go by the Western media, China's decades long miracle is now wobbly because growth is slumped, its famously industrious workforce is shrinking. Its wide property boom has turned to bust, which has made the Chinese wary of spending and the main belong, which the Chinese miracle nests. The global system of free trade is sort of disintegrating. China's response to its very real economic troubles is to double down on its plans of dominating the industries of tomorrow. The strategy is built around what officials call new productive forces, and involves mass production of electric cars, batteries, drones, etc, some this will be beat by world class firms in fierce competition to innovate, lower costs and increase value, but subsidies in specific state direction will also play a non trivial role. China already accounts for 31% of global manufacturing, and by some estimates, annual investments in the new productive forces reached $1.6 trillion last year, given that the Chinese are not big consumers and are spending even less deterred by the uncertainty of the impact on their future of the real estate crash, some of the new production will have to be exported. The World realizes this and is falling back on what economists call protectionist measures to safeguard against a new wave of Chinese exports. Tariff falls have come up in preparation for the coming China shock. This isn't about de risking supply chains against over dependence on China and maintaining economic security. The bigger concern now is that China will end up flooding global markets with low cost, high quality goods, wiping out industries and the rest of the world. My guest on the show today is Dr Ila Patnaik, one of my favorite Indian economists for her rare ability for writing, difficult to understand economics simply. Dr Patnaik is the Group chief economist at the Aditya Birla group. She was the principal economist in the finance ministry earlier, where she wrote the Modi government's first economic survey. One of the chapters in that she wrote is the only government document that has endorsed and outlined a shift to a proper free market economy in India. I asked Dr Patnaik how India should respond to China's renewed push for a larger share of global exports. I've known Ila for such a long time that I can't recall our first meeting, but I do recall a book discussion sometime after the global financial crisis. At that time, India was seen as an upcoming global economic powerhouse and therefore market for, among other things, books written by international best selling authors, a senior editor of the Financial Times and had written this book and was touring India, promoting it. At a discussion, he expressed much appreciation for how India's handling of the global financial crisis was, according to him, far superior than that in the US, where the regulators had paid the same time that a crisis was brewing. In contrast, the RBI here had announced preemptive safeguards, which had impressed this author tremendously, the Obama administration of bailouts for too big to fail institutions in the US, on the other hand, had dismayed him, just as when the audience thought that this book discussion was drawing to an end, Ila engaged the author in a gentle discussion about his fundamental arguments in her trademark soft spoken, polite way, this author had throughout the whole world sending 1000s of copies of the book, probably without being made to encounter the basic flaws in his arguments. The book had done well because it appealed to popular sentiments at that time about expertise and experts. But in Delhi's peak winter, he broke into a sweat trying to defend the book's main argument. Sadly, no recording is available.
Puja Mehra: Hi Ila, thanks for coming on the show.
Ila Patnaik: Hi Puja, thanks for having me.
Puja Mehra: Ila, I wanted to talk to you today about China and how China's ever growing. Exports are a headache for all countries, and many countries such as the US and even India, we've tried various ways, such as tariff walls, etc, to force China to correct some of the imbalance that it has in its trade with the rest of the world, but nothing seems to be effective, and China's exports just keep growing and growing and growing. And India's specially struggled against that. So I wanted you to help us understand today, how is it that we struggle with all of China's exports that come into our economy, and also, how have our responses to that being have they been effective or not?
