NITI Aayog's Panagariya cautions against cutting trade ties with China

'Both countries can play the trade sanctions game but the ability of a $17 tn economy (China) to inflict injury on a $3 tn economy (India)'

Amid demands for snapping trade ties with China for its transgressions on the border, former NITI Aayog Vice Chairman Arvind Panagariya has opined that cutting trade with Beijing at this juncture would amount to sacrificing India's potential economic growth.

Instead, Panagariya suggested that India should try to enter into free trade agreements (FTA) with countries such as the UK and the European Union to expand its trade.

"Engaging China in a trade war at this juncture will mean sacrificing a considerable part of our potential growth... purely on economic grounds, it will be unwise to take any action in response to it (transgressions on the border)," the eminent economist told PTI.

Indian and Chinese troops clashed along the Line of Actual Control (LAC) in the Tawang sector of Arunachal Pradesh on December 9 and the face-off resulted in "minor injuries to a few personnel from both sides", according to the Indian Army.

Panagariya, currently a professor of economics at Columbia University, said both countries can play the trade sanctions game but the ability of a USD 17 trillion economy (China) to inflict injury on a USD 3 trillion economy (India) is far greater than the reverse.

"Now there are some who want trade sanctions on China to 'punish' it for its transgressions on the border... if we try to punish China, it will not sit back, as amply illustrated by its response to sanctions by even the mighty United States," he observed.

Panagariya pointed out that even a large economy such as the US has not been very successful with its sanctions either against China or even Russia.

"Its close ally, EU, has had to pay a very high price of the sanctions against Russia (GDP: USD 1.8 trillion only). So, this is a very slippery slope," he observed.

The trade deficit, the difference between imports and exports, between India and China touched USD 51.5 billion during April-October this fiscal. The deficit during 2021-22 had jumped to USD 73.31 billion as compared to 44.03 billion in 2020-21, according to the latest government data

According to the data, imports during April-October this fiscal stood at USD 60.27 billion, while exports aggregated at USD 8.77 billion.

Explaining further, Panagariya said it so happens that for many products India imports, China is the cheapest supplier so New Delhi buys them from Beijing.

It also happens that for goods India wants to export, China does not offer New Delhi the best price.

"So, we sell them to other trade partners such as the US. The fact that this results in a trade deficit with China and trade surplus with the US should be no reason for worry," Panagariya said.

To reduce the trade deficit with China, Panagariya suggested that the idea ought to expand trade faster with other trading partners rather than cutting it with Beijing through a blunt instrument such as trade sanctions.

" We should take advantage of India's excellent growth prospects for the next decade and concentrate on growing the economy bigger as fast as possible. Once we are the third largest economy, our sanctions threats are likely to carry greater credibility," he said.

Asked can India tame its widening overall trade deficit, he said the appropriate indicator of external imbalance from the viewpoint of macroeconomic and financial stability is the current-account deficit as it measures the increase in our liabilities abroad.

According to Panagariya, while movements in the current-account balance give him no reason for concern, as a fast-growing economy, it is even desirable for India to borrow up to 2 to 3 per cent of GDP abroad to finance its investments.

"We may end up with a current-account deficit between 2 to 3 per cent in the current fiscal years but this too is well within our tolerance limit and poses no threat to macroeconomic stability," he noted.

In 2020-21, India had a current-account surplus of 0.9 per cent of the GDP while in 2021-22, India had a current-account deficit of 1.2 per cent of the GDP.