India's Ancient Cultures and New Opportunities
Isher Ahluwalia is currently the vice chairperson of the Planning Board of the Government of Punjab, India and member of the National Manufacturing Competitiveness Council, Government of India.
Dr. Ahluwalia is also chairperson of the Board of Governors of the Indian Council for Research on International Economic Relations (ICRIER), a research institute based in New Delhi. She had earlier served as ICRIER's Director and Chief Executive from 1997-2001. Dr. Ahluwalia was a visiting professor at the School of Public Affairs, University of Maryland--College Park in 2002 and 2003. She received her B.A. from Presidency College at Calcutta University, her M.A. from the Delhi School of Economics, and her Ph.D. from the Massachusetts Institute of Technology, all in economics.
This interview with Asia Society was conducted on February 2nd, 2006, while Dr. Ahluwalia was in New York for the Asia Society panel discussion on Encyclopedic India: Ancient Cultures and New Opportunities.
How would you characterize the model of trade liberalization that India has pursued over the last fifteen years or so?
It has basically been a gradualist model with a consistent direction of opening up to foreign competition. We started out with very high tariff rates and a very complex regime of quantitative restrictions on imports. At a very early stage of the reforms, the government decided to lower the tariff rates significantly and promised to follow a consistent course of further reductions. Except for a short period in the late 1990s when there was a brief reversal due to some protectionist pressures, tariff rates have been coming down. Today, if you look at the average weighted import tariff, it has come down from over 70 per cent in 1991 to about 15 per cent. We have come a long way. On quantitative restrictions, the government started the liberalization with everything except consumer goods and agricultural products. Consumer goods were liberated from the quantitative restrictions in April 2001.
How would you compare the development and liberalization experience of India with that of China? And what might the two learn from each other?
Actually it is very difficult to compare the two. In China, there is an autocratic regime of policymakers: they decide and then everyone else has to fall in line. In India, vested interests of the existing private sector, and bureaucracy of the state on the one hand, and a vibrant media and civil society that is always debating policy options on the other, require more time and negotiation (formal or informal). So when the government of India decides that it is going to lower tariffs, let us say, it really needs to build a consensus around the change. By its very nature, this is a more time-consuming process in India than in China. But the positive side is that when you do something with consensus behind it, it is more durable. In the case of China, you always wonder what will happen; a reversal is more possible.
I would say one of the lessons that we have now learnt from China has to do with decentralization. In China, provincial autonomy has meant that provinces have been competing against each other to create a better investment climate. Today in India the state governments are in a position where they recognize the importance of creating a good investment climate to attract private investment. So there is competition among state governments. Another lesson, I would say, for India would be that China started out with agricultural sector reforms and then moved to industrial reforms. We in India did not do that. But the present government is recognizing the importance of redressing that imbalance and really focusing on agro-industry linkages and facilitating the process of rural development.
What would you say the disadvantage is of undertaking industrial sector reform and neglecting the agricultural sector? What tends to be the effect on the economy?
For one thing, since agriculture still contributes 25 per cent of India's GDP and about 60 per cent of the population is dependent on agriculture, you can well imagine the potential for demand creation of the agricultural sector in the economy. Secondly, even from the perspective of poverty, in a democracy like India, since the bulk of the poor are in the rural sector, any democratic government accountable to voters cannot neglect the rural sector. Industrial development brings with it modernization and linkages with the global market. But industrial development has to be linked back to agriculture through backward linkages which generate high-value sustainable growth in agriculture and better opportunities for livelihoods in the economy.
You have conducted a lot of research on the WTO. What would you say are the main issues confronting large developing countries like India at the WTO?
If there are aspects of the WTO which have a bearing on restricting market access for countries like India, then we need to be pro-active in negotiating so that we can gain market access. If we have competitive advantage in agriculture, as we do, then it is in our interest to get the industrialized countries to cut their export subsidies and their domestic support to agriculture so that they do not distort trade in agriculture. If on intellectual property rights the TRIPS [the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights] regime is not sensitive to public health exigencies in poorer countries then we have to ensure that we get exemptions on public health grounds. Industrialized countries also impose a lot of non-tariff barriers, whether through so-called labor standards or objections to products produced in a particular manner, all of which effectively restricts market access to developing countries. So, again, we need to be pro-active and insist that these non-tariff barriers are removed.
What do you see as the likelihood of large developing countries forming a coalition in such a way that they can actually exercise that degree of power and have some of these demands met in forums like the WTO?
There are already several groupings of developing countries including the G-20 which are not just confined to the larger developing countries. They also want to take along with them some of the poorer developing countries. There is also the realization among all developing countries that coalitions have to be issue-based. On some issues, you may work with large countries; on others, with small countries. But it is essential to get groupings together to improve bargaining power so that developing countries can also get a fair deal and not be bullied by countries with more economic power.