Ila Patnaik: Okay so. Let me start with the current scenario in China, and then move on to India and then try and answer your question. Okay, so for background, we know that post covid China has been slowing down. Also the trajectory that it's expected to have is slower. So you know, we have saw all these decades of double digit growth, or very high growth, nearly nine to 10% in China, those have now moved to around 5% in the coming years, China is expected to be slow. However, China has built up a lot, lot of capacity, and with the current real estate slow down, also the demographic change that has happened where China has a lot less younger people, you know, so maybe urbanization will be slower, certainly more number of houses than perhaps are required by the population. So that slows down their new housing. All of that, put together, has created a situation where you're seeing unemployment in China. We are seeing slower growth in China, and because the way the government works, and the you know, the scale and coordination that happens there, there is a concerted effort to continue to have if domestic demand is slowing down, then you want to have export it, and earlier, exports have been an engine of growth for China for many years, and that was a model that worked. So it's quite expected and not surprising that, you know, they try to bring back that model of high export growth, particularly when domestic demand is seen to be visibly slowing. Now, while that is happening in China and this thing of them trying, they're going to have to push out more exports. And you know, the advanced economies like the US and Europe are reacting by putting up that if barriers, it is countries like ours where we haven't quite figured out yet how to respond. So let's look at, you know, as I said, turn to India. So what are the factors? What's happening here? And it's, again, not something new here, that we are uncompetitive as an economy compared to China. I mean, we've had poorer infrastructure, we've had higher labor costs, we've had higher energy costs. We have, in many cases, an irrational tariff structure. We actually industry cross subsidizes agriculture or consumers. So like in power, industry pays higher direct and cross subsidizes households or agriculture, and in freight, also industry subsidizes passenger traffic consumers. So, you know, we've had many of these issues which have which are not new, so in trying to solve some of them, so we got the GST, but then there are taxes still outside the GST, and I'll talk in further detail about some of those when I come to what can be done. But I'm just saying that here is a weaker system in many ways, because there are more fictions, higher costs, more logistics issues, and things were difficult enough, but now, if the Chinese economy and the Chinese system and government and industry together focus on increasing their exports, then we become more vulnerable. So that's kind of what is the situation today? And I think we have to first of all see this reality, that this is something that is happening that also the advanced economies are not embarrassed about trying to protect their industry. I mean, we seem to be caught in this situation where, you know, we have to be the liberalizers. I just think that we're a bit late in the day. You know, there was a phase when that was the fashion of the day, but today, when everybody has started protecting then, you know, we are wearing yesterday's fashion, and we are going to say no, no, we will be the liberalizers. And you know, when they are kind of when America realizes how their industries have been hollowed out, they're trying to revive some of them. I think we just need to, first and foremost, look around and say, Okay, what is the problem? And then start looking for options. Now, one of the most important things I think we should do is first correct whatever we can before we start doing protectionism. So yes, that's an option. It's on the table. Many countries are adopting that.
Puja Mehra: Should I at this point give an interesting example I came. Across when I was preparing for this conversation. That sort of makes it very stark on how difficult it is for even countries where cost competitiveness is not as much of an issue as it is in India, but how they stack up against China. So talking about EVs electrical vehicles. I read somewhere that the cheapest electrical vehicle available in the US market right now is the Nissan LEAF, which costs about $28,000 the average cost of EVs in the US is $58,000 more than half the US sales of EVs are by Tesla. The cheapest Tesla available is $48,000 BYD, a Chinese electrical vehicle maker, sells in Mexico. They don't sell in the US, but they send in Mexico a model called the dolphin mini for just $21,000 and in the Chinese economy, their newest money is the cheapest, and it sells for just $10,000 that's the sort of cost competitiveness that we are talking about between the US and China. So that should probably put in perspective and how difficult it is going to be for India, which you were just explained,
Ila Patnaik: Yeah. So, you know, I talked to a lot of people in industry, and the story I hear is that the scale at which the Chinese produce, as well as you know, that the coordination of industry with government, whether it is for, you know, setting a strategy for how to export, how to set prices in another country, whether it is a strategy for reducing costs, they're able to coordinate with the government, and therefore the whole policy framework that gets created to support industry to achieve certain goals, I think that puts them somewhere else. You know, I'm not sure whether it's good or bad. I'm not passing any judgments on that, but we are nowhere near anything like that. And perhaps he'll never be able to do that kind of coordination, because, you know, they have these very large monopolies and the scale at which they're operating. So yes, it's really, I mean, it's very It's difficult. It's very, very difficult because, you know, and they've already created that capacity. So when you think of new investment, and you think of, will my new investment be profitable or not? You have to think of, okay, you're going to put in fixed costs. Whereas the Chinese have already put in that fixed cost, maybe even recovered it, and they will keep the factories going, even at variable cost, which really means your prices will be very low. So are you going to make money at those prices? And often the answer is no, and so you don't invest. Now you look at the last 1012, years private investment in India, in manufacturing, so basically in tradables. So, you know, there are some, let me define what I mean by tradables. There are some goods that are like, say, making roads or even cement, or very, very heavy goods where the cost of transportation is very high, and you may or not possible to transport, where you have to produce locally, extract material locally, and then you produce locally. So those are non tradables there. We still are able to compete. But when it comes to tradables, where you can import and often, the price is set by the international price, which means the price determined more or less because of the large supply and demand from China. Then in those products, Indian industry finds it very hard to compete, because in manufacturing, you're almost exporting. See, if you think about the market as, say, India ASEAN have a free trade agreement. So that's the simplest example where products come in from ASEAN at zero duties as part of that agreement, then the Indian producer is effectively facing an international market. So it is not as if there is a export market, but your domestic market has the same characteristics that an international market would have, which is where there are, you know, zero duties there. So here you are with all kinds of cesses. Let me give you now some of the examples of the taxes. So, like we talked about how we have a disadvantage, or industry in India has a disadvantage because it has to pay subsidized power for agriculture, power for households, freight for industry. So it has many disadvantages. Similarly, in tariffs, also we have disadvantages. Now one very obvious thing that any trade, they. Would agree is that there should not be inverted duties. Inverted duties are when the duty on the input is higher than the duty on the output. So if that is the case, you actually make it more expensive to produce the output at home. If the same technology is being used abroad, then it's cheaper to just import it, because you know you you're paying higher duty on the input, whereas the person who is selling to you from abroad is not paying that higher duty and is just paying the duty on output. So we have many products where there is an inverted duty. We correct them one by one. Then there are lobbies each part of the value chain fights about the previous one and says, Oh, this one is charging me too much, so you reduce that, or you impose duties on some products, which are raw materials, so your raw materials are more expensive. So that's one issue, and we need to correct that, and the government needs to correct that. The second would be taxes outside GST. So the consequence of that is that if you are an exporter, then your GST is returned to you, plus you get it's called Road tap. That is remission of duties. So the additional non GST duties get returned to you. But if you are a domestic producer, your competitor is only charged equivalent into the GST on the border, so effectively you end up in paying what a coal says, an education says RPO, the renewable power obligation and state duties on even captive power. So 1% tax is charged by states on captive power, so you end up paying all these additional duties, which the foreigner doesn't. So those are the kind of things that we have to do, even before we turn to trying to put protective tariff or non tariff measures. I mean, I would say, Why doesn't it work? Because you haven't even started doing those. We need to start doing those.
Puja Mehra: So even if we were what you're explaining, actually shows that how Indian industry has a hand tied behind their back and they're expected to compete with China when, like I was saying earlier, many industries in other countries not even have these handicap and even they are not able to concede. So once we talk about removing these handicaps, that's one. And then once we come to the stage where those handicaps are not holding back industry or increasing costs, then what needs to be done? Because that alone also will not take care of the China problem. Am I right?