You mentioned this, and I would just like you to elaborate: A number of critics have pointed to the discriminatory aspects of intellectual property rights, in particular of TRIPS (trade related intellectual property rights). Could you explain what the impact of TRIPS is on the Indian pharmaceutical market, for example?
The Indian pharmaceutical industry in an earlier era was really doing reverse engineering and the Indian Patent Act allowed them to take and reproduce the intellectual property of industrialized countries. This was all legal. After the WTO admitted a TRIPS regime which all WTO members had to follow, the Indian industry went through a major transformation. They recognized the importance of respecting patents and started to go into R&D themselves. What has happened now is that because of the new patent regime that India has put in place and because of the competitive strength of India in the pharmaceutical sector, we actually have Indian multinationals in pharmaceuticals. India is doing extremely well in both R&D, in registering patents and in penetrating the markets of the West. The initial fears of the pharmaceutical industry about their inability to compete with a stricter intellectual property regime have turned out to be unfounded. Those fears are now a thing of the past and the industry has developed a global vision and is beginning to take on the best and the brightest.
What are the effects of this on consumers? What would you say were the effects on price levels before the India Patent Act and after it?
There was actually a lot of apprehension that the new TRIPS regime will lead to higher prices. That actually has not happened at all. Also under the TRIPS regime, if you had a public health emergency in a country then you could get compulsory licensing of a patented drug in your own country and could produce that drug at a lower price. However, if you did not have the capacity to produce that drug, then you could not import it. About four or five years ago there was a major issue made of this, especially with AIDS drugs and the question of affordable access in life-threatening situations. There is now room within TRIPS to accommodate these concerns. In the Doha round they have been able to extract a concession on this. If South Africa has a public health emergency and they need, for example, AIDS drugs and they cannot produce it, they can choose to have compulsory licensing in India so that India can produce the necessary drugs and sell the same to South Africa.
There are other problems with TRIPS. For example, when you have indigenous medicine, how do you protect the intellectual property medicine where very often it is the community that is the owner of this property? How do you apportion royalties? But again, there have been a couple of cases where, for example, the neem patent was revoked and India gained.
As I am sure you're aware, there are a number of people who have argued that economic liberalization has created greater inequalities within and between societies. Has this been the case in India? And if you believe that this is so, how might liberalization be made more equitable?
Let me talk about inequalities within India. In the past, public investment was directed towards poorer states, so there was more regional balance, but that balance came at the cost of high growth rates, so there was a lower growth rate and more balance between states. Now when market forces are reigning, to some extent there is also more regional inequality. The fact is that when liberalization takes place and state governments are allowed to take larger responsibility for development in their states, the public sector also becomes less important and the states compete to attract private investment. It is also true that most of the private investment goes to those states with a better investment climate. To that extent, there is likely to be more regional inequality. But there is also the demonstration effect, because once the message goes down to the states that they have to get down to the business of development and growth in their own states, then they undertake the kind of policies which will attract more investment. So in the long run you get higher growth and better standards of living for all. But initially there is likely to be greater regional inequality.
As far as inequality across income groups is concerned, there is very little data for that. There is some data on consumption inequality and that consumption inequality may have increased, but I am not sure. I think the focus in the first instance is that the lot of the poorest must improve. So long as everybody's lot is improving even if it means that the rich are getting a little bit richer, the change is for the better. The focus should be on expanding the pie and making sure that the gains are as broad based as possible.
Do you see any difference between the policies that the Vajpayee government pursued and the policies being implemented by Manmohan Singh's government on this question of economic inequality?
There are two major differences. First the Vajpayee government really neglected agriculture and this government is focusing a great deal on rural development. That, by its very nature, is equalizing. Second, the Manmohan Singh government is really paying a lot of attention to health and education. Again, focus on these sectors is in itself equalizing: the more education there is, the more equalizing the effect because people are being empowered with skills to seek employment. Whether or not they succeed, time will tell. But in terms of their emphasis, I would say health, education and agriculture are sectors that address the inequality issue much more directly.
Now to turn to the last question: Do you see India assuming a more prominent position globally in international institutions such as the UN (in particular with a bid for a seat on the Security Council), the WTO and others, and in regional organizations such as SAARC?
It really depends on whether we can realize the potential that we have for much higher growth. Given the size of our economy, if we can sustain even eight per cent growth for the next five or six years, I think that will give us tremendous leverage to position ourselves in the way that you suggest in these international organizations. But we cannot get that purely on the basis of population numbers. Basically I am very optimistic. I think we are getting there but we are not there yet. It is a conditional statement. If we stay on this course then, yes, I think we will get there. But we can't demand that kind of power; we have to command it.
Interview conducted by Nermeen Shaikh of Asia Society.