Ila Patnaik: I would say that first and foremost, get rid of the handicaps. Okay? And then look case by case on if there is evidence of dumping, don't hesitate in imposing anti dumping duties. If there is evidence of malpractice, if there is evidence of you know where our rules require us to be, say, sustainable, and there China is, say, cutting down forests. Okay, if there is a difference in the forest tree laws or what we have to do which impose higher costs, then you have to go down that route and put up what may be termed as non tariff barriers. So first, get rid of your self created disabilities, and having gotten rid of the disabilities, then on a case by case basis, wherever there is a problem where they are coming in so aggressively, so, so there is this, sometimes anti dumping duties work, and sometimes they also don't work. Okay, so I've heard examples of where one where anti dumping duty of 20% was imposed, where Chinese then reduced their prices by 200% so, okay, what can you another example where, and that was in the pharma industry, in APIs, where you put an anti dumping duty on the final output. And then there was coordination among the suppliers, who were again Chinese for raw materials which we buy from them, whose prices were increased almost as a coordinated effort. So then you are again, you know you're squeezed, even though you've managed to increase one side. But then if your prices are increased, you don't make so it's not straightforward. It is not simple, but it's just that. That's why I said that the first thing you have to do is to understand and accept that there is a problem and we have to take action otherwise in the next day, say the problem takes five years to solve. Okay, where China has excess capacity for five years, where they try to push product by the end of five years, you could lose your. Know, if you start shutting down, you lose your capacity, you lose your skills, and then you don't know what to do. I mean, today, the steel industry is crying that, you know, because of the lower demand for steel in China, because of the real estate slump, the steel prices go down, and once prices go down, your profit margins go down. So, you know, even if the steel comes through Vietnam, I mean, I've heard of a story where an entire plant has been moved to Vietnam, because Chinese steel has 5% duty, whereas with Vietnam is part of the ASEAN agreement, and so there's no duty on that. So it gets moved there, and then they have an agreement so they can import the steel from China to Vietnam at zero duty. So companies can shift their operations from one part of the world to another, depending on where it is more profitable. So, you know, there are no easy answers, but we do have to be aware of the fact that we don't want to hollow out our industry and decimate whatever capacity we have, and is most likely a temporary phenomena would go away in 510, years, maybe five years. They may adjust fast, because they will also not keep adding capacity, right? So eventually there will be a catch up, but I think in the interim, we do need to worry.
Puja Mehra: It's interesting you say this Ila, because you're a free market economist. I have always read you that you write making free market arguments. And it seems to me, when I read your colleagues, especially in the US, there seems to be no solution in dealing with China through the free trade way they spend so much. The Chinese government spends so much on industrial policy, almost double of what the US spends. So do economists have a solution as yet to the China problem, or this is just going to carry on with tariff walls and all the removal of the handicaps that you're discussing.
Ila Patnaik: So first, I think that the that most of the hearing that we studied, you know, in school, college, university, was based on perfect competition. Then, of course, we also studied monopoly. We studied program's models, but we have not really seen anything like what we are seeing today, where a government is helping industry, coordinating with industry to undertake this sort of an export and industrial policy, where we've not seen anything like that. I really don't think the economic models and the tools we have with us today really help us understand some of these. And I completely confess that before studying this and seeing the last few years what is happening, I would also being easily taken in by those arguments that, yeah, you open up, it's better for the consumers, but is it better for the consumers? Is the question, because it you know, when you consumer are also ultimately the ones who get the jobs, that's one problem, and that's, I think, how the US is approaching it that their politics, the politics goes completely against you. And you know, we live in a world where we live in democracies, and when the politics goes against you, you have masses of people who are resentful because they feel they've lost their jobs because industry has moved out of the US to China. China is the factory of the world, and then you have this whole politics revolving around a question of job. So not to say whether it's right or wrong Pooja, I want to just say that this is the reality of the world that today, the reason why people are trying to address this question and putting up tariff walls is because otherwise, the politics takes them to a place where, see, Biden did not remove the Trump taxes on China. Biden administration, in fact, was even more aggressive. And I'd like to add, it's not just the politics, but to have 60% of global manufacturing in just one country is also a security threat, like we saw when the supply chains got disrupted after covid. So I do see the dilemma that economists free trade economists have here on how to cope with the China view of Yeah, and what buttons me is that third question that maybe China's model is not sustainable. So if all of us are depending on the sustainability of the China model, that they will continue to, you know, work in factories. I mean, they after their ban child policy, the demographics has changed. The current demographics is not what you know it was. It is not the protectionism in the export growth that has led to the domestic slowdown. It is the domestic slowdown that is lead. Into the export push that is causing the protectionism. So if you look, and, let's say you look at the data for exports, about a couple of years ago, despite the tariff walls, you did not see a decline in exports, either to the US or to Europe. Okay, yes, the growth rate of exports slowed down from China to Europe and US, the growth rate of exports slowed down, but they continued to grow, and it was positive growth. So you know, you're not seeing that exports went away. That really didn't happen. Does China have the capacity to continue to be the factory of the world even after its own young population is declining if their system is dependent on government, pushing infrastructure and that keeping demand up in they are trying to rebalance. For quite a while, they're trying to rebalance their own economy and reduce their dependent on exports and turn towards consumption, not particularly successfully, but that has been last 10, 810, years. That's what they've been trying. So if we say, Okay, let us all just import from China and forget about I don't know what we would give them instead, because at the end of the day, one has to produce and sell something. I'm not saying there has to be bilateral trade balance. But at the end of the day, if you keep importing things, you'll have to give them, give something. You know, yes, they might need software and services, but I don't know that that's adequate, and this is something we'll have to think about. Can we completely depend on them? Is their system going to be sustainable to continue giving us all the manufactured products in the world they might be today, but will they continue to create capacity when they don't have domestic or much a slower export demand? So I worry that if we don't think adequately about these and we just, you know, choose the path where we say, okay, like domestic industry were decimated, we might be in for trouble, and consumers will end up facing higher prices in the longer run and shortages and difficulties than they might if we were not to do the same. So it's kind of not that one is not being, you know, open to markets, but kind of more of, you know, solve this problem thinking through time and through various constraints and their demographics and so on, not just imagination.
Puja Mehra: And have you seen anything at all around the world which has had some you know, which can be replicated, which has had some success. One and two, if there are no economic policy tools, then does the solution lie in politics? Does the world need to have a conversation with China, which itself is very difficult, but you know, Can something like that then be the way out?
Ila Patnaik: I think it's too early to say, because countries like ours have not even yet woken up with the fact that how big is the threat. So we have to get ourselves up. I mean, even, even when you talk to industry, there are people in industry who say, no, no, no, we should import from China, because they're getting cheap products, right? So they're getting cheap raw materials compared to what it might have been. Here. You're talking about an example of a successful strategy. I am saying first we have to have awareness of the problem, then we have to develop a strategy, and we have to implement it, then we have to see whether it's successful or not. So no, I have not seen a success.
Puja Mehra: So I think what you're saying is we first need to take a economy wide view, rather than an industry specific views, because then we get lost between the winners of the losers of doing trade or importing a lot from China.
Ila Patnaik: True, true. Absolutely, absolutely.
Puja Mehra: Right. Thanks so much.
Ila Patnaik: Thank you for having me.
Puja Mehra: The Chinese exports create an imbalance in the global markets that puzzles and buries even those economists that normally advocate free trade. ELA, his colleague in the finance ministry and former chief economic adviser, Dr Arvind Subramanian, has just published a piece that will give you a start. He has shown, using data, how ineffective the retaliatory policies being used around the world to correct China's export dominance have been China's share of global exports was less than 1% in 1985 this had increased to 12% by 2007 just before the global financial crisis. In global exports of footwear and apparels, its share was more than 50% this base was built using aggressive export promotion policies. The Chinese central bank was buying Forex to keep the exchange rate competitive, and at the peak, their foreign exchange reserves were as much as $4 trillion after the global finance. Crisis under pressure from the US, China let its currency appreciate by as much as 50% in 10 years. More recently, tariff walls have come up, and yet China's export competitiveness has not reduced. Its share in global manufacturing. Exports rose from 12% around the time of the global financial crisis to 22% in 2022 Dr Subramanian has concluded in this piece that conventional policy leavers are not working against China's export dominance. What will work? We still don't know, while the exports figure that out. In the meantime, India must, as Eli explained, get some things that are within our control and order. I suppose.
